|SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
      FORM 10-K
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
|------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |  |                    
|------------------------- |  | -------------------
|For the fiscal year ended |  | Commission File No.
|December 31, 2004         |  | 0-26575            

|                                                                                   
|-----------------------------------------------------------------------------------
|U.S. NEUROSURGICAL, INC.
    (Exact name of Registrant as specified in its charter)

|                                |  |                       
|------------------------------- |  | ----------------------
|Delaware                        |  | 52-1842411            
|(State or other jurisdiction of |  | (I.R.S. Employer      
|incorporation or organization)  |  | Identification Number)

|                                                        |           
|------------------------------------------------------- | ----------
|2400 Research Boulevard, Suite 325, Rockville, Maryland | 20850     
|(Address of principal executive office)                 | (Zip Code)

|                                                                  
|------------------------------------------------------------------
|Registrants telephone number, including area code: (301) 208-8998
|                                                                  
|                                                                  

|                    |                                                            
|------------------- | -----------------------------------------------------------
|Title of Each Class | Name of Each Exchange on Which Registered                  
|                    | None                                                       
|                    |                                                            
|                    | Securities Registered Pursuant to Section 12(g) of the Act:
|                    |                                                            
|                    | Common Stock, par value $.01 per share                     

|                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate by check mark whether the Registrant (1) has filed all reports required to be filed in Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

|YES  x |  | NO o
|------ |  | ----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405
of this chapter) is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this form 10-K.
The
aggregate market value of Registrants Common Stock held by non-affiliates was approximately
$150,000 on March 15, 2005, based upon the average of the bid and asked prices as reported on the
OTC Bulletin Board.
The
number of shares of Registrants Common Stock, par value $.01 per share, outstanding as of March
15, 2005, was 7,697,185.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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|Part I 
|-------
|       
|ITEM 1.
|       

|U.S. Neurosurgical, Inc. (USN) owns and operates stereotactic radiosurgery centers, utilizing
the Leksell Gamma Knife technology (Gamma Knife). As used herein, unless the context indicates otherwise,
the term Company, Registrant and USN. means U.S.Neurosurgical,
Inc. and its subsidiary, U.S. Neurosurgical Physics, Inc.. The Company, a Delaware corporation, was
formed in July 1993. The Companys executive offices are located at 2400 Research Boulevard,
Suite 325, Rockville, Maryland 20850, and its telephone number is (301) 208-8998.
Disclosure Regarding Forward Looking Statements
Statements
contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that forward-looking statements are inherently uncertain. Actual performance and results may differ
materially from that projected or suggested herein due to certain risks and uncertainties including,
without limitation, the outcome of the Companys payment, timing and ultimate collectability
of accounts receivable for Gamma Knife procedures from different payor groups such as Medicare and
private payors; competition; technological obsolescence; government regulation; and
malpractice liability. Additional information concerning certain risks and uncertainties that could
cause actual results to differ materially from that projected or suggested may be identified from
time to time in the Company filings with the Securities and Exchange Commission (SEC) and the Companys
public announcements, copies of which are available from the SEC or from the Company upon request.
U. S. NeuroSurgical, Inc.
General
USN,
was organized in July 1993 to own and operate stereotactic radiosurgery centers, utilizing the Gamma
Knife technology. USN currently owns and operates two Gamma Knife centers, one on the premises of
Research Medical Center (RMC) in Kansas
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|City, Missouri, and one on the premises of New York University Medical Center (NYU) in New York, New
York. Management continues to explore opportunities to open additional Gamma Knife Centers. USNs
business strategy is to provide a mechanism whereby hospitals, physicians, and patients can have
access to Gamma Knife treatment capability, a high capital cost item. USN provides the Gamma
Knife to medical facilities on a cost per treatment basis. USN owns the Gamma Knife units,
and is reimbursed by the facility where it is housed, based on utilization.
USNs
principal target market is medical centers in major health care catchment areas that have physicians
experienced with and dedicated to the use of the Gamma Knife. As it has with its RMC and NYU Gamma
Knife centers, USN would seek cooperative ventures with these facilities if it were to explore opening
additional centers. USN believes that, as of December 31, 2004, there were approximately 100 Gamma
Knife treatment centers in the United States of America.
Through
September 9, 1999, USN was a wholly owned subsidiary of GHS, Inc (GHS). Effective on September
17, 1999, GHS distributed its shares of USN to the stockholders of GHS ( the Spinoff).
Gamma Knife Technology
The
Leksell Gamma Knife is a unique stereotactic radiosurgical device used to treat brain tumors and
other malformations of the brain without invasive surgery. The Gamma Knife delivers a single, high
dose of ionizing radiation emanating from 201 cobalt-60 sources positioned about a hemispherical,
precision machined cavity. The lesion is first targeted with precision accuracy using advanced imaging
and three dimensional treatment planning techniques such as CT Scans, MR Scans, conventional X-rays,
or angiography. Each individual beam is focused on a common target producing an intense concentration
of radiation at the target site, destroying the lesion while spreading the entry radiation dose uniformly
and harmlessly over the patients skull. The mechanical precision at the target site is +/-
0.1mm (1/10 of 1 millimeter). Because of the
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|steep fall-off in the radiation intensity surrounding the target, the lesion can be destroyed, while
sparing the surrounding tissue.
The
procedure, performed in a single treatment, sharply reduces hospital stay times and eliminates post-surgical
bleeding and infection. When compared with conventional neurosurgery, Gamma Knife treatment is less
expensive. However, not all patients are candidates for radiosurgery since the decision to use the
Gamma Knife depends on the type, size, and location of the lesion.
Kansas City and New York Centers
In July 1993, USN purchased its first Leksell Gamma Knife from Elekta Instruments, Inc. (Elekta), for
the purpose of installing it at RMC in Kansas City, Missouri. USN paid approximately $3,000,000 for
the Gamma Knife through a capital lease financing.
USN
opened its first Gamma Knife Center on the premises of RMC in September 1994. RMC is part of Hospital
Corporation of America (HCA). USN formed a cooperative venture with RMC in September, 1993. Per an
agreement with RMC, GHS, Inc., sold 500,000 shares of its common stock for $500,000 to RMC to
secure additional working capital in order to enable USN to construct a Gamma Knife facility. USN
installed the Gamma Knife in the facility, where it is being utilized by neurosurgeons credentialled
by RMC. USN is reimbursed for use of the Gamma Knife by RMC based on a percentage of the fees collected
by RMC for Gamma Knife procedures. USN is responsible for the maintenance and insurance for the Gamma
Knife equipment at the RMC facility. Pursuant to a ground lease agreement, RMC leased to USN the
land on which to build the Gamma Knife facility. USNs facility agreements with RMC expire in
2015 and there are no renewal options. Costs associated with closing and restoring the RMC facility
to its original condition are the responsibility of USN. For the year ended December 31, 2004, 2003
and 2002, USN derived revenues from the RMC center of
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|approximately $1,153,000, $1,449,000 and $1,473,000 respectively, as a result of 111, 117 and 131 procedures
performed, respectively, during such periods.
USN
opened its second treatment center in July 1997 on the campus of NYU in New York, New York. Construction
of the Gamma Knife suite was completed in July 1997. The Gamma Knife cost and the cost of the facility
improvements totaled approximately $4,700,000. In August 2003, the Cobalt source was reloaded in
the New York Gamma Knife. After making the first 80% of payments equivalent to $582,000 to Elekta
Instruments, DVI, the leasing company that USN had used for the previous six years on all transactions,
filed for protection under Chapter 11 of the U.S. Bankcruptcy Code. USN began making all lease payments
into an escrow account beginning in September 2003 while the Company continued to negotiate with
DVI and its successor. The Company refinanced the lease with SMT Leasing in April 2004. During November
2002 the Company extended the term of its agreement with NYU until 2010. The Company has a marketing
representative to help introduce the technology to neurosurgeons in the New York tri-state region.
Pursuant to USNs facility agreement with NYU, USN is responsible for the maintenance and insurance
for the Gamma Knife equipment at the NYU facility and is reimbursed for use of the Gamma Knife based
on a fee per procedure performed with the equipment. Costs associated with closing and restoring
the NYU facility to its original condition are the responsibility of USN/ NYU provides the medical
and technical staff to operate the facility. For the years ended December 31, 2004, 2003, and 2002,
USN derived revenues from the NYU center of approximately $1,250,000, $995,000 and $1,166,000, respectively,
as a result of 162, 131 and 150 procedures performed, respectively, during such periods. The
reimbursement for the procedures has remained consistent the past two years. We expect reimbursement
to remain about the same in the next year.
In
August 2003 USN commenced payment on a $750,000 lease for the NYU cobalt reload, that was originally
thought to be fully funded by DVI, Inc. In August after making the first payment of $21,584 on August
10, 2003 USN found that DVI, Inc. had
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|failed to make the final 2 payments to Elekta that amounted to $150,000. On August 15, 2003 DVI,
Inc. filed for protrection under Chapter 11 of the U.S. Bankcruptcy Code seeking to reorganize. In
September 2003 and the months after, the Company made lease payments into an escrow account controlled
by counsel while it negotiated a resolution to the shortfall created by DVI. The new financing was
for approximately $728,000 that will be payable over 36 months at $23,000 per month beginning in
April 2004.
Risk Factors:
Regulatory Environment
The
levels of revenues and profitability of companies involved in the health services industry, such
as USN, may be affected by the continuing efforts of governmental and third party payors to contain
or reduce the costs of health care through various means. Although the Company does not believe that its
business activities will be materially affected by changes in the regulatory environment, it
is uncertain what legislative proposals will be adopted or what actions federal, state or private
payors for healthcare goods and services may take in response to any healthcare reform proposals
or legislation. The Company cannot predict the effects healthcare reform may have on its business,
and no assurance can be given that any such reforms will not have a material effect on USN.
In
addition, the provision of medical services in the United States is dependent on the availability
of reimbursement to consumers from third party payors, such as government and private insurance companies.
Although patients are ultimately responsible for services rendered, the Company expects that the
majority of its revenues will be derived from reimbursements by third party payors. Medicare
has authorized reimbursement for Gamma Knife treatment. Over the last several years, such third party
payors are increasingly challenging the cost effectiveness of medical products and services and taking
other cost-containment measures. Therefore, although treatment costs using the Gamma Knife compare
favorably to traditional invasive brain surgery, it is
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|unclear how this trend among third party payors and future regulatory reforms affecting governmental
reimbursement will affect procedures in the higher end of the cost scale.
In
the future, the Company may establish additional Gamma Knife centers. Completion of future centers
would require approvals and arrangements with hospitals, health care organizations, or other third
parties, including certain regulatory authorities. The Food and Drug Administration has issued the
requisite pre-market approval for the Gamma Knife utilized by USN. In addition, many states require
hospitals to obtain a Certificate of Need (CON) before they can acquire a significant piece of medical
equipment. Should the Company enter into future ventures such need will be demonstrable,
but it can have no assurance that Certificates of Need will be granted.
In addition, the Nuclear
  Regulatory Commission (NRC) must issue a permit to USN to permit loading the COBALT at each Gamma
  Knife site. While the Company believes that it can obtain a NRC permit for each Gamma Knife machine,
  there is no assurance that it will.
Liability Insurance
Although
USN does not directly provide medical services, it has obtained professional medical liability insurance,
and has general liability insurance as well. USNs professional medical liability and general
liability policies have limits of $2 million each and USN has also purchased an excess coverage policy
providing an additional $8 million of insurance coverage. The Company believes that its insurance
is adequate for providing treatment facilities and non-medical services, although there can be no
assurance that the coverage limits of such insurance will be adequate or that coverage will not be
reduced or become unavailable in the future.
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|Competition
The
health care industry, in general, is highly competitive and the Company expects to have substantial
competition from other independent organizations, as well as from hospitals in establishing future
Gamma Knife centers. There are other companies that provide the Gamma Knife on a cost per treatment
basis. In the past two years a new technology called CyberKnife has also entered into
the noninvasive market. In addition, larger hospitals may be expected to install Gamma Knife or competing
technologies as part of their regular inpatient services. Virtually all of these competitors have
greater financial and other resources than the Company. Principal competitive factors include quality
and timeliness of test results, ability to develop and maintain relationships with referring physicians,
facility location, convenience of scheduling and availability of patient appointment times. The Company
believes that cost containment measures will encourage hospitals to seek companies that are providing
the technology, instead of incurring the capital cost of establishing their own Gamma Knife centers.
Gamma Knife Supply and Servicing
Currently
the only company that manufactures, sells, and services the Gamma Knife is Elekta Instruments, Inc.,
a subsidiary of AB Elekta of Stockholm, Sweden. In 1993, USN entered into purchase agreements with
Elekta for the purchase of the Gamma Knives at its RMC and NYU centers. During 2004, the Company
entered into an agreement to upgrade to a new Gamma Knife at RMC. After the trade in of the older
unit the cost will be approximately $2,500,000. Elekta is responsible for the installation and testing
of the equipment and the training of the hospital staff in the operation of the equipment. As part
of the purchase of the Gamma Knife devices from Elekta, USN entered into purchase and maintenance
agreements pursuant to which Elekta provides USN with ongoing maintenance, repairs and software upgrades
for the RMC and NYU Gamma knives at an aggregate cost of $145,000 per year. Any interruption in the supply
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|or services from Elekta would adversely affect USNs ability to maintain its Gamma Knife treatment
centers.
Gamma Knife Financing
The
Gamma Knife is an expensive piece of equipment presently costing approximately $3,800,000. Therefore,
the Companys development of new Gamma Knife centers is dependent on its ability to secure favorable
financing. The cobalt at the NYU facility was reloaded in August 2003 and the costs were approximately
$800,000, which were partially financed. The payments are for $23,000 per month until March 2007.
In May 2003 the Company borrowed $137,000 to fund its short term obligations. The term of the loan
is 40 months and carries an interest rate of 8.5% and has a monthly payment of $3,960.
New Technology/Possible Obsolescence
Gamma
Knife technology may be subject to technological change. Consequently, the Company will have to rely
on the Gamma Knifes manufacturer, Elekta, to introduce improvements or upgrades in order to
keep pace with technological change. Any such improvements or upgrades which the Company may be required
to introduce will require additional financing. In addition, newly developed techniques and devices
for performing brain surgery may render the Gamma Knife less competitive or obsolete.
Employees
U.S.
Neurosurgical, Inc. has five full-time employees and one part-time employee. Of these employees,
three are engaged in sales and marketing, one is a physicist, and two are in administration
and office support.
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|ITEM 2. | PROPERTIES
|------- | ----------
|        |           

