UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-K  x
  ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005oro
  TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor the transition period from         
           to         
          . Commission file number:  0-15586 U.S. Neurosurgical, Inc.(Exact name of registrant as
specified in its charter) Delaware
  
  52-1842411(State of other jurisdiction of
  incorporation or organization)
  
  (I.R.S. Employer Identification No.) 2400 Research
Blvd, Suite 325, Rockville, Maryland 20850
(Address of principal executive offices) (301) 208-8998(Registrants telephone
number) Securities
  Registered Pursuant to Section 12(b) of the Act:
  NoneSecurities
  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 by Section 13 or 15(d) of the Exchange Act during the preceding 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              
                    
Noo
  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.          Yes  x              
                    
Noo Indicate by
check mark whether the registrant is a large accelerated filer, an accerated filer or a non-accelerated filer.  See definition of
accelerated filer and large accerated filer in Rule
12b-2 of the Exchange Act. Large accelerated filer o
  
  Accelerated filer o
  
  Non-accelerated filer x  Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes  o              
                    
Nox
 The aggregate
market value of Registrants Common Stock held by non-affiliates was
approximately $600,000 on March 17, 2006, based upon the average of the bid and
asked prices as reported on the OTC Bulletin Board. As of March
24, 2006, there were outstanding 7,697,185 shares of the registrants Common
Stock. $.01 par value. Documents
incorporated by reference:  None    FORM 10-K

U.S. Neurosurgical, Inc.Form 10-K for the Fiscal Year Ended September 30, 2005

Table of Contents


PART I
  
  3Item 1.
  Business
  3Item 1A.
  Risk Factors
  5Item 2.
  Properties
  8Item 3.
  Legal Proceedings
  8Item 4.
  Submission of Matters to a Vote of Security
  Holders
  8PART II
  
  9Item
  5.      Market For The Registrants Common
  Equity, Related Stockholder Matters and Issuer Purchases of Equity Secuities
  9Item 6.
  Selected Financial Data
  10Item 7.
  Managements Discussion and Analysis of
  Financial Condition and Results of Operation
  11Item 7A.
  Quantitative and
  Qualitative Disclosures about Market Risk
  13Item 8.
  Financial Statements and Supplementary
  Data
  14Item 9.
  Changes in and Disagreements With
  Accountants on Accounting and Financial Disclosure
  15Item 9A.
  Controls and Procedures
  15Item 9B.
  Other Information
  16PART III
  
  17Item 10.
  Directors and Executive Officers of the
  Registrant
  17Item 11.
  Executive Compensation
  18Item 12.     Security Ownership of Certain Beneficial
  Owners and Management and Related Stockholder Matters
  19Item 13.
  Certain Relationships and Related
  Transactions
  20Item 14.
  Principal Accounting Fees and Services
  20PART IV
  
  21Item 15.
  Exhibits, Financial Statement Schedules
  212

PART I

Item 1.
  Business.U.S.
Neurosurgical, Inc. (USN)
owns and operates stereotactic radiosurgery centers, utilizing the Leksell
Gamma Knife technology (the 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 (the
SEC) and the Companys public announcements, copies of which are available
from the SEC or from the Company upon request.

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 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,
2005, there were approximately 100 Gamma Knife treatment centers in the United
States of America.

3

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.

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 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 Cityand 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 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, 2005, 2004 and 2003, USN derived revenues from the RMC
center of approximately $1,134,500, $1,153,000 and $1,449,000 respectively, as
a result of 103, 111 and 117 procedures performed, respectively, during such
periods.

4

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.  NYU pays USN a scheduled fee based on the
number of patient procedures performed.
For the years ended December 31, 2005, 2004, and 2003, USN derived
revenues from the NYU center of approximately $973,500, $1,250,000 and
$995,000, respectively, as a result of 161, 162 and 131 procedures performed,
respectively, during such periods.

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
failed to make the final 2 payments to Elekta that
amounted to $150,000.  On August 15,
2003, DVI, Inc. filed for protection 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.

