SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No.1)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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. Employerincorporation 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  Securities
          Registered Pursuant to Section 12(b) of the Act:Title
          of Each Class
      Name
          of Each Exchange on Which RegisteredNone
      Not
          ApplicableSecurities
          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 ___________  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.   1     EXPLANATORY NOTE



This Amendment No. 1 on Form 10-K/A (Form 10-K/A) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, initially filed with the U.S. Securities and Exchange Commission (SEC) on April 13, 2005 (the Original Filing) reflects a restatement of our consolidated financial statements in order to reflect the cumulative effect of adopting the Financial Accounting Standards Boards Statement No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143), in the statement of operations for the year ended December 31, 2003, rather than reflecting it directly within retained earnings. This resulted in restatement of the consolidated statements of operations, consolidated statements of stockholders equity, consolidated statements of cash flows and notes E and M to reflect the $84,000 (net of
income tax effect of $56,000) change in the results of operations of the Company. Conforming changes were also made to the Selected Financial Data for 2003 presented in Item 6 of the Form 10-K/A and to the quarterly data presented in Item 8. These changes affect only the results for the fiscal year ended December 31, 2003.



In addition, in order to provide a clearer understanding of our disclosure controls and procedures, and one that is consistent with current regulations under the Securities Exchange Act of 1934 (the Regulations), we have revised our disclosure in Item 14 of Form 10-K/A  Controls and Procedures.



We have also amended our discussion in Item 14 of Form 10-K/A - Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources  in order to provide the tabular format for the disclosures of our contractual obligations as required under the Regulations.



Although this Form 10-K/A contains all of the items required to be included in an annual report on Form 10-K, no information in the Original Filing, other than specifically indicated above, is amended hereby.



Upon discovery of the incorrect application of SFAS No. 143, management reported
its findings to its independent public accounting firms and to the audit




2


committee of the board of directors. After further discussions between
management and its independent public accounting firms, management recommended
to the audit committee that our previously reported 2003 financial statements
should be restated to correct this error, and the audit committee agreed with
this recommendation. As a result of the decision to restate our consolidated
financial statements and make the other modifications described above, we
reevaluated our disclosure controls and procedures as of the date of the
Original Filing and determined that the failure to correctly apply SFAS No. 143
constituted a material weakness in our control over financial reporting for
asset retirement obligations. With recent changes and improvements, management
believes that it has fully remediated that weakness as of the date of filing of
this report. (See Item 14. Controls and Procedures. )



This Form 10-K/A does not reflect events occurring after the date of the
Original Filing or modify or update those disclosures affected by subsequent
events. Consequently, all other information is unchanged and reflects the
disclosures made at the time of the Original Filing. Accordingly, this Form
10-K/A should be read in conjunction with our filings made subsequent to the
Original Filing. With this Form 10-K/A, our Chief Executive Officer has also
reissued his certifications required by Sections 302 and 906 of the
Sarbanes-Oxley Act.






3


Part I




ITEM 1.
        BUSINESS

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




4


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




5


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




6


approximately $1,154,000, $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 $1,249,000, $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




7


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




8


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.




CompetitionThe health care industry, in general, is highly competitive and the Company expects to have substantial competition from other independent organizations, as well as




9


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 or services from Elekta would adversely affect USNs ability to maintain its Gamma Knife treatment centers.






10


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.




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




11


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 PROCEEDINGSNone


ITEM 4.
        SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS


None




12


PART II

ITEM 5.
        MARKET FOR THE REGISTRANTS COMMON STOCK ANDRELATED SECURITY HOLDER MATTERS

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
        BidJanuary
        1  March 31, 2003
    .10
    .05April
        1 - June 30, 2003
    .12
    .07July
        1  September 30, 2003
    .17
    .08October
        1  December 31, 2003
    .13
    .08January
        1  March 31, 2004
    .11
    .09April
        1 - June 30, 2004
    .11
    .09July
        1  September 30, 2004
    .13
    .09October
        1  December 31, 2004
    .17
    .09The 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.