|The
Companys base facility, from which it conducts substantially all of its administrative operations,
is located in Rockville, Maryland and occupies approximately 1,300 square feet. The rent is approximately
$40,000 per year. USN occupies approximately 1,600 square feet in its RMC facility. This facility
is located on the campus of RMC in Kansas City, Missouri. USN also occupies about 2,000 square feet
at the NYU Medical Center in New York, New York. Pursuant to the facility agreements with RMC and
NYU, USN is not required to pay separate rent for the premises occupied by its Gamma Knife centers.
Rent is deducted up front in the fee paid to USN for the use of the Gamma Knife. USNs agreements
with RMC expire in September 2015 and there are no renewal options. USNs agreement with NYU
was extended this year and now expires in June 2010.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |                                                    
|------- | ---------------------------------------------------
|ITEM 3. | LEGAL PROCEEDINGS                                  
|        |                                                    
|None   
|        |                                                    
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|        |                                                    
|None   

|10
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|PART II
|-------
|       
|ITEM 5.
|       

|                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The
Companys Common Stock is traded on the OTC Bulletin Board. The following table displays the
range of high and low bid quotations as reported by NASDAQ System for the period from January 1,
2003 through December 31, 2004.
|                                                                                                                                                                                                                                 

|Period                        |  | High Bid |  | Low Bid | 
|----------------------------- |  | -------- |  | ------- | 
|                              |  |          |  |         | 
|January 1  March 31, 2003    |  | .10      |  | .05     | 
|April 1 - June 30, 2003       |  | .12      |  | .07     | 
|July 1  September 30, 2003   |  | .17      |  | .08     | 
|October 1  December 31, 2003 |  | .13      |  | .08     | 
|January 1  March 31, 2004    |  | .11      |  | .09     | 
|April 1 - June 30, 2004       |  | .11      |  | .09     | 
|July 1  September 30, 2004   |  | .13      |  | .09     | 
|October 1  December 31, 2004 |  | .17      |  | .09     | 

|                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
As of March 15, 2005, there were approximately 400 holders of record of the Companys Common Stock.
To
date the Company declared no dividends on its Common Stock and does not anticipate declaring dividends
in the foreseeable future.

|                                                                                                                                                                                                                                                                                                                                                                                       |                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|ITEM 6.                                                                                                                                                                                                                                                                                                                                                                                | SELECTED FINANCIAL DATA
|                                                                                                                                                                                                                                                                                                                                                                                      
|Set forth below is the selected financial data pertaining to the financial condition and operations of the Company for the years ended December 31, 2000 through 2004. The latest financial statements of the Company are included in Item 14 in Part IV of this report. The information set forth should be read in conjunction with such financial statements and the notes thereto.

|11
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|Year EndedDecember 31,(in thousands, except per share amounts)
|--------------------------------------------------------------
|                                                              
|                                                              

|                                          | 2004 |       | 2003 |   | 2002  |  | 2001 |       | 2000 |  
|----------------------------------------- | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | -
|Operating Revenue                         | $    | 2,403 |      | $ | 2,444 |  | $    | 2,639 |      | $
|Expenses:                                
|Patient expense                           |      | 780   |      |   | 820   |  |      | 930   |      |  
|General and administrative                |      | 1384  |      |   | 1411  |  |      | 1386  |      |  
|Interest expense                          |      | 59    |      |   | 86    |  |      | 163   |      |  
|                                          |      |       |      |   |       |  |      |       |      |  
|Net Income (loss)                         |      | 123   |      |   | 61    |  |      | 98    |      |  
|Basic and diluted Income per common share | $    | 0.02  |      | $ | 0.01  |  | $    | 0.01  |      | $

|                                 |   |       |  |   | December 31, | 
|-------------------------------- | - | ----- |  | - | ------------ | 
|
|Balance Sheet Data:              |   |       |  |   |              | 
|Cash and cash equivalents        | $ | 511   |  | $ | 89           | 
|Total assets                     |   | 4,201 |  |   | 3,150        | 
|Long-term obligations            |   | 1,652 |  |   | 542          | 
|Stockholders equity (deficiency) |   | 1,464 |  |   | 1,337        | 