Employees

U.S.
Neurosurgical, Inc. has four full-time employees and two 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 1A.
  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

5

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
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 CONs will be granted.  In addition, the Nuclear Regulatory
Commission (the 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.

Competition

The
health care industry, in general, is highly competitive and the Company expects
to have substantial competition from other independent organizations, as well
as from hospitals in establishing future Gamma Knife centers.  There are other companies

6

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.

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.  In addition, after
a number of years of use, the radioactive cobalt contained in the Gamma Knife
requires replacement.  This is also an
expensive process.  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.

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.

7

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

Item 3.
  Legal Proceedings.The
Company is not involved in any material pending legal proceedings.

Item 4.
  Submission of Matters to a Vote of Security Holders.None

8

PART II

Item 5.         Market For The Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Secuities.

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, 2004 through December 31, 2005.

Period




High Bid

Low BidJanuary 1 
  March 31, 2004

.11



.09April 1 -
  June 30, 2004

.11




.09July 1 
  September 30, 2004

.13



.09October 1 
  December 31, 2004

.17




.09January 1 
  March 31, 2005

.28



.16April 1 -
  June 30, 2005

.21




.18July 1 
  September 30, 2005

.18



.16October 1 
  December 31, 2005

.20




.15The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.

As
of March 17, 2006, 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.

During
the fourth quarter of 2005, the Company did not purchase any of its own equity
securities.

9

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, 2001
through 2005. 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.

Year Ended December 31,2005

2004

2003

2002

2001(in thousands, except per share
amounts)


(As restated)Operating Revenue

$
2,108

$
2,403

$
2,444

$
2,639

$
2,573Expenses:Patient
expense


816


780


820


930


1133General and
administrative


1,447


1384


1411


1386


1282Interest
expense


252


59


86


163


277Cumulative
effect of accounting method change (net of
applicable income income tax
  of $56,000)









(84
)Net Income (loss)


(285
)

123


(23
)

98


120Basic and diluted Income (loss) per common
share:Income
  before cumulative effect of accounting
method change

$
(0.04
)
$
0.02

$
0.01

$
0.01

$
0.02Cumulative
  effect of accounting method change








$
(0.01
)Net income (loss)

$
(0.04
)
$
0.02

$
0.00

$
0.01

$
0.02December 31,2005

2004

2003

2002

2001Balance Sheet Data:Cash
  and cash equivalents

$
422

$
511

$
89

$
88

$
311Total
  assets


4,663


4,201


3,150


2,963


3,795Long-term
  obligations


2,300


1,652


542


101


1,005Stockholders
  equity


1,179


1,464


1,337


1,368


1,27910
Item 7.        Managements Discussion and Analysis
of Financial Condition and Results of Operation.

The
following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this report.

Results of operations

2005
Compared to 2004

Patient
revenue declined 12% to $2,108,000 in 2005 as compared to $2,403,000 in 2004.
The decrease in revenue is attributable to three factors. First, our RMC site
was closed for 5 weeks in March/April of 2005 when the Gamma Knife was replaced
with a new model. Second, the volume at RMC decreased as a result of
competition from other stereotactic modalities at other centers. Finally,
reimbursement dropped at our NYU site as a result of contract renegotiation. In
December, 2004, our reimbursement changed to a fixed rate for all cases as
opposed to a rate that was affected by the payor for the procedure. The net
effect was a lower average rate per case.

Patient
expenses rose 5% to $816,000 in 2005 from $780,000 in 2004. The increase was
due to to higher depreciation charges resulting from the installation of the
new machine at RMC. Selling, general and administrative expense (SG&A)
increased 4% to $1,447,000 in 2005 from $1,384,000 in the previous year.
SG&A increased principally as a result of added marketing costs at RMC.
Interest expense rose 48% to $252,000 in 2005 from $59,000 in 2004. This was
due to increased borrowing associated with the Gamma Knife upgrade at RMC. As a
result of the above, principally the decrease in revenues in 2005, the Company
experienced a net loss of $285,000 as compared to net income of $123,000 in the
prior year.

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.
SG&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.