13


Year Ended

December 31,

(in thousands, except per share amounts)

___________________________________________________________________________




2004
    2003
    2002
    2001
    2000(As
      restated)Operating
        Revenue
    $2,403
    $2,444
    $2,639
    $2,573
    $2,575Expenses:Patient
        expense
    780
    820
    930
    1133
    1,125General
        and administrative
    1384
    1411
    1386
    1282
    1,338Interest
        expense
    59
    86
    163
    277
    318Cumulative
        effect of accounting method change (net of applicable income income tax
        of $56,000)
    
    (84)Net
        Income (loss)
    123
    (23)
    98
    120
    (17)Basic
        and diluted Income (loss) per common share:Income
        before cumulative effect of accounting method change
    $0.02
    $0.01
    $0.01
    $0.02
    $0.00Cumulative
        effect of accounting method change
    
    $(0.01)Net
        income (loss)
    $0.02
    $0.00
    $0.01
    $0.02
    $0.00


December 31,2004
    2003
    2002
    2001
    2000Balance
        Sheet Data:Cash
        and cash equivalents
    $511
    $89
    $88
    $311
    $286Total
        assets
    4,201
    3,150
    2,963
    3,795
    4,856Long-term
        obligations
    1,652
    542
    101
    1,005
    2,168Stockholders
        equity (deficiency)
    1,464
    1,337
    1,368
    1,279
    1,131






14


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.










15


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 decrease in net income of $84,000 as the cumulative effect of the accounting method change 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






16


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.

The following is a summary of the Companys contractual obligations at December 31, 2004:




Contractual
        Obligations
    Payments
        due by periodTotal
    Less
        than 1 year
    1-3
      years
    3-5
      years
    More
        than
      5
        yearsCapital
        (Finance) Lease Obligations
    1,919,000
    467,000
    1,452,000Operating
        Lease Obligations
    153,000
    39,600
    79,200
    16,200
    18,000Asset
        retirement obligation
    200,000
    
    
    100,000
    100,000Total
    2,272,000
    506,400
    1,531,800
    116,200
    118,000

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)




17


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.




ITEM 7A.
        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKNone


ITEM 8.
        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe Financial Statements and Supplementary Data are listed under Item 14 in thisAnnual Report of Form 10-K and attached hereto.
Quarter
      Ended**2004**
    
    
    31-Mar
    
    30-Jun
    
    30-Sep
    
    31-Dec
    
    Year**Revenue**
    
    
    
    529
    
    
    774
    
    
    637
    
    
    463
    
    $
    2,403**Income
      (Loss) from operations**
    
    
    
    40
    
    
    246
    
    
    85
    
    
    (132
    )
    
    239**Net
      Income (loss)**
    
    
    
    33
    
    
    131
    
    
    44
    
    
    (85
    )
    
    123**Basic
      and diluted Income per common share**
    
    
    $
    0.00
    
    $
    0.0
    2
    $
    0.0
    1
      -
      $0.01
    
    $
    0.02**2003**
    
    
    31-Mar
    
    30-Jun
    
    30-Sep
    
    31-Dec
    
    Year**Revenue**
    
    
    
    835
    
    
    550
    
    
    490
    
    
    569
    
    $
    2,444**Income
      (Loss) from operations**
    
    
    
    257
    
    
    (54
    )
    
    (157
    )
    
    167
    
    
    213**Net
      Income (loss)**
    
    
    
    136
    
    
    (41
    )
    
    (110
    )
    
    (8
    )
    
    (23
    )**Basic
      and diluted Income per common share**
    
    
    $
    0.02
    
      -
      $0.01
    
      -
      $0.01
    
    $
    0.00
    
    $
    0.00**2002**
    
    
    31-Mar
    
    30-Jun
    
    30-Sep
    
    31-Dec
    
    Year**Revenue**
    
    
    
    746
    
    
    638
    
    
    660
    
    
    595
    
    $
    2,639**Income
      (Loss) from operations**
    
    
    
    196
    
    
    69
    
    
    64
    
    
    (6
    )
    
    323**Net
      Income (loss)**
    
    
    
    84
    
    
    15
    
    
    19
    
    
    (20
    )
    
    98**Basic
      and diluted Income per common share**
    
    
    $
    0.01
    
    $
    0.00
    
    $
    0.00
    
    $
    0.00
    
    $
    0.01


ITEM 9.
        DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE


None




18


PART III




ITEM 10.
        DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT




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 Goldhas 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. Leimkuhlerhas 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




19


October 1999,  he served as Vice President and General Counsel of Allen & Company Incorporated, an investment banking firm.