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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------
|        |                                                                                      

|The
following discussion should be read in conjunction with the Financial Statements and Notes set forth
elsewhere in this report.
Results of Operations
2004 Compared to 2003
Patient
revenue decreased 2% to $2,403,000 in 2004 compared to $2,444,000 in 2003. Patient expenses decreased
5% to $780,000 in 2004 from $820,000 in 2003. S,G & A decreased 2% to $1,384,000 in 2004 from
$1,411,000 in 2003. Income from operations was $239,000 in 2004 compared to $213,000 in 2003. Interest
expense declined 31% to $59,000 in 2004 from $86,000 in 2003. This was due to the paydown of principal
on the Gamma Knife cobalt lease. In 2005, interest expense will increase due to the replacement of
the Kansas City Gamma Knife with a newer model. As a result of the above, net income was $123,000
compared to $61,000 in 2003. The trends of the recent past lead us to believe that reimbursement
will continue to remain at current levels.
2003 Compared to 2002
Patient revenue declined 7% to $2,444,000 in 2003 as compared to $2,639,000. The decrease was mainly
due to the reload of the cobalt source at our NYU site during the summer of 2003. The site was
not available for use for about one month. Reimbursement continued at the same levels as the prior
year. Patient expenses declined 12% to $820,000 from $930,000 in 2002. The decrease was due to decreased
depreciation on the knives. Selling, general and administrative expense (S,G & A) increased 2%
to $1,411,000 from $1,386,000 in the previous year. Interest expense declined 48% to 85,000 in 2003
from $160,000 in 2002. This was due to the payoff of the NYU Gamma Knife lease. As a result of the
above the net income was $61,000 as compared to $98,000 in 2002.
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|During 2003, the Company adopted FAS 143 and recorded asset retirement obligations of $200,000 based
upon estimated amounts, consisting principally of removal of Gamma Knives and disposal of regulated
materials and the restoration of facilities at NYU and RMC. The pro forma amount of the liability
as of January 1, 2002 and December 31, 2002 would also approximate $200,000. Such liabilities
have been measured using current information, current assumptions and current interest rates and
have been recorded with a corresponding increase in the carrying value of the Gamma Knives. The Company
is amortizing such costs over the lives of the respective useful lives from inception.
Upon initial application of FAS 143, the Company has recognized $140,000 of accumulated depreciation
and a deferred tax asset of $56,000 and a net increase in accumulated deficit of $84,000 as the cumulative
effect of a change in accounting principles during the year ended December 31, 2003. Application
of the provisions of FAS 143 would have resulted in a decrease in net income of approximately $12,000
for the year ended December 31, 2002. If the Company had adopted this standard effective January 1,
2003, total assets, liabilities and accumulated deficit at the end of each of the first three quarters
would have increased by $120,000, $200,000 and $80,000, respectively. In addition, amortization expense
would be $1,000 higher in each of the first three quarters of 2003.
Liquidity and Capital Resources
At December 31, 2004 the Company had a working capital surplus of $86,000 as compared to a working
capital deficit of $359,000 at December 31, 2003. Cash and cash equivalents at December 31, 2003
were $511,000 as compared to $89,000 at December 31, 2003. Net cash provided by operating activities
was $497,000 as compared with $992,000 for the same period a year earlier. Depreciation and amortization
was $566,000 as compared to $779,000 in 2003. Accounts receivable increased $32,000 during the year
as compared to an decrease of $142,000 in 2003. Accounts payable decreased by $159,000 during 2004
as compared to $21,000 in 2003. The Company paid its outstanding obligation of $100,000 with Elekta
during 2004
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|Net
cash used in investing activities for the year ended 2004 was $1,071,000 as compared to $1,014,000
in the year ago period. The Company has made progress payments for $1,282,000 towards its new Gamma
Knife and also resolved the $211,000 in escrow to pay its debt obligations.
Net
cash used in financing activites for the year ended December 31, 2004 was $996,000 as compared to
$23,000 in 2003. The Company paid $1,014,000 towards its capital leases in 2004 as compared to $688,000
in 2003. The Company borrowed $2,010,000 for progress capital and cobalt reload purposes during 2004.
The Company also retired 205,000 shares in 2004.
Critical accounting policies:
Estimates and assumptions:
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Asset retirement obligations:
In June 2001, the Financial Accounting Standards Board (FASB), issued Statement No. 143,
Accounting for Asset Retirement Obligations, (FAS 143) effective for the
fiscal years beginning after June 15, 2002. Accordingly, the Company recorded liabilities for
legal obligations associated with the retirement of tangible long-lived assets based the estimated
fair value of such liabilities. The estimated costs of these obligations is capitalized as costs
of the assets subject to the retirement obligations and amortized over the lives of the assets.
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|15
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|ITEM 7A.                                                                                                                         | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------
|                                                                                                                                 |                                                           
|None                                                                                                                            
|                                                                                                                                 |                                                           
|ITEM 8.                                                                                                                          | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA               
|                                                                                                                                 |                                                           
|The Financial Statements and Supplementary Data are listed under Item 14 in this Annual Report of Form 10-K and attached hereto.
|                                                                                                                                

|                                          | Quarter Ended |      |  |   |     
|----------------------------------------- | ------------- | ---- |  | - | ----
|
|
|                                         
|Revenue                                   |               | 529  |  |   | 774 
|Income (Loss) from operations             |               | 40   |  |   | 246 
|Net Income (loss)                         |               | 33   |  |   | 131 
|Basic and diluted Income per common share | $             | 0.00 |  | $ | 0.02

|2003                                      | 31-Mar |      | 30-Jun |    | 30-Sep |   | 31-Dec |      | Year |  
|----------------------------------------- | ------ | ---- | ------ | -- | ------ | - | ------ | ---- | ---- | -
|
|
|Revenue                                   |        | 835  |        |    | 550    |   |        | 490  |      |  
|Income (Loss) from operations             |        | 257  |        |    | (54    | ) |        | (157 | )    |  
|Net Income (loss)                         |        | 136  |        |    | (41    | ) |        | (110 | )    |  
|Basic and diluted Income per common share | $      | 0.02 |        | -$ | 0.01   |   | -$     | 0.01 |      | $

|2002                                      | 31-Mar |      | 30-Jun |   | 30-Sep |  | 31-Dec |      | Year |  
|----------------------------------------- | ------ | ---- | ------ | - | ------ |  | ------ | ---- | ---- | -
|
|
|Revenue                                   |        | 746  |        |   | 638    |  |        | 660  |      |  
|Income (Loss) from operations             |        | 196  |        |   | 69     |  |        | 64   |      |  
|Net Income (loss)                         |        | 84   |        |   | 15     |  |        | 19   |      |  
|Basic and diluted Income per common share | $      | 0.01 |        | $ | 0.00   |  | $      | 0.00 |      | $

|        |                                                     
|------- | ----------------------------------------------------
|ITEM 9. | DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|        |                                                     
|None   

|16
|--



|PART III                                                           
|-------------------------------------------------------------------
|                                                                   
|ITEM 10.                                                           
|                                                                   
|The directors and executive officers of the Company are as follows:
|                                                                   

|Name                     |  | Age |  | Position                         
|------------------------ |  | --- |  | ---------------------------------
|                         |  |     |  |                                  
|Alan Gold                |  | 60  |  | President & Chairman             
|William F. Leimkuhler    |  | 53  |  | Director                         
|Charles H. Merriman, III |  | 70  |  | Director                         
|Howard Grunfeld          |  | 44  |  | Vice PresidentFinance, Treasurer
|Susan Greenwald          |  | 59  |  | Vice President and Secretary     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Alan Gold has served as President and Chairman of USN since 1996. Mr. Gold has also been a director of USN since
its formation in 1993. Mr Gold served as President of GHS from 1983 through May 1999 and director
of GHS since its formation through November 1999. Mr. Gold, 60, was one of the founders of Global
Health Systems, the predecessor of GHS, serving as its President since its formation in July 1983.
From 1981 to 1983 he served as Executive Vice-President of Libra Group, a company located in Rockville,
Maryland, engaged in health care automation, where he was President of Global Health Foundation and
Libra Research and Executive Vice President of Libra Technology. From July 1997 through March 1998
Mr. Gold was also an employee of Health Management Systems.
William F. Leimkuhler has served as director of USN since May 1999. He also served as a director of GHS since its inception
in 1984 through November 1999. Mr Leimkuhler, 53, is currently the Director of Business Development
for Paice Corporation, the developer of an advanced hybrid electric powertrain for passenger vehicles,
a position he has held since October 1999. He also acts as a consultant on corporate and business
development matters to several emerging growth companies. From January 1994 until

|17
|--



|October 1999,  he served as Vice President and General Counsel of Allen & Company Incorporated,
an investment banking firm.
Charles H. Merriman, III has served as a director of USN since May 1999. He also served as a director of GHS from October
1997 to November 1999. Mr Merriman, 70, Mr. Merriman retired at the close of the year 2001 from
service as Senior Vice President and Managing Director of BB&T Capital Markets (BB&T),
an investment banking enterprise, where he was employed in various capacities since 1972 by BB&T and
its predecessor. Mr. Merriman has extensive knowledge of USNs primary focus on healthcare and
technology.
Howard Grunfeld has served as Treasurer of USN since 1993. He was the Controller of GHS from 1990 until May 1999.
Mr Grunfeld, 44, was appointed Vice President Finance and Chief Financial Officer of USN in
May 1999. Mr Grunfeld served as the Controller of Global Health Systems from 1990 through July 1997.
From July 1997 through February 1998, Mr Grunfeld was an employee of Health Management Systems, Inc.
Susan Greenwaldhas served as Vice President of Marketing Communications and as Secretary of USN since May 1999. She
performed services for GHS in the same capacity from its inception in 1983 through May 1999. Ms.
Greenwald, 59, was one of the founders of Global Health Systems, the predecessor of GHS, and served
as its Vice President of Marketing Communications since 1983. From 1981 through 1983 she was the
Proposal Manager for Libra Technology and Global Health Foundation, sister companies engaged in Federal
contracting and private enterprise, respectively, in the healthcare information technology business.
From July 1997 through February 1998, Ms. Greenwald was an employee of Health Management Systems.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



|Pursuant
to the Companys bylaws, the Companys Board of Directors is elected by the stockholders
at each annual meeting to serve until the next annual meeting or until their successors are
elected and qualified. In the case of a vacancy, a director will be appointed by a majority of the
remaining directors then in office to serve the remainder of the term left vacant. Directors do not
receive any fees for attending board meetings. Directors are entitled to receive reimbursement for
traveling costs and other out-of-pocket expenses incurred in attending board meetings. During
the year ended December 31, 2004, the Board of Directors held three meetings, which were attended
by all incumbent directors. The Company does have a standing audit committee, but does not have a
nominating or compensation committee.
Pursuant
to the Companys bylaws, officers of the Company hold office until the first meeting of directors
following the next annual meeting of stockholders and until their successors are chosen and qualified.
Section 16 (a) Beneficial Ownership Reporting Compliance
Based
solely upon a review of the copies of the forms furnished to the Company, or written representations
from certain reporting persons, the Company believes that during the years ended December 31, 2004,
all filing requirements applicable to its officers and directors were complied with by such individuals.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                        |                       
|------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|ITEM 11                                                                                                                                                 | EXECUTIVE COMPENSATION
|                                                                                                                                                        |                       
|The information below sets forth the compensation for the year ended December 31, 2004, 2003, and 2002, for the Chief Executive Officer of the Company.