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

11

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, 2005 the Company had a working capital deficit of $251,000 as
compared to a working capital surplus of $86,000 at December 31, 2004.

Cash
and cash equivalents at December 31, 2005 were $422,000 as compared to $511,000
at December 31, 2004. Net cash provided by operating activities was $420,000 in
2005 as compared with $497,000 for the same period a year earlier. Depreciation
and amortization was $682,000 in 2005 as compared to $566,000 in 2004. Accounts
receivable decreased $124,000 during the year as compared to an increase of
$32,000 in 2004. Accounts payable increased by $23,000 during 2005 as compared
to a decrease of $159,000 in 2004.

Net
cash used in investing activities for the year ended 2005 was $1,323,000 as
compared to $1,071,000 in the year ago period.

Net
cash used in financing activites for the year ended December 31, 2005 was
$814,000 as compared to $996,000 in 2004.

Off-balance sheet arangements

None

12

Tabular disclosure of contractual obligations

The
following is a summary of the Companys contractual obligations at December 31,
2005:

Payments due by periodContractual Obligations
  
  Total
  
  Less than 1
  year
  
  1-3years
  
  3-5
  years
  
  More than
  5 yearsCapital (Finance) Lease
Obligations
  
  $
  3,365,000
  
  $
  849,000
  
  $
  1,211,000
  
  $
  1,305,000Operating Lease
Obligations
  
  $
  90,000
  
  $
  40,000
  
  $
  50,000Asset retirement
obligation
  
  $
  200,000
  
  
  
  
  
  
  
  $
  100,000
  
  $

  100,000Total
  
  $
  3,655,000
  
  $
  889,000
  
  $
  1,261,00
  
  $
  1,405,000
  
  $
  100,000Critical accounting policies

Estimates
and assumptions

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

Asset
retirement obligations

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



Item 7A.
  Quantitative and Qualitative
Disclosures about Market Risk.Market
risk represents the risk of loss that may impact the Companys financial
position due to adverse changes in financial market prices and rates.  Market risk exposure is primarily a result of
fluctuations in interest rates.  The
Company does not hold or issue financial instruments for trading purposes.

13

The
Company has exposure to market rate risk for changes in interest rates related
to the interest income on our cash, cash equivalents, and short-term
investments, but we believe that the impact of these fluctuations does not have
a material effect on our financial position due to the short-term nature of any
such investments.  The obligations under
the Companys capital lease and its loans payable are based on fixed interest
rates and thus the amounts due under these instruments do not fluctuate with
changes in market prices and rates.




Item 8.
  Financial Statements and
Supplementary Data.The
Financial Statements and Supplementary Data are listed under Item 15 in this
Annual Report of Form 10-K and attached hereto.

Quarter Ended2005
  
  31-Mar
  
  30-Jun
  
  30-Sep
  
  31-Dec
  
  YearRevenue
  
  $
  476
  
  $
  664
  
  $
  546
  
  $
  422
  
  $
  2,108Income (Loss) from
  operations
  
  
  (119
  )
  
  41
  
  
  38
  
  
  (115
  )
  
  (155
  )Net Income
(loss)
  
  
  (151
  )
  
  (41
  )
  
  (3
  )
  
  (90
  )
  
  (285
  )Basic
          and diluted net income (loss) per common share
  
  $
  (0.02
      )
  $
  (0.01
      )
  $
  0.00
  
  $
  (0.01
      )
  $
  (0.04
      )2004
  
  31-Mar
  
  30-Jun
  
  30-Sep
  
  31-Dec
  
  YearRevenue
  
  $
  529
  
  $
  774
  
  $
  637
  
  $
  463
  
  $
  2,403Income (Loss) from
  operations
  
  
  40
  
  
  246
  
  
  85
  
  
  (132
  )
  
  239Net Income
(loss)
  
  
  33
  
  
  131
  
  
  44
  
  
  (85
  )
  
  123Basic
          and diluted net income (loss) per common share
  
  $
  0.00
  
  $
  0.02
  
  $
  0.01
  
  $
  (0.01
      )
  $
  0.022003 (Restated)
  