Charles H. Merriman, IIIhas 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 Grunfeldhasserved 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.






20


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 ComplianceBased 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




Name
        and
    Annual
        CompensationPrincipal
        Position
    Year
    Salary($)Alan
        Gold
    2004
    $300,000President
        & Director
    2003
    $300,0002002
    $300,000




21


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.
        SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

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
      Address
      of Beneficial Owner
    
    
    Number of
      Shares
      Beneficially
      Owned (1)
    
    Percent of
      ClassAlan
      Gold (2)
      2400 Research Blvd 
      Rockville, MD 20850
    
    
    
    1,140,246
    
    
    
    14.5
    %Howard Grunfeld
      2400 Research Blvd 
      Rockville, MD 20850
    
    
    
    155,900
    
    
    
    2.0
    %William F.
      Leimkuhler
      43 Salem Straits Road
       Darien, CT 06820
    
    
    
    100,000
    
    
    
    1.3
    %Charles H.
      Merriman III
      5507 Cary St. Road 
      Richmond, VA 23226
    
    
    
    130,672
    
    
    
    1.7
    %Stanley S.
      Shuman (3)
      711 Fifth Avenue 
      New York, NY 10022
    
    
    
    2,688,000
    
    
    
    34.2
    %Allen & Company
      Incorporated
      711 Fifth Avenue 
      New York, NY 10022
    
    
    
    1,847,000
    
    
    
    23.4
    %All Directors
      and Officers of USN
      as a group (2) (four persons)
    
    
    
    1,526,818
    
    
    
    19.5
    %

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




22


(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.                              .






23


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,




24


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.

As further discussed in Note A[1] to the consolidated financial statements, we have restated the consolidated financial statements in order to reflect the cumulative effect of adopting the Financial Accounting Standards Boards Statement No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143), in the statement of operations for the year ended December 31, 2003, rather than reflecting it directly within retained earnings.

Disclosure Controls and Procedures

Management of the Company, including the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Companys disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as
of the end of the period covered by this Amendment No. 1 on Form 10-K/A
(Form 10-K/A) to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, initially filed with the U.S.
Securities and Exchange Commission (the SEC) on April




25


13, 2005. In
connection with the restatement of the consolidated financial statements
presented in this Form 10-K/A, under the direction of the Companys Chief
Executive Officer, management reevaluated the Companys disclosure controls and procedures and determined that the failure to correctly apply SFAS No. 143 constituted a material weakness in the Companys control over financial reporting for asset retirement obligations.


  In
    connection with the preparation and filing of this Form 10-K/A, management
    of the Company took certain steps to enhance its disclosure controls and procedures,
    not only in connection with the deficiency with respect to asset retirement
    obligations, but also due to other recent changes in the Companys operations,
    including (1) the sudden death of our former CFO and (2) issues with major
    customers that have required us to re-evaluate operations to achieve greater
    efficiencies. The Company chose not to hire a new CFO at this time, but in
    the interests of efficiency, one of the Companys outside directors will
    play a greater role in the reporting and disclosure process (the Director/Advisor)
    and a part-time controller has been retained. Consideration is being given
    to increasing the size of the Board of Directors and steps have been taking
    to providing the members of the Audit Committee with broader access to employees
    and advisors responsible for accounting and financial reporting. In addition,
    the Company has formed a Disclosure Committee, initially consisting of the
    CEO and the Director/Advisor, which will periodically review the Companys
    disclosure controls and procedures, will take steps to ensure that material
    information is available to the Disclosure Committee (as well as the Board
    of Directors and the Audit Committee) on a timely basis and will have principal
    oversight and responsibility for the preparation of periodic reports. In addition,
    the Disclosure Committee is charged with evaluating the applicability and
    the appropriate implementation of prevailing accounting standards and concepts
    and pronouncements issued by the FASB and other regulatory bodies and self-regulatory
    organizations (such as SFAS 143). While these steps were prompted in large
    part by recent changes in the Companys operations, these adjustments
    will improve disclosure controls and procedures generally, and specifically
    as they relate to the previously identified deficiency in reporting for asset
    retirement obligations as provided under SFAS 143.