|                           | 
|-------------------------- | 
|Summary Compensation Table
|
|
|
|Alan Gold                  | 
|President & Director       | 
|                           | 

|19
|--



|The Company and Mr. Gold are parties to an employment agreement giving either the Company or Mr. Gold the option to terminate the agreement by giving the other party 6 months written notice.                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                     
|ITEM 12.                                                                                                                                                                                                             
|                                                                                                                                                                                                                     
|The following table sets forth, as of March 15, 2005, certain information with respect to each beneficial owner of more than 5% of the Companys Common Stock and each director and executive officer of the Company:
|                                                                                                                                                                                                                     

|Name and Addressof Beneficial Owner | Number of Shares
      Beneficially 
      Owned (1) |           | Percent of
      Class | 
|----------------------------------- | ---------------------------------------------------- | --------- | ---------------------- | 
|Alan Gold (2)                       |                                                      | 1,140,246 |                        | 
|2400 Research Blvd.                
|Rockville, MD 20850                
|                                    |                                                      |           |                        | 
|Howard Grunfeld                     |                                                      | 155,900   |                        | 
|2400 Research Blvd.                
|Rockville, MD 20850                
|                                    |                                                      |           |                        | 
|William F. Leimkuhler               |                                                      | 100,000   |                        | 
|43 Salem Straits Road              
|Darien, CT 06820                   
|                                    |                                                      |           |                        | 
|Charles H. Merriman III             |                                                      | 130,672   |                        | 
|5507 Cary St. Road                 
|Richmond, VA 23226                 
|                                    |                                                      |           |                        | 
|Stanley S. Shuman (3)               |                                                      | 2,688,000 |                        | 
|711 Fifth Avenue                   
|New York, NY 10022                 
|                                    |                                                      |           |                        | 
|Allen & Company Incorporated        |                                                      | 1,847,000 |                        | 
|711 Fifth Avenue                   
|New York, NY 10022                 
|                                    |                                                      |           |                        | 
|All Directors and Officers of USN   |                                                      | 1,526,818 |                        | 
|as a group (2) (four persons)      

|                   |                                                                                                                                        
|------------------ | ---------------------------------------------------------------------------------------------------------------------------------------
|__________________
|                   |                                                                                                                                        
|(1)                | Unless otherwise indicated, all shares are beneficially owned and sole voting and investment power
  is held by the person named above.

|20
|--



|(2) | Includes 1,140,246 shares held jointly by Mr. Gold and his wife, Susan Greenwald, as joint tenants
  with right of survivorship.
|--- | --------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                 

|(3) | Includes 1,847,000 shares owned by Allen & Company Incorporated, Mr. Shuman disclaims beneficial
  ownership in such shares, except to the extent of his pecuniary interest therein.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21
|--



|ITEM 13. | CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------
|         |                                               

|In
1993, pursuant to an agreement (the USN Agreement) between the Company and A. Hyman Kirshenbaum,
M.D. (Kirshenbaum) and Jerry Brown, Ph.D (Brown), the Company, among other
things, granted an aggregate 20% interest in USN to Brown and Kirshenbaum. In addition, following
the execution of the USN agreement, Kirshenbaum was appointed as an officer of USN and Brown
was appointed to the Companys Board of Directors and executed an employment agreement with
USN. Under the terms of the USN Agreement, the Company possessed the right to repurchase for cash
or Common Stock such 20% interest during each of the third through sixth full fiscal years of the
USN Agreement at a value to be calculated by the Company in accordance with the terms of the USN
Agreement. The Company exercised its right to repurchase the 20% interest in USN in November 1996
at a value of $38,781.40, which value was disputed by Brown and Kirshenbaum.
In
June 1997, the Company instituted an action (the Declaratory Action) in the United States
District Court of Maryland, Southern Division against Kirshenbaum and Brown seeking a declaration
from the Court that its repurchase of Browns and Kirshenbaums 20% interest in USN for
$38,781.40 was fair and equitable. In response to the Declaratory Action, Brown and Kirshenbaum filed
a counterclaim and third party claim against GHS, USN, Alan Gold and Allen & Co. Incorporated,
a significant stockholder of GHS, citing various claims including causes of action for breach of
contract and fraud. USN filed a counterclaim against Brown and Kirshenbaum alleging various torts
claims arising out of the business relationship.
In addition to the above described federal court action, Brown filed a state court action in the District
Court in and for Montgomery County, Maryland against USN and other parties seeking breach of contract
damages for lost salary, unreimbursed expenses and for consequential damages and costs arising out
of what he claims to be an improper termination from USN.
On May 25, 1999, the parties to the above-described actions settled all of above described legal proceedings
pursuant to an Agreement and Plan of Settlement dated March 22, 1999 between Brown, Kirshenbaum,
GHS, USN, Alan Gold, and Allen & Company. As part of the closing of such settlement, GHS delivered
$200,000 in cash and 68,688 additional shares of GHS common stock to Brown and Kirshenbaum. In addition,
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--



|USN delivered to Brown and Kirshenbaum promissory notes (the Settlement Notes) in the aggreagate
amount of $450,000, bearing interest at the rate of 6% per annum, and payable over a four-year period
as follows: $100,000 on the first, third and fourth anniversaries of such closing and $150,000 on
the second anniversary of such closing.The final payment was made in May 2003. On June 9, 1999, the
Declaratory Action was dismissed with prejudice by the parties, and said dismissal was approved by
the District Court judge.
As consideration for financial advisory services rendered by Allen & Company Incorporated (Allen)
to GHS in connection with GHSs acquisition of ChangeYourLife.com, LLC and Concept Development
Inc. on May 27, 1999, GHS agreed to pay Allen a financial advisory fee of $400,000, payable in installments
of $100,000 on each of August 1, 1999, August 1, 2000, September 1, 2000 and October 1, 2000. As
a result of the Assignment and Assumption Agreement entered into between GHS and USN in connection
with USNs Spinoff from GHS, USN will be solely responsible for the payment of such fees because
such fees relate to events occurring prior to May 27, 1999. Allen is a significant shareholder of
the Company.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | Item 14.     Controls and Procedures.
| | -------------------------------------
| |                                      

|(a) | Evaluation of disclosure controls and procedures. As of a date within the 90-day period prior to the filing of this report, an evaluation of the effectiveness
    of USNs disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
    and 15d-14(c) of the United States Securities Exchange Act of 1934 (the Exchange Act))
    was carried out by our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation,
    the CEO and CFO have concluded that as of such date our disclosure controls and procedures are effective
    to ensure that information required to be disclosed by us in reports that it files or submits under
    the Exchange Act is recorded, processed, summarized and reported within the time periods specified
    in United States Securities and Exchange Commission rules and forms.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) | Changes in Internal Controls. Subsequent to the completion of their evaluation, there have been no significant changes in our internal
  controls or in other factors that could significantly affect the internal controls, including any
  corrective actions with regard to significant deficiencies and material weaknesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|23
|--



|PART IV 
|--------
|        
|ITEM 15.
|        

|                                                       
|-------------------------------------------------------
|as part of this report:                                
|
|Consolidated Financial Statements of the Company       
|Report of Independent Registered Public Accounting Firm
|Balance Sheets as of December 31, 2004 and 2003        
|Statements of Operations for the years ended           
|December 31, 2004, 2003, and 2002.                     
|Statements of Changes in Stockholders Equity          
|for the period January 1, 2002 through                 
|December 31, 2004                                      
|Statements of Cash Flows for the year ended            
|December 31, 2004, 2003, and 2002.                     
|Notes to Financial Statements                          

|                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|All schedules
have been omitted as the conditions requiring their filing are not present or the information required
therein has been included in the notes to the financial statements.
(b)          Reports on Form 8-K
|                                                                                                                                                                                                                         

|December 16, 2004
|-----------------

| |                                                 
| | ------------------------------------------------
| | Notice of change in certifying public accountant
| |                                                 

| | Exhibits
| | --------
| |         

|(a) | Form of Amended and Restated Certificate of Incorporation of U.S. Neurosurgical, Inc. (USN)
(1)
|--- | -------------------------------------------------------------------------------------------------
|    |                                                                                                  
|(b) | Form of Amended and Restated Bylaws of USN (1)                                                   
|    |                                                                                                  
|(c) | Form of Stock Certificate of Common Stock (1)                                                    
|    |                                                                                                  
|(d) | Distribution Agreement dated May 27, 1999 between GHS, Inc. (GHS) and USN (1)                  
|    |                                                                                                  
|(e) | Tax Matters Agreement dated May 27,1999 betwwen GHS and USN (1)                                  