  31-Mar
  
  30-Jun
  
  30-Sep
  
  31-Dec
  
  YearRevenue
  
  $
  835
  
  $
  550
  
  $
  490
  
  $
  569
  
  $
  2,444Income (Loss) from
  operations
  
  
  257
  
  
  (54
  )
  
  (157
  )
  
  167
  
  
  213Net Income
(loss)
  
  
  136
  
  
  (41
  )
  
  (110
  )
  
  (8
  )
  
  (23
  )Basic
          and diluted net income per (loss) common share
  
  $
  0.02
      
  $
  (0.01
      )
  $
  (0.01
      )
  $
  0.00
  
  $
  0.0014

Item 9.
  Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.There have
been no disagreements between the Company and its former accountant during the
past two fiscal years on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope of procedure, which have not
been resolved to the satisfaction of the former accountant.



Item 9A.
  Controls and Procedures.Disclosure Controls and Procedures

As
further discussed in Note A[1] to the consolidated financial statements, in
connection with the filing of 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, 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.  In connection with such restatement, 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 the 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

15

previously
identified deficiency in reporting for asset retirement obligations as provided
under SFAS 143.  Moreover, management
believes that it has fully remediated that weakness as of the date of filing of
the Form 10-K/A.

Management
of the Company, including the Chief Executive 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 report.  Based upon that evaluation (including an
evaluation of the updated procedures described above) the Companys Chief
Executive Officer concluded that the Companys disclosure controls and
procedures were effective as of the end of the period covered by this report
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 Securities and Exchange Commission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.



Item 9B.
  Other Information.None

16

PART III




Item 10.
  Directors and Executive Officers of
the RegistrantThe
directors and executive officers of the Company are as follows:



Name
  
  Age
  PositionAlan Gold
  61
  President
  & ChairmanWilliam F.
  Leimkuhler
  54
  DirectorCharles H.
  Merriman, III
  71
  DirectorSusan
  Greenwald
  60
  Vice
  President and SecretaryAlan Gold has
served as President and Chairman of USN since 1996. Mr. Gold has also been a
director of USN since its formation in 1993. Mr Gold served as President of GHS
from 1983 through May 1999 and director of GHS since its formation through
November 1999. Mr. Gold was one of the founders of Global Health Systems, the
predecessor of GHS, serving as its President since its formation in July 1983.  From 1981 to 1983 he served as Executive
Vice-President of Libra Group, a company located in Rockville, Maryland,
engaged in health care automation, where he was President of Global Health
Foundation and Libra Research and Executive Vice President of Libra Technology.
From July 1997 through March 1998 Mr. Gold was also an employee of Health
Management Systems.

William F.
Leimkuhler has served as director of USN since May
1999. He also served as a director of GHS since its inception in 1984 through
November 1999. Mr Leimkuhler is currently General Counsel & 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 October 1999,  he served as Vice
President and General Counsel of Allen & Company Incorporated, an
investment banking firm.

Charles H.
Merriman, III has served as a director of USN since
May 1999. He also served as a director of
GHS from October 1997  to November
1999. Mr. Merriman 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.

Susan
Greenwald has served as Vice President of Marketing
Communications and as Secretary of USN since May 1999. She performed services
for GHS in the same

17

capacity from
its inception in 1983 through May 1999. Ms. Greenwald 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.

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, 2005, the
Board of Directors held three meetings, which were attended by all incumbent
directors.  The Company has a standing
audit committee, but does not have a nominating or compensation committee.

Pursuant
to the Companys bylaws, officers of the Company hold office until the first
meeting of directors following the next annual meeting of stockholders and
until their successors are chosen and qualified.

Section 16 (a) Beneficial Ownership Reporting Compliance

Based
solely upon a review of the copies of the forms furnished to the Company, or
written representations from certain reporting persons, the Company believes
that during the years ended December 31, 2005, all filing requirements
applicable to its officers and directors were complied with by such
individuals.