26


Management believes that it has fully remediated the weakness identified as to
asset retirement obligations as of the date of filing of this report. Based upon
the Companys reevaluation of disclosure controls and procedures, the
actions taken to
remediate the deficiency, and the modifications to the Companys controls
and procedures described above, the Companys Chief Executive Officer has
concluded that the Companys disclosure controls and procedures were
effective as of the date of the filing of this Form 10-K/A for the information
required to be disclosed by the Company in the reports it files or submits under
the Securities Exchange Act of 1934, as amended, to be recorded, processed,
summarized and reported within the time periods specified in the SECs
rules and forms.


Changes in Internal Control Over Financial Reporting



There have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.






27


PART IV




ITEM 15.
        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTSON FORM 8-K


(a)
    The
        following documents are filedas
        part of this report:Page
        No.ConsolidatedFinancial Statements of the Company
    F-1Report
        of Independent Registered Public Accounting Firm
    F-2,3Balance
        Sheets as of December 31, 2004 and 2003
    F-4Statements
        of Operations for the years endedDecember
        31, 2004, 2003, and 2002.
    F-5Statements
        of Changes in Stockholders Equityfor
        the period January 1, 2002 throughDecember
        31, 2004
    F-6Statements
        of Cash Flows for the year endedDecember
        31, 2004, 2003, and 2002.
    
    F-7Notes
        to Financial Statements
    
    F-8

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-KDecember 16, 2004Notice 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)(f)
        Assignment and Assumption Agreement dated May 27, 1999 between GHS and USN (1)




28


(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.






29


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:  March 7, 2006




U.S. Neurosurgical, Inc.(Registrant)




By/s/ Alan GoldAlan GoldPresident and Chief Executive OfficerandPrincipal Financial Officer

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.

March 7, 2006
        /s/ Alan GoldAlan GoldPresident and Director(Chief Executive Officer)




March 7, 2006
        /s/ William F. LeimkuhlerWilliam F. LeimkuhlerDirector


March 7, 2006
        /s/ Charles H. Merriman IIICharles H. Merriman IIIDirector






30


U.S.              NEUROSURGICAL,
INC. AND SUBSIDIARY


Contents



Page**Consolidated
      Financial Statements**
    ****
    ****
    **F-1**Report
      of Independent Registered Public Accounting Firm
    
    
    F-2Report
      of Independent Registered Public Accounting Firm
    
    
    F-3Balance
      sheets as of December 31, 2004 and 2003
    
    
    F-4Statements
      of operations for the years ended December 31, 2004, 2003 and 2002
    
    
    F-5Statements
      of stockholders equity for the years ended December 31, 2004, 2003 and
      2002
    
    
    F-6Statements
      of cash flows for the years ended December 31, 2004, 2003 and 2002
    
    
    F-7Notes
      to financial statements
    
    
    F-8F-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 U.S. NeuroSurgical, Inc. and 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 U.S. NeuroSurgical, Inc. and subsidiary as of
December 31, 2003, and the consolidated results of their operations and their
consolidated cash flows for the years ended December 31, 2003 and 2002 in conformity
with U.S. generally accepted accounting principles.


The 2003 consolidated financial
statements have been restated with respect to the presentation of the cumulative effect of
a change in accounting method as more fully described in Note A[1].


EISNER LLP


New York, New YorkFebruary 4, 2004



With respect to the third paragraph
of Note A[1]December 23, 2005

F-3




U.S.
          NEUROSURGICAL, INC. AND SUBSIDIARY


Consolidated Balance
Sheets

December 31,2004
    
    2003**ASSETS**Current assets:Cash
      and cash equivalents
    
    
    **$**
    **511,000**
    
    $
    89,000Accounts
      receivable (net of allowance for doubtful accounts of
              $36,000 in 2004 and 2003)
    
    
    ****
    **404,000**
    
    
    372,000Accounts
      receivable - stockholder
    
    
    ****
    **57,000**
    
    
    96,000Other
      current assets
    
    
    ****
    **199,000**
    
    
    144,000Cash
      held in escrow
    
    
    ****
    ****
    
    
    211,000Total
      current assets
    
    
    ****
    **1,171,000**
    
    
    912,000Property
      and equipment:Gamma
      Knives (net of accumulated depreciation of
              $7,147,000 in 2004 and $6,645,000
      in 2003)
    