|24
|--



|(f) | Assignment and Assumption Agreement dated May 27, 1999 between GHS and USN (1)                                                                                                                                                              
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                             
|(g) | Employment Agreement dated December 14,1984 betwwen USN and Alan Gold, as amended March 7, 1986 (incorporated
  by reference to Exhibit 10.3 of GHSs Registration Statement No. 33-4532-W on form S-18)                                    
|    |                                                                                                                                                                                                                                             
|(h) | Gamma Knife Neuroradiosurgery Equipment Agreement dated August, 1993 between Research Medical Center
  and USN (incorporated by reference to Exhibit 10h to GHSs Quarterly Report or Form 10-Q for
  the quarter ended September 30, 1993).
|    |                                                                                                                                                                                                                                             
|(i) | Ground Lease Agreement dated August, 1993 between Research Medical Center and USN (incorporated by
  reference to Exhibit 10j to GHSs Quarterly Report on Form 10-Q for the quarter ended September
  30, 1993).                           
|    |                                                                                                                                                                                                                                             
|(j) | LGK Agreement dated July 12, 1993 between Elekta Instruments, Inc. and USN (incorporated by reference
  to Exhibit 10k to GHSs Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).                                    
|    |                                                                                                                                                                                                                                             
|(k) | Agreement dated December 29, 1993 between USN and Elekta Instruments, Inc. (incorporated by reference
  to 10o to GHSs 1994 Annual Report on Form 10-K).                                                                                   
|    |                                                                                                                                                                                                                                             
|(l) | Agreement dated August 1, 1996 between USN and DVI, Inc. (incorporated by reference 10j to GHSs
  1997 Annual Report on form 10-K).                                                                                                        
|    |                                                                                                                                                                                                                                             
|(m) | Certifications of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                     
|    |                                                                                                                                                                                                                                             
|(n) | Gamma Knife Neuroradiosurgery Equipment dated as of November 26, 1996 betwwen New York University on
  behalf of New York University Medical Center and USN. (1)                                                                            
|    |                                                                                                                                                                                                                                             
|(o) | List of Subsidiaries (1)                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                             
|(1) | Previously filed as an exhibit to the Form 10. Registration Statement of USN filed with the SEC on August 25, 1999.                                                                                                                         

|25
|--



|SIGNATURES                                                                                                                                                                                                                                      | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                                                                                               
|Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
      Dated:     April 7, 2005

| |                         
| | ------------------------
| | U.S. Neurosurgical, Inc.
| | (Registrant)            
| |                         
| | By                      
| |                         
| |                         
| |                         
| |                         
| | By                      
| |                         
| |                         
| |                         

|Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|April 7, 2005 |  | /s/ Alan Gold              
|------------- |  | ---------------------------
|              |  |                
|              |  | Alan Gold                  
|              |  | President and Director     
|              |  | (Chief Executive Officer)  
|              |  |                            
|April 7, 2005 |  | /s/ William F. Leimkuhler  
|              |  |                
|              |  | William F. Leimkuhler      
|              |  | Director                   
|              |  |                            
|April 7, 2005 |  | /s/ Charles H. Merriman III
|              |  |                
|              |  | Charles H. Merriman III    
|              |  | Director                   

|26
|--



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
|---------------------------------------

|                                                                                        |     
|--------------------------------------------------------------------------------------- | ----
|Contents                                                                                |     
|                                                                                        | Page
|                                                                                        |     
|Consolidated Financial Statements                                                       |     
|                                                                                        |     
|Report of Independent Registered Public Accounting Firm                                 | F-2 
|                                                                                        |     
|Report of Independent Registered Public Accounting Firm                                 | F-3 
|                                                                                        |     
|Balance sheets as of December 31, 2004 and 2003                                         | F-4 
|                                                                                        |     
|Statements of operations for the years ended December 31, 2004, 2003 and 2002           | F-5 
|                                                                                        |     
|Statements of stockholders equity for the years ended December 31, 2004, 2003 and 2002 | F-6 
|                                                                                        |     
|Statements of cash flows for the years ended December 31, 2004, 2003 and 2002           | F-7 
|                                                                                        |     
|Notes to financial statements                                                           | F-8 

|F-1
|---



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of Directors and StockholdersU.S. NeuroSurgical Inc.Rockville, Maryland
  We have audited the accompanying consolidated balance sheet of US NeuroSurgical, Inc. & subsidiary
as of December 31, 2004, and the related consolidated statements of operations, stockholders
equity and cash flows for the year ended December 31, 2004. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit. The consolidated financial statements
of the Company as of December 31, 2003, and for each of the two years in the period ended, were audited
by other auditors whose report dated February 4, 2004, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of US NeuroSurgical, Inc. & subsidiary as of December 31,
2004, and the consolidated results of their operations and their cash flows for the year ended
December 31, 2004, in conformity with United States generally accepted accounting principles.
Goodman and Company, LLPRockville, MarylandJanuary 28, 2005
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-2
|---



|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and StockholdersU.S. NeuroSurgical Inc.Rockville, Maryland
We have audited the accompanying consolidated balance sheet of US NeuroSurgical, Inc. & subsidiary
as of December 31, 2003, and the related consolidated statements of operations, stockholders
equity and cash flows for the years ended December 31, 2003 and 2002. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of US NeuroSurgical, Inc. & subsidiary as of December 31,
2003, and the consolidated results of their operations and their cash flows for the years ended
December 31, 2003, and 2002 in conformity with U.S. generally accepted accounting principles.
Eisner LLPNew York, New YorkFebruary 4, 2004
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-3
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
|---------------------------------------
|                                       
|Consolidated Balance Sheets            

|                                                                                                                                                    |              |           
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ----------
|                                                                                                                                                    | December 31, |           
|                                                                                                                                                    |              |           
|                                                                                                                                                    | 2004         |           
|                                                                                                                                                    |              |           
|ASSETS                                                                                                                                              |              |           
|Current assets:                                                                                                                                     |              |           
|Cash and cash equivalents                                                                                                                           | $            | 511,000   
|Accounts receivable (net of allowance for doubtful accounts of
           $36,000 in 2004 and 2003)                                                 |              | 404,000   
|Accounts receivable - stockholder                                                                                                                   |              | 57,000    
|Other current assets                                                                                                                                |              | 199,000   
|Cash held in escrow                                                                                                                                 |              |          
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|Total current assets                                                                                                                                |              | 1,171,000 
|                                                                                                                                                    |              |           
|Property and equipment:                                                                                                                             |              |           
|Gamma Knives (net of accumulated depreciation of
           $7,147,000 in 2004 and $6,645,000 in 2003)                                              |              | 965,000   
|Leasehold improvements (net of accumulated amortization of
           $1,545,000 in 2004 and $1,483,000 in 2003)                                    |              | 497,000   
|Office furniture and computers (net of accumulated depreciation of
           $107,000 in 2004 and $105,000 in 2003)                                |              |          
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|                                                                                                                                                    |              | 1,462,000 
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|Progress payments - RMC Gamma Knife                                                                                                                 |              | 1,282,000 
|Cash held in escrow                                                                                                                                 |              | 106,000   
|Deferred tax asset                                                                                                                                  |              | 180,000   
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|                                                                                                                                                    | $            | 4,201,000 
|                                                                                                                                                    |              |           
|LIABILITIES                                                                                                                                         |              |           
|Current liabilities:                                                                                                                                |              |           
|Accounts payable and accrued expenses                                                                                                               | $            | 39,000    
|Obligations under capital leases and loans payable - current portion                                                                                |              | 467,000   
|Due to stockholder                                                                                                                                  |              | 300,000   
|Deferred tax liability                                                                                                                              |              | 240,000   
|Other current liabilities                                                                                                                           |              | 39,000    
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|Total current liabilities                                                                                                                           |              | 1,085,000 
|                                                                                                                                                    |              |           
|Asset retirement obligations                                                                                                                        |              | 200,000   
|Obligations under capital leases and loans payable - net of current portion                                                                         |              | 1,452,000 
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|Total liabilities                                                                                                                                   |              | 2,737,000 
|                                                                                                                                                    |              |           
|Commitments, litigation and other matters (Notes A[10], C, E and H)                                                                                 |              |           
|                                                                                                                                                    |              |           
|STOCKHOLDERS EQUITY                                                                                                                                |              |           
|Common stock - par value $.01; 25,000,000 shares authorized; 7,697,185
       shares issued at December 31, 2004 and 7,866,185 at December 31, 2003 |              | 77,000    
|Additional paid-in capital                                                                                                                          |              | 2,797,000 
|Accumulated deficit                                                                                                                                 |              | (1,410,000
|Treasury stock, at cost, 204,000 shares in 2003                                                                                                     |              |          
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|                                                                                                                                                    |              | 1,464,000 
|                                                                                                                                                    |              |           
|                                                                                                                                                   
|                                                                                                                                                    | $            | 4,201,000 
|                                                                                                                                                    |              |           

|                                              
|----------------------------------------------
|See notes to consolidated financial statements

|F-4
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
|---------------------------------------
|                                       
|Consolidated Statements of Operations  

|                                           |   |          
|------------------------------------------ | - | ---------
|
|
|
|
|
|Revenue (Notes B and C)                    | $ | 2,403,000
|
|
|Costs and expenses:                        |   |          
|Patient expenses                           |   | 780,000  
|Selling, general and administrative        |   | 1,384,000
|
|
|                                           |   | 2,164,000
|
|
|Income from operations                     |   | 239,000  
|
|
|Interest expense                           |   | (59,000  
|Interest income                            |   | 3,000    
|
|
|                                           |   | (56,000  
|
|
|Income before income taxes                 |   | 183,000  
|Provision for income tax                   |   | (60,000  
|
|
|Net income                                 | $ | 123,000  
|
|
|Basic and diluted net income per share:    |   |          
|Net income                                 | $ | 0.02     
|
|
|Weighted average common shares outstanding |   | 7,767,100
|                                          

|                                              
|----------------------------------------------
|See notes to consolidated financial statements