Item 11.
  Executive CompensationThe
information below sets forth the compensation for the year ended December 31,
2005, 2004, and 2003, for the Chief Executive Officer of the Company.

Summary Compensation Table

Name andPrincipal Position
  
  Annual CompensationYear
  
  Salary($)Alan Gold
  
  2005
  
  $ 300,000President
  & Director
  
  2004
  
  $ 300,0002003
  
  $ 300,00018

Director Compensation

During
2005, our Directors who are not officers or employees (Non-Employee
Directors) received an annual retainer of $3,000.  The Chairman of the Companys Audit Committee
received an additional retainer $5,000.
Our Directors of the Company who are officers or employees do not
receive any additional compensation for serving on the Board or on any Board
committee.

Employmnt Agreements

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
Beneficial Owners and Management and Related Stockholder Matters.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
  %William F.
    Leimkuhler43 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) (three persons)
  
  1,370,918
  
  
  19.5
  %19

(1)
  Unless otherwise indicated, all shares are
  beneficially owned and sole voting and investment power is held by the person
  named above.(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.Item 13.
  Certain Relationships and Related TransactionsNone


Item 14.
  Principal Accounting Fees and Services.Audit
Fees represent fees for services rendered in connection with the annual audit
and quarterly reviews of the Companys financial statements. For the years
ended December 31, 2005 and 2004, the Company paid or accrued $23,079 and
$40,000, respectively, for Audit Fees to Goodman and Company, LLP and for the
year ended December 31, 2004 the Company paid or accrued $18,500 for Audit Fees
to Eisner LLP.

Audit-Related
Fees represent fees for services rendered in connection with assurance and
related services that are reasonably related to the performance of the audit or
review of the financial statements and are not reported as Audit Fees. For the
years ended December 31, 2005 and 2004, the Company did not pay or accrue any
amounts for Audit Related Fees.

Tax
Fees represent fees for services rendered in connection with tax compliance,
tax advice and tax planning. For the years ended December 31, 2005 and 2004,
the Company paid $5,586 for Tax Fees to Goodman and Company, LLP and for the
year ended December 31, 2004 the Company paid $18,000 for Tax Fees to Eisner
LLP.

All
Other Fees represent fees for services rendered by the Companys principal
accountants other than those described above. For the years ended December 31,
2005 and 2004, the Company did not pay or accrue any amounts for these
services.

The
Audit Committee of the Companys Board of Directors has established a policy
requiring its pre-approval of all audit and non-audit services provided by its
registered independent public accounting firm. The policy requires the general
pre-approval of annual audit services and all other permitted services. All of
the audit and non-audit services described above were approved by the Audit
Committee.

20

PART IV



Item 15.
  Exhibits, Financial Statement Schedules.(a)
  Financial Statements and Financial Statement
  Schedules. The following are filed as part of this report:Page No.Consolidated
  Financial Statements of the Company
  
  
  F-1Report of
  Independent Registered Public Accounting Firm
  
  
  F-2,3Balance
Sheets
  as of December 31, 2005 and 2004
  
  
  F-4Statements of
  Operations for the years ended December 31, 2005, 2004, and 2003.
  
  
  F-5Statements of
  Changes in Stockholders Equity for the period January 1, 2003 through
  December 31, 2005
  
  
  F-6Statements of
  Cash Flows for the year ended December 31, 2005, 2004, and 2003.
  
  
  F-7Notes to
  Financial Statements
  
  
  F-8All
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)
  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 between GHS
  and USN (1)(f)
  Assignment and Assumption Agreement dated May 27,
  1999 between GHS and USN (1)(g)
  Employment Agreement dated December 14,1984 between
  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).21

(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 between 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.(c)
  Financial Statement Schedules.
  None22

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 28, 2006

U.S. Neurosurgical, Inc.(Registrant)By
  /s/ Alan
GoldAlan
GoldPresident and
  Chief Executive OfficerandPrincipal
  Financial OfficerPursuant
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 28, 2006
  /s/ Alan GoldAlan GoldPresident and Director(Chief Executive Officer)March 28, 2006
  /s/ William F. LeimkuhlerWilliam F. LeimkuhlerDirectorMarch 28, 2006
  /s/ Charles H. Merriman IIICharles H. Merriman IIIDirectorU.S.
NEUROSURGICAL, INC. AND SUBSIDIARY