    
    ****
    **965,000**
    
    
    1,467,000Leasehold
      improvements (net of accumulated amortization of
              $1,545,000 in 2004 and $1,483,000
      in 2003)
    
    
    ****
    **497,000**
    
    
    559,000Office
      furniture and computers (net of accumulated depreciation of
              $107,000 in 2004 and $105,000
      in 2003)
    
    
    ****
    ****
    
    
    2,000****
    **1,462,000**
    
    
    2,028,000Progress
      payments - RMC Gamma Knife
    
    
    ****
    **1,282,000**
    
    
    Cash held
      in escrow
    
    
    ****
    **106,000**
    
    
    106,000Deferred
      tax asset
    
    
    ****
    **180,000**
    
    
    104,000**$**
    **4,201,000**
    
    $
    3,150,000**LIABILITIES**Current liabilities:Accounts
      payable and accrued expenses
    
    
    **$**
    **39,000**
    
    $
    198,000Obligations
      under capital leases and loans payable - current portion
    
    
    ****
    **467,000**
    
    
    581,000Due
      to stockholder
    
    
    ****
    **300,000**
    
    
    300,000Deferred
      tax liability
    
    
    ****
    **240,000**
    
    
    150,000Other
      current liabilities
    
    
    ****
    **39,000**
    
    
    42,000Total
      current liabilities
    
    
    ****
    **1,085,000**
    
    
    1,271,000Asset retirement
      obligations
    
    
    ****
    **200,000**
    
    
    200,000Obligations
      under capital leases and loans payable - net of current portion
    
    
    ****
    **1,452,000**
    
    
    342,000Total
      liabilities
    
    
    ****
    **2,737,000**
    
    
    1,813,000Commitments,
      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**
    
    
    79,000Additional
      paid-in capital
    
    
    ****
    **2,797,000**
    
    
    2,808,000Accumulated
      deficit
    
    
    ****
    **(1,410,000**
    )
    
    (1,533,000
    )Treasury
      stock, at cost, 204,000 shares in 2003
    
    
    ****
    ****
    
    
    (17,000
    )****
    **1,464,000**
    
    
    1,337,000**$**
    **4,201,000**
    
    $
    3,150,000See notes to consolidated
financial statements
F-4




U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY


Consolidated Statements
of Operations


Year
      Ended December 31,2004
    
    2003
    
    2002(Restated
      Note A[1])Revenue
      (Notes B and C)
    
    
    **$**
    **2,403,000**
    ****
    $
    2,444,000
    
    $
    2,639,000Costs and
      expenses:Patient
      expenses
    
    
    ****
    **780,000**
    ****
    
    820,000
    
    
    930,000Selling,
      general and administrative
    
    
    ****
    **1,384,000**
    ****
    
    1,411,000
    
    
    1,386,000****
    **2,164,000**
    ****
    
    2,231,000
    
    
    2,316,000Income from
      operations
    
    
    ****
    **239,000**
    ****
    
    213,000
    
    
    323,000Interest
      expense
    
    
    ****
    **(59,000**
    **)**
    
    (86,000
    )
    
    (163,000
    )Interest
      income
    
    
    ****
    **3,000**
    ****
    
    1,000
    
    
    3,000****
    **(56,000**
    **)**
    
    (85,000
    )
    
    (160,000
    )Income before
      income taxes and cumulative effect of
           accounting method change
    
    
    ****
    **183,000**
    ****
    
    128,000
    
    
    163,000Provision
      for income tax
    
    
    ****
    **(60,000**
    **)**
    
    (67,000
    )
    
    (65,000
    )Income before
      cumulative effect of accounting method change
    
    
    ****
    **123,000**
    ****
    
    61,000
    
    
    98,000Cumulative
      effect of accounting method change (net of
           applicable income tax of $56,000)
    
    
    ****
    ****
    ****
    
    (84,000
    )
    