|F-5
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY        
|-----------------------------------------------
|                                               
|Consolidated Statements of Stockholders Equity

|                                                                                                         |                              |           |        |   |                                        |   |                          
|-------------------------------------------------------------------------------------------------------- | ---------------------------- | --------- | ------ | - | -------------------------------------- | - | -------------------------
|                                                                                                         | Common Stock                 |           |        |   | Treasury Stock                         |   |                          
|                                                                                                         |                              |           |        |   |                                        |   |                          
|                                                                                                         | Number
      of
      Shares |           | Amount |   | Additional
      Paid-in
      Capital |   | Accumulated
      Deficit
|                                                                                                         |                              |           |        |   |                                        |   |                          
|                                                                                                        
|Balance - January 1, 2002                                                                                |                              | 7,866,185 |        | $ | 79,000                                 |   | $                        
|Purchase of 114,000 shares of treasury stock                                                             |                              |          |        |   |                                       |   |                          
|Net income for the year ended
      December 31, 2002                                                    |                              |          |        |   |                                       |   |                          
|                                                                                                         |                              |           |        |   |                                        |   |                          
|                                                                                                        
|Balance - December 31, 2002                                                                              |                              | 7,866,185 |        |   | 79,000                                 |   |                          
|Cumulative effect of change in accounting
      principle, Net of applicable income tax
      of $56,000 |                              |          |        |   |                                       |   |                          
|Purchase of 90,000 shares of treasury stock                                                              |                              |          |        |   |                                       |   |                          
|Net income for the year ended
      December 31, 2003                                                    |                              |          |        |   |                                       |   |                          
|                                                                                                         |                              |           |        |   |                                        |   |                          
|                                                                                                        
|Balance - December 31, 2003                                                                              |                              | 7,866,185 |        |   | 79,000                                 |   |                          
|Retirement of treasury stock                                                                             |                              | (204,000  | )      |   | (2,000                                 | ) |                          
|Issuance of common stock as compensation                                                                 |                              | 35,000    |        |   |                                       |   |                          
|Net income for the year ended
      December 31, 2004                                                    |                              |          |        |   |                                       |   |                          
|                                                                                                         |                              |           |        |   |                                        |   |                          
|                                                                                                        
|Balance - December 31, 2004                                                                              | $                            | 7,697,185 |        | $ | 77,000                                 |   | $                        
|                                                                                                         |                              |           |        |   |                                        |   |                          

|                                              
|----------------------------------------------
|See notes to consolidated financial statements

|F-6
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
|---------------------------------------
|                                       
|Consolidated Statements of Cash Flows  

|                                                                                            |                         |           
|------------------------------------------------------------------------------------------- | ----------------------- | ----------
|                                                                                            | Year Ended December 31, |           
|                                                                                            |                         |           
|                                                                                            | 2004                    |           
|                                                                                            |                         |           
|                                                                                           
|Cash flows from operating activities:                                                       |                         |           
|Net income                                                                                  | $                       | 123,000   
|Adjustments to reconcile net income to net cash provided by
          operating activities: |                         |           
|Issuance of stock as compensation                                                           |                         | 4,000     
|Depreciation and amortization                                                               |                         | 566,000   
|Deferred income tax provision                                                               |                         | 14,000    
|Changes in:                                                                                 |                         |           
|Accounts receivable                                                                         |                         | (32,000   
|Accounts receivable - stockholder                                                           |                         | 39,000    
|Other current assets                                                                        |                         | (55,000   
|Accounts payable and accrued expenses                                                       |                         | (159,000  
|Other current liabilities                                                                   |                         | (3,000    
|                                                                                            |                         |           
|                                                                                           
|Net cash provided by operating activities                                                   |                         | 497,000   
|                                                                                            |                         |           
|Cash flows from investing activities:                                                       |                         |           
|Property and equipment                                                                      |                         |          
|Progress payments - RMC Gamma Knife                                                         |                         | (1,282,000
|Decrease (increase) in cash held in escrow                                                  |                         | 211,000   
|                                                                                            |                         |           
|                                                                                           
|Net cash used in investing activities                                                       |                         | (1,071,000
|                                                                                            |                         |           
|                                                                                           
|Cash flows from financing activities:                                                       |                         |           
|Repayment of capital lease and loan obligations                                             |                         | (1,014,000
|Cash received on financing of equipment                                                     |                         | 2,010,000 
|Purchase of treasury stock                                                                  |                         |          
|                                                                                            |                         |           
|                                                                                           
|Net cash used in financing activities                                                       |                         | 996,000   
|                                                                                            |                         |           
|                                                                                           
|Net change in cash and cash equivalents                                                     |                         | 422,000   
|Cash and cash equivalents - beginning of year                                               |                         | 89,000    
|                                                                                            |                         |           
|                                                                                           
|Cash and cash equivalents - end of year                                                     | $                       | 511,000   
|                                                                                            |                         |           
|                                                                                           
|Supplemental disclosures of cash flow information:                                          |                         |           
|Cash paid for:                                                                              |                         |           
|Interest                                                                                    | $                       | 59,000    
|Income taxes                                                                                | $                       | 44,000    
|                                                                                            |                         |           
|Supplemental disclosures of noncash activities:                                             |                         |           
|Issuance of stock as compensation                                                           | $                       | 4,000     

|                                              
|----------------------------------------------
|See notes to consolidated financial statements

|F-7
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|December 31, 2004 and 2003                
|                                          

|NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
|------------------------------------------------------------
|                                                            

|[1] | Basis of preparation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | U.S. NeuroSurgical, Inc. (USN) owns and operates stereotactic radiosurgery centers, utilizing
  the Gamma Knife technology. U.S. NeuroSurgical Physics, Inc. (USNP) administers the billing
  and collection of the fees charged by the physicist who operates the Kansas City gamma knife. USN
  and USNP are collectively referred to herein as the Company. The Company was a wholly owned subsidiary
  of GHS, Inc. (GHS), a publicly owned company. Effective May 27, 1999, GHS transferred
  its investment in USNP to USN. On May 20, 1999 the Board of Directors of USN authorized a stock
  split of USNs common stock which resulted in the number of outstanding shares of USN common
  stock equaling the number of shares of GHS common stock outstanding on the date of the spin-off.
  The Board of Directors of GHS resolved to distribute and the Company did distribute such common shares
  to its own stockholders on a one-to-one basis in a spin-off transaction. Immediately following the
  spin-off, USN became a publicly held company.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The consolidated financial statements include the accounts of USN and USNP. Intercompany transactions
  and balances have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|
|

|[2] | Cash and cash equivalents:                                                                                                          
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                     
|    | The Company considers all highly liquid debt instruments purchased with a maturity of three months
  or less to be cash equivalents.

|
|

|[3] | Revenue recognition:                                                     
|--- | -------------------------------------------------------------------------
|    |                                                                          
|    | Patient revenue is recognized when the Gamma Knife procedure is rendered.

|
|

|[4] | Long-lived assets:                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                             
|    | The Company reviews its long-lived assets for impairment whenever events or changes in circumstances
  indicate that the carrying amount of an asset may not be recoverable.

|
|

|[5] | Depreciation and amortization:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Gamma Knives are being depreciated on the straight-line method over an estimated useful life of
  seven years. The related costs incurred to reload the cobalt are being amortized on a straight-line
  method over an estimated useful life of five years. Leasehold improvements are being amortized on
  the straight-line method over 7 to 20 years, the shorter of useful life or the life of the leases.
  Office furniture and computers are being depreciated on a straight-line method over their estimated
  useful lives ranging from 3 to 7 years. Depreciation expense for the years ended December 31, 2004,
  2003 and 2002 was $566,000, $779,000 and $912,000, respectively.

|
|

|[6] | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities
  are recognized for the future tax consequences attributable to differences between the financial
  statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
  tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
  in the years in which those temporary differences are expected to be recovered or settled. The effect
  on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period
  that includes the enactment date.

|F-8
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|December 31, 2004 and 2003                
|                                          

|NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|------------------------------------------------------------------------
|                                                                        

|[7] | Earnings per share                                                                                                                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                        
|    | Earnings per share are computed by dividing earnings available to common shareholders by the weighted
  average shares outstanding for the period. There were no common stock equivalents during 2004, 2003
  and 2002 and, therefore, no potential dilution for the periods presented.

|
|

|[8] | Advertising costs                                                                          
|--- | -------------------------------------------------------------------------------------------
|    |                                                                                            
|    | The Company follows the policy of charging the costs of advertising to expense as incurred.

|
|

|[9] | Bad debts                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                            
|    | The Company evaluates each of their accounts receivable individually and provides a charge to income
  that is appropriate, in the opinion of management, to absorb probable credit losses.

|
|

|[10] | Estimates and assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | The preparation of financial statements in conformity with accounting principles generally accepted
  in the United States of America requires management to make estimates and assumptions that affect
  the reported amounts of assets and liabilities and contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses during the reporting
  period. Actual results could differ from those estimates.

|
|

|[11] | Fair values of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | The estimated fair value of financial instruments has been determined based on available market information
  and appropriate valuation methodologies. The carrying amounts of cash, accounts receivable, other
  current assets and accounts payable approximate fair value at December 31, 2004 and 2003 because
  of the short maturity of these financial instruments. The carrying values of the obligations under
  capital leases and loans payable approximate fair value because the interest rates on these instruments
  approximate the market rates at December 31, 2004 and 2003.

|
|

|[12] | Asset retirement obligations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     | In June 2001, the Financial Accounting Standards Board (FASB), issued Statement No. 143,
Accounting for Asset Retirement Obligations, (FAS143) effective for the fiscal
  years beginning after June 15, 2002. Accordingly, the Company recorded liabilities for legal obligations
  associated with the retirement of tangible long-lived assets based on the estimated fair value of
  such liabilities. The estimated costs of these obligations is capitalized as costs of the assets
  subject to the retirement obligations and amortized over the lives of the assets.