Contents

PageConsolidated
  Financial Statements
  F-1Report
  of Independent Registered Public Accounting Firm
  F-2Report
  of Independent Registered Public Accounting Firm
  F-3Consolidated
  balance sheets as of December 31, 2005 and 2004
  F-4Consolidated
  statements of operations for the years ended December 31, 2005, 2004 and 2003
  F-5Consolidated
  statements of stockholders equity for the years ended December 31, 2005,
  2004 and 2003
  F-6Consolidated
  statements of cash flows for the years ended December 31, 2005, 2004 and 2003
  F-7Notes
  to consolidated financial statements
  F-8F-1

REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
U.S. NeuroSurgical Inc.
Rockville, Maryland

  We have audited
    the accompanying consolidated balance sheets of U.S. NeuroSurgical, Inc. and
    subsidiary as of December 31, 2005 and 2004, and the related consolidated
    statements of operations, stockholders equity and cash flows for the
    years ended December 31, 2005 and 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 for the
    year ended December 31, 2003 were audited by other auditors whose report
    dated February 4, 2004, expressed an unqualified opinion on those statements.

  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, 2005 and 2004, and the consolidated
    results of their operations and their cash flows for the years ended December 31,
    2005 and 2004, in conformity with United States generally accepted accounting
    principles.

Goodman and Company, LLP
Rockville, Maryland
January 26, 2006
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
U.S. NeuroSurgical, Inc.

We have audited the accompanying consolidated
statements of operations, stockholders equity and cash flows of U.S.
NeuroSurgical, Inc. and subsidiary for the year ended December 31, 2003. 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.

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 provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
enumerated above present fairly, in all material respects, the consolidated
results of operations and consolidated cash flows of U.S. NeuroSurgical, Inc.
and subsidiary for the year ended December 31, 2003 in conformity with U.S.
generally accepted accounting principles.

New York, New York
February 4, 2004

With respect to the third paragraph of Note A[1]December 23, 2005F-3
U.S. NEUROSURGICAL, INC. AND
SUBSIDIARY

Consolidated Balance Sheets

December
  31,2005

2004ASSETSCurrent assets:Cash and cash
equivalents

$
422,000

$
511,000Accounts receivable (net of
allowance for doubtful accounts of $36,000
  in 2005 and 2004)


280,000


404,000Accounts receivable -
RMC


79,000


57,000Other current assets


152,000


199,000Total current assets


933,000


1,171,000Property and
equipment:Gamma Knives (net of
accumulated depreciation of $3,987,000 in 2005
  and $7,147,000 in 2004)


2,982,000


965,000Leasehold improvements (net of
accumulated amortization of $1,641,000
  in 2005 and $1,545,000 in 2004)


400,000


497,000Office furniture and computers
(net of accumulated depreciation of
  $107,000 in 2005 and $107,000 in 2004)


0


03,382,000


1,462,000Progress payments - RMC Gamma
Knife


0


1,282,000Cash held in escrow


108,000


106,000Deferred tax asset


240,000


180,000$
4,663,000

$
4,201,000LIABILITIESCurrent liabilities:Accounts payable and accrued
expenses

$
62,000

$
39,000Obligations under capital
leases and loans payable - current portion


632,000


467,000Due to stockholder


300,000


300,000Deferred tax
liability


190,000


240,000Other current
liabilities


0


39,000Total current
liabilities


1,184,000


1,085,000Asset retirement
obligations


200,000


200,000Obligations under capital
leases and loans payable - net of current
  portion


2,100,000


1,452,000Total liabilities


3,484,000


2,737,000Commitments, litigation and
other matters (Notes A[10], C, E and H)STOCKHOLDERS
EQUITYCommon stock - par value $.01;
25,000,000 shares authorized; 7,697,185
  shares issued at December 31, 2005 and 2004