    **Net
      income (loss)**
    
    
    **$**
    **123,000**
    ****
    $
    (23,000
    )
    $
    98,000**Basic
      and diluted net income (loss) per share:**Income before
      cumulative effect of accounting method change
    
    
    **$**
    **0.02**
    ****
    $
    0.01
    
    $
    0.01Cumulative
      effect of accounting method change
    
    
    ****
    ****
    ****
    
    (0.01
    )
    
    **Net
      income (loss)**
    ****
    ****
    **$**
    **0.02**
    ****
    $
    
    
    $
    0.01**Weighted
      average common shares outstanding**
    ****
    ****
    ****
    **7,767,100**
    ****
    
    7,791,555
    
    
    7,796,645See notes to consolidated
financial statements
F-5




U.S.
          NEUROSURGICAL, INC. AND SUBSIDIARY


Consolidated Statements
of Stockholders' Equity (Restated Note A[1])
Common
      Stock
    
    
    
    Treasury
      StockNumber
      of
      Shares
    
    Amount
    
    Additional
      Paid-in
      Capital
    
    Accumulated
      Deficit
    
    Number
      of
      Shares
    
    Amount
    
    Total**Balance
      - January 1, 2002**
    
    
    
    7,866,185
    
    $
    79,000
    
    $
    2,808,000
    
    $
    (1,608,000
    )
    
    
    
    $
    
    
    $
    1,279,000Purchase
      of 114,000 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,000
    )
    
    (9,000
    )
    
    (9,000
    )Net income
      for the year ended
         December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    98,000
    
    
    
    
    
    
    
    
    98,000**Balance
      - December 31, 2002**
    
    
    
    7,866,185
    
    
    79,000
    
    
    2,808,000
    
    
    (1,510,000
    )
    
    (114,000
    )
    
    (9,000
    )
    
    1,368,000Purchase
      of 90,000 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,000
    )
    
    (8,000
    )
    
    (8,000
    )Net loss
      for the year ended
         December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    (23,000
    )
    
    
    
    
    
    
    
    (23,000
    )**Balance
      - December 31, 2003**
    
    
    
    7,866,185
    
    
    79,000
    
    
    2,808,000
    
    
    (1,533,000
    )
    
    (204,000
    )
    
    (17,000
    )
    
    1,337,000Retirement
      of treasury stock
    
    
    
    (204,000
    )
    
    (2,000
    )
    
    (15,000
    )
    
    
    
    
    204,000
    
    
    17,000
    
    
    Issuance
      of common stock as compensation
    
    
    
    35,000
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Net income
      for the year ended
         December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    123,000
    
    
    
    
    
    
    
    
    123,000**Balance
      - December 31, 2004**
    
    
    **$**
    **7,697,185**
    ****
    **$**
    **77,000**
    ****
    **$**
    **2,797,000**
    ****
    **$**
    **(1,410,000**
    **)**
    **$**
    ****
    ****
    **$**
    ****
    ****
    **$**
    **1,464,000**
    ****See notes to
consolidated financial statements


F-6




U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY




Consolidated Statements
of Cash Flows
Year
        Ended December 31,2004
      
      2003
      
      2002(Restated
        Note A[1])**Cash
        flows from operating activities:**Net
        income (loss)
      
      
      **$**
      **123,000**
      ****
      $
      (23,000
      )
      $
      98,000Adjustments
        to reconcile net income to net cash provided by
                operating activities:Cumulative
        effect of accounting method change
                      for
        asset retirement obligations
      
      
      ****
      ****
      ****
      
      84,000
      
      
      Issuance
        of stock as compensation
      
      
      ****
      **4,000**
      ****
      
      
      
      
      Depreciation
        and amortization
      
      
      ****
      **566,000**
      ****
      
      779,000
      
      
      912,000Deferred
        income tax provision
      
      
      ****
      **14,000**
      ****
      
      41,000
      
      
      33,000Changes
        in:Accounts
        receivable
      
      
      ****
      **(32,000**
      **)**
      
      142,000
      
      
      (113,000
      )Accounts
        receivable - stockholder
      
      
      ****
      **39,000**
      ****
      
      13,000
      
      
      (79,000
      )Other
        current assets
      
      
      ****
      **(55,000**
      **)**
      
      (26,000
      )
      