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[13] | Reclassifications:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | Certain prior year balances have been reclassified to conform to current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|[14] | Recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | The FASB issued FIN No. 46R, Consolidation of Variable Interest Entities (FIN 46R).
  FIN 46R relates to certain entities in which equity investors do not have the characteristics
  of a controlling financial interest or do not have sufficient capital at risk for the entity to finance
  its activities without additional subordinated financial support from other parties. Under certain
  circumstances, an enterprise may be required to consolidate such an entity if it will absorb a majority
  of the entitys expected losses, receive a majority of the entitys residual returns, or
  both. FIN 46R became effective for variable interest entities created after

|F-9
|---



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|December 31, 2004 and 2003                
|                                          

|NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|------------------------------------------------------------------------
|                                                                        

| | January 31, 2003, and had no effect on the Companys financial position as of December 31, 2004
  and 2003, and its results of operations for the years then ended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In December 2004, the FASB issued Statement No. 123(R), Share-Based Compensation which
  requires the recognition of costs resulting from transactions involving the acquisition of goods
  and services by issuing its shares, share options, or other equity instruments. This standard requires
  a fair value-based measurement method in accounting for share-based payment transactions with both
  employees and nonemployees. This standard replaces Statement No. 123, Accounting for Stock-Based
  Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting
  for Stock Issued to Employees. Accordingly, the use of the intrinsic value method as provided
  under APB Opinion No. 25 will be eliminated. SFAS No. 123(R) is effective for all awards of share-based
  payments granted, modified, or cancelled after June 15, 2005, except for public entities filing as
  small business issuers. Public entities that file as small business issuers will be required to apply
  Statement 123(R) in the first interim or reporting period that begins after December 15, 2005. In
  addition, compensation costs for the unvested portion of awards, issued prior to and outstanding
  as of June 15, 2005, would continue to be recognized at the grant-date fair value as the remaining
  requisite service is rendered. The Company does not currently have a stock compensation plan.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In December 2004, the FASB issued Statement No, 153, Exchanges of Nonmonetary Assets  An
  Amendment of APB Opinion No. 29, which eliminates the exception from fair value measurement
  for nonmonetary exchanges of similar productive assets that do not culminate an earning process under
  APB Opinion No. 29, Accounting for Nonmonetary Transactions. Statement No. 153 requires
  that the measurement be based on the recorded amount of the assets relinquished for nonmonetary exchanges
  that do not have commercial substance. A nonmonetary exchange has commercial substance if the future
  cash flows of the entity are expected to change significantly as a result of the exchange. This standard
  is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
  2005. The potential effect of Statement No. 153 on the financial statements is currently being considered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                        
|--------------------------------------------------------
|NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER (RMC)
|                                                        

|[1] | Gamma Knife neuroradiosurgery equipment agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | USN entered into a neuroradiosurgery equipment agreement (the equipment agreement) with
  RMC, a stockholder of the Company for a period of 21 years, which commenced, with the completion
  of the neuroradiosurgery facility (the facility) in September 1994. The equipment agreement,
  among other matters, requires USN to provide (i) the use of the Gamma Knife equipment (the equipment)
  to RMC, (ii) the necessary technical personnel for the proper operation of the equipment, (iii) sufficient
  supplies for the equipment, (iv) the operation, maintenance and repair of the equipment, (v) all
  basic hardware and software updates to the equipment and, (vi) an uptime guarantee. In return,
  RMC pays USN 80% of RMCs fees, subject to adjustments, for the use of the equipment and the
  facility. The agreement also provides for USN to establish for the benefit of RMC an escrow account
  funded with an amount equal to one months average of the compensation payable to USN. USN is
  the owner of and entitled to the income from the escrow account so long as no event of default has
  occurred. As of December 31, 2004 and 2003, the escrow account balance was $106,000. The equipment
  agreement terminates automatically upon termination of the ground lease agreement (see Note B[2]).
  The Company had patient revenue from RMC in the amounts of $1,153,000, $1,449,000 and $1,473,000
  for the years ended December 31, 2004, 2003 and 2002, respectively.

|F-10
|----



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|December 31, 2004 and 2003                
|                                          

|NOTE B - AGREEMENTS WITH RESEARCH MEDICAL CENTER (RMC) (CONTINUED)
|--------------------------------------------------------------------
|                                                                    

| | The Company has agreed to purchase a new Gamma Knife for $2,136,000 to replace the existing equipment.
  At December 31, 2004 the Company paid the Gamma Knife manufacturer progress payments of $1,282,000
  representing 60 percent of its agreed upon purchase price. The Company expects to complete the installation
  and begin operations in April 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|[2] | Ground lease agreement:                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | USN constructed a facility in Kansas City, Missouri on property which the Company leases from RMC.
  The lease term is for a period of 21 years commencing September 1994. The lease provides for rent
  at $3,600 per annum. The terms of the lease include escalation clauses for increases in certain operating
  expenses and for payment of real estate taxes and utilities. Title to all improvements upon the land
  vests in RMC.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE C - AGREEMENT WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY MEDICAL CENTER (NYU)
During November 1996, USN entered into a neuroradiosurgery equipment agreement (NYU agreement)
with NYU for a period of seven years (the term), with an option for NYU to extend the
term for successive three-year periods or to purchase the Gamma Knife equipment at an appraised market
value price. USN may negotiate the purchase price and upon failure of the parties to agree may request
that the facility be closed. All costs associated with closing and restoring the facility to its
original condition are the responsibility of USN. The equipment agreement, among other matters, requires
USN to provide (i) the use of the Gamma Knife equipment to NYU, (ii) training necessary
for the proper operation of the Gamma Knife equipment, (iii) sufficient supplies for the equipment,
(iv) the repair and maintenance of the equipment, (v) all basic hardware and software upgrades
to the equipment and, (vi) an uptime guarantee. In return, NYU pays USN a scheduled fee based
on the number of patient procedures performed. The Company had patient revenue from NYU in the amounts
of $1,250,000, $995,000 and $1,166,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
During November 2002, USN and NYU agreed to an early renewal of the NYU agreement and an early reload
of the cobalt contained in the Gamma Knife Equipment. The reload process was completed in the summer
of 2003 at a cost of $803,000. The NYU agreement has been extended from December 2004 and now expires
June 2010. In addition, the fee structure under the amendment has changed, effective December 1,
2004, to provide for a payment to USN of a flat fee for each patient procedure performed.
NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE
USN acquired its first Gamma Knife (Knife 1) from Elekta Instruments (Elekta) for $2,900,000 under
a capital lease. The Company refinanced the lease with DVI Financial Services, Inc. (DVI) under a
39-month capital lease with an implicit interest rate of approximately 10.4%. The lease obligation
has been satisfied.
On December 6, 1994, USN entered into an additional agreement with Elekta to acquire a second Gamma
Knife (Knife 2) for $2,900,000 which was also financed by DVI pursuant to a capital lease obligation.
The lease terms provide for interest at the higher of 12.0% or that rate adjusted for any increase
in the thirty-month Treasury Note rate, as defined in the agreement. The lease obligation has been
satisfied.
During 2000, USN entered into two, three-year loan agreements with DVI in the amounts of $625,000 and
$194,000 to finance the removal and reinstallation of the supply of cobalt at RMC. The loans bear
interest at 10.7% per annum and are collateralized by the Gamma Knife at RMC. These loans have been
repaid.
During July 2003, USN entered into a 30-month lease agreement with DVI to finance the removal and reinstallation
of the supply of cobalt at NYU. The loan bears interest at 8.5% and is collateralized by the Gamma
Knife at NYU. The lease obligation has been satisfied.

|F-11
|----



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|December 31, 2004 and 2003                
|                                          

|NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
During May 2003, USN entered into a forty-month agreement with DVI in the amount of $137,000. The loan
bears interest at 9.208% per annum and is collateralized by the Gamma Knife at RMC. This loan has
been repaid.
On May 22, 2001, USN entered into a forty-month loan agreement with DVI or its successor in the
amount of $200,000. The loan bears interest at 9.479% and is collateralized by the Gamma Knife at
RMC.
In August 2003, USN commenced payment on a $750,000 lease for the NYU cobalt reload, which was originally
thought to be fully funded by DVI. Also in August 2003, DVI filed for protection under Chapter 11
of the U.S. Bankruptcy Code and it was determined that DVI had failed to make payments of $150,000
to the cobalt vendor, Elekta. Commencing September 2003, the Company made all loan and lease payments,
then owed to DVI or its successor, into an escrow account held by the Companys attorney and
commenced negotiations for a resolution to the underfunding of the payments to Elekta. During February
2004, the Company paid $50,000 of the amount owed to Elekta. The Company released the escrowed amounts
to DVI or its successor in payment of all loan and lease obligations through March 15, 2004 and reached
an agreement that the amount owed to DVI or its successor for the NYU cobalt reload was equal to
$560,000 representing the amount funded by DVI of $582,000 reduced by a payment made by USN during
August 2003. In April 2004, the Company refinanced the lease for an amount of $728,000 which was
used to repay $560,000 owed to DVI or its successor, to pay the remaining $100,000 plus sales tax
owed to Elekta and to refund $50,000 to the Company for the payment made to Elekta during February
2004. The agreement with SMT Leasing requires 36 monthly payments of $23,107, bears interest at 8.883%
and is collateralized by the Gamma Knife at NYU.
In 2004, the Company has purchased a replacement Gamma Knife (Knife 3) at the RMC site and has financed
this purchase with a capital lease arrangement with SMT Leasing. The lease agreement provides that
any progress payments made to the Gamma Knife manufacturer bear interest at the 60 day U.S. Treasury
note rate, with interest only payments every 30 days until installation is completed and accepted.
Upon equipment acceptance, the lease obligation repayment begins. Such lease terms require 72 monthly
payments of $37,869, at an implicit interest rate of 8.4%.
The obligations under the capital leases and loans payable are as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |              |          
|-------------------------------------- | ------------ | ---------
|                                       | December 31, |          
|                                       |              |          
|                                       | 2004         |          
|                                       |              |          
|                                      
|Capital leases - Gamma Knife           | $            | 1,845,000
|Loans payable - leasehold improvements |              | 74,000   
|                                       |              |          
|                                      
|                                       |              | 1,919,000
|Less current portion                   |              | (467,000 
|                                       |              |          
|                                      
|                                       | $            | 1,452,000
|                                       |              |          