77,000


77,000Additional paid-in
capital


2,797,000


2,797,000Accumulated deficit


(1,695,000
      )

(1,410,000
      )1,179,000


1,464,000$
4,663,000

$
4,201,000See
  notes to consolidated financial statements
F-4U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

Consolidated Statements of Operations

Year Ended
  December 31,2005

2004

2003(Restated
  Note A[1])Revenue (Notes B and
C)

$
2,108,000

$
2,403,000


2,444,000Costs and expenses:Patient expenses


816,000


780,000


820,000Selling, general and
administrative


1,447,000


1,384,000


1,411,0002,263,000


2,164,000


2,231,000Income (loss) from
operations


(155,000
)

239,000


213,000Interest expense


(252,000
)

(59,000
)

(86,000
)Interest income


12,000


3,000


1,000(240,000
)

(56,000
)

(85,000
)Income
          (loss) before income taxes


(395,000
)

183,000


128,000Provision for income tax
benefit (expense)


110,000


(60,000
)

(67,000
)Income
          (loss) before cumulative effect of accounting method change


(285,000
)

123,000


61,000Cumulative effect of accounting
method change (net of applicable
  income tax of $56,000)








(84,000
)Net income
(loss)

$
(285,000
)
$
123,000


(23,000
)Basic and diluted net income
(loss) per share:Net income
(loss)

$
(0.04
)
$
0.02


Weighted average common
shares outstanding


7,697,185


7,767,100


7,791,555See
  notes to consolidated financial statements
F-5U.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
      
      TotalBalance
          - January 1, 2003
      
      
      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
          income (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 (loss) for the year ended December 31, 2004
      
      
      
      
      
      
      
      
      
      
      
      123,000
      
      
      
      
      
      
      
      
      123,000Balance
          - December 31, 2004
      
      
      7,697,185
      
      
      77,000
      
      
      2,797,000
      
      
      (1,410,000
      )
      
      
      
      
      
      
      
      1,464,000Net
          income (loss) for the year ended December 31, 2005
      
      
      
      
      
      
      
      
      
      
      
      (285,000
      )
      
      
      
      
      
      
      
      (285,000
      )Balance
          - December 31, 2005
      
      
      7,697,185
      
      $
      77,000
      
      $
      2,797,000
      
      $
      (1,695,000
      )
      
      
      
      $
      
      
      $
      1,179,000See notes
  to consolidated financial statements
F-6U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Year Ended
  December 31,2005

2004

2003(Restated
  Note A[1])Cash flows from operating
activities:Net income (loss)

$
(285,000
)
$
123,000

$
(23,000
)Adjustments
          to reconcile to net cash provided by operating activities:Cumulative effect of
accounting method change for asset retirement
  obligations








84,000Issuance of stock as
compensation





4,000


Depreciation and
amortization


682,000


566,000


779,000Deferred income tax
provision


(110,000
)

14,000


41,000Changes in:Accounts
  receivable


124,000


(32,000
)

142,000Accounts
  receivable - stockholder


(22,000
)

39,000


13,000Other
  current assets


47,000


(55,000
)

(26,000
)Accounts
  payable and accrued expenses


23,000


(159,000
)

(21,000
)Other
  current liabilities


(39,000
)

(3,000
)

3,000Net cash provided by operating
activities


420,000


497,000


992,000Cash flows from investing
activities:Property and
equipment


(2,603,000
)




(803,000
)Progress payments - RMC Gamma
Knife


1,282,000


(1,282,000
)

Decrease (increase) in cash
held in escrow


(2,000
)

211,000


(211,000
)Net cash used in investing
activities


(1,323,000
)

(1,071,000
)

(1,014,000
)Cash flows from financing
activities:Repayment of capital lease and
loan obligations


(505,000
)

(1,014,000
)

(688,000
)Cash received on financing of
equipment


1,319,000


2,010,000


719,000Purchase of treasury
stock








(8,000
)Net cash used in financing
activities


814,000


996,000


23,000Net change in cash and cash
equivalents


(89,000
)