      (65,000
      )Accounts
        payable and accrued expenses
      
      
      ****
      **(159,000**
      **)**
      
      (21,000
      )
      
      (33,000
      )Other
        current liabilities
      
      
      ****
      **(3,000**
      **)**
      
      3,000
      
      
      (20,000
      )Net
        cash provided by operating activities
      
      
      ****
      **497,000**
      ****
      
      992,000
      
      
      733,000**Cash
        flows from investing activities:**Property
        and equipment
      
      
      
      
      
      
      (803,000
      )
      
      Progress
        payments - RMC Gamma Knife
      
      
      ****
      **(1,282,000**
      **)**
      
      
      
      
      Decrease
        (increase) in cash held in escrow
      
      
      ****
      **211,000**
      ****
      
      (211,000
      )
      
      (1,000
      )Net
        cash used in investing activities
      
      
      ****
      **(1,071,000**
      **)**
      
      (1,014,000
      )
      
      (1,000
      )**Cash
        flows from financing activities:**Repayment
        of capital lease and loan obligations
      
      
      ****
      **(1,014,000**
      **)**
      
      (688,000
      )
      
      (946,000
      )Cash
        received on financing of equipment
      
      
      ****
      **2,010,000**
      ****
      
      719,000
      
      
      Purchase
        of treasury stock
      
      
      ****
      ****
      ****
      
      (8,000
      )
      
      (9,000
      )Net
        cash used in financing activities
      
      
      ****
      **996,000**
      ****
      
      23,000
      
      
      (955,000
      )**Net
        change in cash and cash equivalents**
      
      
      ****
      **422,000**
      ****
      
      1,000
      
      
      (223,000
      )Cash
        and cash equivalents - beginning of year
      
      
      ****
      **89,000**
      ****
      
      88,000
      
      
      311,000**Cash
        and cash equivalents - end of year**
      
      
      **$**
      **511,000**
      ****
      $
      89,000
      
      $
      88,000**Supplemental
        disclosures of cash flow information:**Cash
        paid for:Interest
      
      
      **$**
      **59,000**
      ****
      $
      86,000
      
      $
      158,000Income
        taxes
      
      
      **$**
      **44,000**
      ****
      $
      
      
      $
      164,000**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




NOTE A  THE
COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES


[1]
Basis
of preparation and restatement: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.We
have restated the consolidated financial statements in order to reflect the cumulative
effect of adopting the Financial Accounting Standards Boards Statement No. 143,
Accounting for Asset Retirement Obligations, in the statement of operations for the year
ended December 31, 2003, rather than reflecting it directly within retained earnings. This
resulted in restatement of the consolidated statements of operations, consolidated
statements of stockholders equity, consolidated statements of cash flows and notes E
and M to reflect the $84,000 (net of income tax effect of $56,000) change in the results
of operations of the Company.Year ended
      December 31, 2003**As
      previously reported:**Net
      income
    
    
    $
    61,000Net
      income per share
    
    
    $
    0.01**As
      restated:**Income
      before cumulative effect of accounting method change
    
    
    $
    61,000Cumulative
      effect of accounting method change (net
          of applicable income tax of $56,000)
    
    
    
    (84,000
    )Net
      (loss)
    
    
    $
    (23,000
    )Net
      income (loss) per share:Income
      before cumulative effect of accounting method change
    
    
    $
    0.01Cumulative
      effect of accounting method change
    
    
    
    (0.01
    )Net
      (loss)
    
    
    $
    0.00[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.F-8




U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY




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


[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.[7]
Earnings
per shareEarnings
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
costsThe
Company follows the policy of charging the costs of advertising to expense as incurred.[9]
Bad
debtsThe
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.F-9



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY




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


[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 afterJanuary
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.F-10



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY





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


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.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.F-11



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY





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.