|F-12
|----



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                     
|Notes to Consolidated Financial Statements                                                                                                                           
|December 31, 2004 and 2003                                                                                                                                           
|                                                                                                                                                                     
|NOTE D - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)
      Future payments as of December 31, 2004 on the equipment leases and loans are as follows:

| | Year Ending
      December 31,          |                     |           |           |        
| | --------------------------------------- | ------------------- | --------- | --------- | -------
| |                                         |                     |           |           |        
|
| |                                         | 2005                |           | $         | 529,000
| |                                         | 2006                |           |           | 585,000
| |                                         | 2007                |           |           | 365,000
| |                                         | 2008                |           |           | 273,000
| |                                         | 2009                |           |           | 273,000
| |                                         | 2010 and thereafter |           | 341,000   |        
| |                                         |                     |          
|
| |                                         |                     |           | 2,366,000 |        
| |                                         | Less interest       |           | (447,000  | )      
| |                                         |                     |          
|
| | Present value of net minimum obligation | $                   | 1,919,000 |           |        
| |                                         |                     |          

|The above schedule of minimum lease payments only provides for repayment of the RMC Gamma Knife progress
payments funded by SMT Leasing through December 31, 2004. When fully funded, such minimum rentals
will increase by approximately $1,890,000.
The Companys Gamma Knives are held under capital leases and amortization is included in depreciation
expense.
NOTE E  ASSET RETIREMENT OBLIGATIONS
During 2003, the Company adopted FAS 143 and recorded asset retirement obligations of $200,000 based
upon estimated amounts, consisting principally of removal of Gamma Knives and disposal of regulated
materials and the restoration of facilities at NYU and RMC. The pro forma amount of the liability
as of January 1, 2002 and December 31, 2002 would also approximate $200,000. Such liabilities have
been measured using current information, current assumptions and current interest rates and have
been recorded with a corresponding increase in the carrying value of the Gamma Knives. The Company
is amortizing such costs over the lives of the respective useful lives from inception.
Upon initial application of FAS 143, the Company has recognized $140,000 of accumulated depreciation
and a deferred tax asset of $56,000 and a net increase in accumulated deficit of $84,000 as the cumulative
effect of a change in accounting principles during the year ended December 31, 2003. Application
of provisions of FAS 143 would have resulted in a decrease in net income of approximately $12,000
for the year ended December 31, 2002.
NOTE F - CONCENTRATIONS
For the years ended December 31, 2004, 2003 and 2002, the Company derived all of its patient revenue
from two hospitals. These two hospitals also accounted for 100% of the accounts receivable at December 31,
2004 and 2003.
The Company has been dependent on one manufacturer who sells, supplies and services the Gamma Knife.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F-13
|----



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY                                        
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|December 31, 2004 and 2003                                                     
|                                                                               
|NOTE G - TAXES
      The components of the income tax provision are as follows:

|          | Year Ended December 31, |       
|--------- | ----------------------- | ------
|
|
|
|Current:  |                         |       
|Federal   | $                       | 32,000
|State     |                         | 14,000
|
|
|          |                         | 46,000
|
|
|Deferred: |                         |       
|Federal   |                         | 10,000
|State     |                         | 4,000 
|
|
|          |                         | 14,000
|
|
|          |                         | 60,000
|

|A reconciliation of the tax provision (benefit) calculated at the statutory federal income tax rate with amounts reported follows:
|----------------------------------------------------------------------------------------------------------------------------------

|                                                   | Year Ended December 31, |        
|-------------------------------------------------- | ----------------------- | -------
|
|
|
|
|Income tax (benefit) at the federal statutory rate | $                       | 64,000 
|State income tax (benefit), net of federal taxes   |                         | 9,000  
|Other                                              |                         | (13,000
|
|
|Income tax provision (benefit)                     | $                       | 60,000 
|

|Items which give rise to deferred tax assets and liabilities are as follows:
|----------------------------------------------------------------------------

|                                                                                                                                     |   |         
|------------------------------------------------------------------------------------------------------------------------------------ | - | --------
|
|
|
|
|Deferred tax asset:                                                                                                                  |   |         
|Asset retirement obligations recorded for financial reporting 
          relating to cumulative change in accounting principles      | $ | 60,000  
|Excess of book depreciation over tax depreciation                                                                                    |   | 120,000 
|Deferred tax liability:                                                                                                             
|Net effect of the conversion from accrual basis of accounting to 
          cash basis accounting to cash basis for tax purposes (1) |   | (240,000
|
|                                                                                                                                    
|Net deferred tax liability                                                                                                           | $ | (60,000 
|

|    |                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In January 2003, the Company filed with the Internal Revenue Service to compute its taxable income utilizing the


  cash basis of accounting rather than the accrual basis.

|F-14
|----



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|December 31, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE H - LITIGATION
      The Company is involved in certain claims and legal actions from time to time arising in the ordinary course of business. In the opinion of management, the ultimate disposition of any such matters has not, and is not expected to, have a material adverse effect on the financial position of the Company.
      NOTE I  COMMITMENTS AND CONTINGENCIES
      Leases:
    The Company leases office space under an operating lease expiring March 2008. The terms of the lease include an escalation clause for a portion of certain operating expenses. At December 31, 2004, the annual future minimum rental payments under the operating lease and the ground lease referred to in Note B(2) are as follows:

| | Year Ending
      December 31, |  |  
| | ------------------------------ |  | -
| |                                |  |  
|
| | 2005                           |  | $
| | 2006                           |  |  
| | 2007                           |  |  
| | 2008                           |  |  
| |                                |  |  
|
| |                                |  | $
| |                                |  |  

|Rent expense was approximately $41,000, $36,000 and $36,000 for the years ended December 31, 2004, 2003, and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Gamma Knives:
  The Company has entered into a contract to purchase a new Gamma Knife for approximately $2,136,000
to replace the existing equipment at the RMC site. Additionally, the Company has obtained lease financing
in connection with its purchase of the Gamma knife and has received advances under this lease (used
to fund progress payments) of $1,282,000 at December 31, 2004. Additional advances of $854,000 will
be required to fully fund the purchase of the new Gamma Knife equipment.
The Company is required to reload cobalt at each facility approximately every 5 years. The cobalt of
RMC was reloaded in 2000 at a cost of approximately $800,000 and cobalt at NYU was reloaded in 2003
at a cost of approximately $803,000.
Product Liability:
Although the Company does not directly provide medical services, it has obtained professional medical
liability insurance, and has general liability insurance as well. The Companys professional
medical liability and general liability policies have limits of $2 million each and the Company also
has an excess coverage policy providing $8 million of insurance coverage. The Company believes that
its insurance is adequate for providing treatment facilities and non-medical services, although there
can be no assurance that the coverage limits of such insurance will be adequate or that coverage
will not be reduced or become unavailable in the future.

|F-15
|----



|U.S. NEUROSURGICAL, INC. AND SUBSIDIARY   
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|December 31, 2004 and 2003                

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE J - EMPLOYEES 401(K) PLAN
The Company has established an employee benefits plan covering substantially all of its employees,
which includes employer participation, in accordance with the provisions of Section 401(k) of
the Internal Revenue Code. The plan allows participants to make pre-tax contributions and the Company
may, at its discretion, match certain percentages of the employee contribution. Amounts contributed
to the plan are deposited into a trust fund administered by independent trustees. The Companys
discretionary matching 401(k) contributions for the years ended 2004, 2003 and 2002 were approximately
$61,000, $45,000 and $33,000, respectively.
NOTE K - RELATED PARTY TRANSACTIONS
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|[1] | The amount due to stockholder is due on demand without interest.                                                                                                                                                                                                                                                            
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                             
|[2] | The Company and its president are parties to an employment agreement giving either party the option
  to terminate employment by giving the other party six months written notice. The presidents
  compensation for the years ended December 31, 2004, 2003 and 2002 were $300,000, $300,000 and
  $300,000, respectively.
|    |                                                                                                                                                                                                                                                                                                                             
|[3] | During the year ended December 31, 2002, the Company hired a family member of an officer for computer
  consulting services. Such consulting expense amounted to $4,000.                                                                                                                                                    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE L - TREASURY STOCK
In December 2000, the USN board of directors authorized the repurchase of up to 500,000 shares of USNs
common stock. Through December 31, 2004, the Company had repurchased 454,500 shares at a cost
of $32,000, of which 250,500 shares were retired in 2001 and 204,000 shares were retired in 2004.
NOTE M  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations:

|                                          | Three Months Ended |     
|----------------------------------------- | ------------------ | ----
|
|
|2004                                      |                    |     
|Revenue                                   |                    | 529 
|Income (loss) from operations             |                    | 40  
|Net income (loss)                         |                    | 33  
|Basic and diluted income per common share | $                  | 0.00
|                                          |                    |     
|                                          |                    |     
|                                          |                    |     
|2003                                      |                    |     
|Revenue                                   |                    | 835 
|Income (loss) from operations             |                    | 257 
|Net income (loss)                         |                    | 136 
|Basic and diluted income per common share | $                  | 0.02
|                                          |                    |     

|F-16
|----