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


F-12



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY




NOTE D  OBLIGATION
UNDER CAPITAL LEASE AND LOANS PAYABLE (CONTINUED)


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
      
      2003Capital
        leases - Gamma Knife
      
      
      **$**
      **1,845,000**
      ****
      $
      756,000Loans payable
        - leasehold improvements
      
      
      ****
      **74,000**
      ****
      
      167,000**$**
      **1,919,000**
      ****
      $
      923,000Less current
        portion
      
      
      ****
      **(467,000**
      **)**
      
      (581,000
      )**$**
      **1,452,000**
      ****
      $
      342,000Future payments as of
December 31, 2004 on the equipment leases and loans are as follows:



Year Ending
      December 31,2005
    
    $
    529,0002006
    
    
    585,0002007
    
    
    365,0002008
    
    
    273,0002009
    
    
    273,0002010 and
      thereafter
    
    
    341,0002,366,000Less interest
    
    
    (447,000
    )Present value
      of net minimum obligation
    
    $
    1,919,000The 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.

F-13



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY





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 decrease in net income of $84,000 as the cumulative effect of the
accounting method change 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.


NOTE G  TAXES


The components of the income tax
provision are as follows:





Year
      Ended December 31,2004
    
    2003
    
    2002Current:Federal
    
    
    **$**
    **32,000**
    ****
    (15,000
    )
    $
    24,000State
    
    
    ****
    **14,000**
    ****
    41,000
    
    
    8,000****
    **46,000**
    ****
    26,000
    
    
    32,000Deferred:Federal
    
    
    ****
    **10,000**
    ****
    35,000
    
    
    28,000State
    
    
    ****
    **4,000**
    ****
    6,000
    
    
    5,000****
    **14,000**
    ****
    41,000
    
    
    33,000****
    **60,000**
    ****
    67,000
    
    
    65,000F-14



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY




NOTE G  TAXES
(CONTINUED)


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





Year
      Ended December 31,2004
    
    2003
    
    2002Income
      tax (benefit) at the federal statutory rate
    
    
    **$**
    **64,000**
    ****
    $
    44,000
    
    $
    52,000State income
      tax (benefit), net of federal taxes
    
    
    ****
    **9,000**
    ****
    
    23,000
    
    
    13,000Other
    
    
    ****
    **(13,000**
    **)**
    
    
    
    
    Income tax
      provision (benefit)
    
    
    **$**
    **60,000**
    ****
    $
    67,000
    
    $
    65,000Items which give rise to deferred tax
assets and liabilities are as follows:



December 31,2004
    
    2003Deferred
      tax asset:Asset
      retirement obligations recorded for financial reporting relating to
           cumulative change in accounting principles
    
    
    **$**
    **60,000**
    ****
    $
    58,000Excess
      of book depreciation over tax depreciation
    
    
    ****
    **120,000**
    ****
    
    46,000Deferred
      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**
    **)**
    
    (150,000
    )Net deferred
      tax liability
    
    
    **$**
    **(60,000**
    **)**
    $
    (46,000
    )(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.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.


F-15



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY



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
    
    $
    40,0002006
    
    
    40,0002007
    
    
    40,0002008
    
    
    10,000$
    130,000Rent 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.


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.


F-16



U.S. NEUROSURGICAL, INC.
AND SUBSIDIARY




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 Ended31-Mar
    
    
    30-Jun
    
    
    30-Sep
    
    
    31-Dec**2004**Revenue
    
    
    
    529
    
    
    774
    
    
    637
    
    
    463Income
      (loss) from operations
    
    
    
    40
    
    
    246
    
    
    85
    
    
    (132
    )Net
      income (loss)
    
    
    
    33
    
    
    131
    
    
    44
    
    
    (85
    )Basic
      and diluted income per common share
    
    
    $
    0.00
    
    $
    0.02
    
    $
    0.01
    
    $
    -0.01**2003**Revenue
    
    
    
    835
    
    
    550
    
    
    490
    
    
    569Income
      (loss) from operations
    
    
    
    257
    
    
    (54
    )
    
    (157
    )
    
    167Income
      (loss) before cumulative effect of
               accounting method
      change
    
    
    
    136
    
    
    (41
    )
    
    (110
    )
    
    76Cumulative
        effect of accounting method change
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )(As
      restated - See Note A[1])Net
      income (loss)
    
    
    
    136
    
    
    (41
    )
    
    (110
    )
    
    (8
    )Basic
      and diluted income per common share
    
    
    $
    0.02
    
    $
    -0.01
    
    $
    -0.01
    
    $
    0.00F-17