422,000


1,000Cash and cash equivalents -
beginning of year


511,000


89,000


88,000Cash and cash equivalents -
end of year

$
422,000

$
511,000

$
89,000Supplemental disclosures of
cash flow information:Cash paid for:Interest

$
252,000

$
59,000

$
86,000Income taxes

$


$
44,000

$
Supplemental disclosures of
noncash activities:Issuance of stock as
compensation

$


$
4,000

$
See notes to
consolidated financial statements
F-7U.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 or the Company) 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.The Company
  has 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, 2003As previously reported:Net
income


$
61,000Net income per
share


$
0.01As 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, 2005, 2004, and
  2003 was $682,000 $566,000, and $779,000, 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 share:Earnings per
  share are computed by dividing earnings available to common shareholders by
  the weighted average shares outstanding for the period. There were no common
  stock equivalents during 2005, 2004, and 2003 and therefore, no potential
  dilution for the periods presented.[8]
Advertising
          costs:The Company
  follows the policy of charging the costs of advertising to expense as
  incurred.[9]
Bad debts:The Company
          evaluates each of its accounts receivable individually and provides
          a charge to income that is appropriate, in the opinion of management,
          to absorb probable credit losses.[10]
Estimates and assumptions:The preparation
  of financial statements in conformity with accounting principles generally
  accepted in the United States of America requires management to make
  estimates and assumptions that affect the reported amounts of assets and
  liabilities and contingent assets and liabilities at the date of the
  financial statements and the reported amounts of revenues and expenses during
  the reporting period. Actual results could differ from those estimates.[11]
Fair values of financial instruments:The
  estimated fair value of financial instruments has been determined based on
  available marketF-9

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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

  information
          and appropriate valuation methodologies. The carrying amounts of cash,
          accounts receivable, other current assets and accounts payable approximate
          fair value at December 31, 2005 and 2004 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, 2005 and 2004.[12]
      Credit
        Risk:At
          times, the Company may have cash and cash equivalents at a financial
          institution in excess of insured limits. The Company places its cash
          and cash equivalents with high credit quality financial institutions
          whose credit ratings are monitored by management to minimize credit
          risk. Accounts receivable consist primarily of amounts due from two
          medical centers. Historically, credit losses on accounts receivable
          have not been significant.[13]
      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.[14]
      Reclassifications:Certain
          prior year balances have been reclassified to conform to current year
          presentation.[15]
      Recently
          issued accounting pronouncements:The
          FASB issued FIN No. 46R, Consolidation of Variable Interest Entities
          (FIN 46R). FIN 46R relates to certain entities in which
          equity investors do not have the characteristics of a controlling financial
          interest or do not have sufficient capital at risk for the entity to
          finance its activities without additional subordinated financial support
          from other parties. Under certain circumstances, an enterprise may be
          required to consolidate such an entity if it will absorb a majority
          of the entitys expected losses, receive a majority of the entitys
          residual returns, or both. FIN 46R became effective for variable interest
          entities created after January 31, 2003, and had no effect on the Companys
          financial position as of December 31, 2005 and 2004, and its results
          of operations for the years then ended.In
          December 2004, the FASB issued Statement No. 123(R), Share-Based
          Compensation which requires the recognition of costs resulting
          from transactions involving the acquisition of goods and services by
          issuing its shares, share options, or other equity instruments. This
          standard requires a fair value-based measurement method in accounting
          for share-based payment transactions with both employees and nonemployees.
          This standard replaces Statement No. 123, Accounting for Stock-Based
          Compensation, and supersedes Accounting Principles Board (APB)
          Opinion No. 25, Accounting for Stock Issued to Employees.
          Accordingly, the use of the intrinsic value method as provided under
          APB Opinion No. 25 will be eliminated. SFAS No. 123(R) is effective
          for all awards of share-based payments granted, modified, or cancelled
          after June 15, 2005, except for public entities filing as small business
          issuers. Public entities that file as small business issuers will be
          required to apply Statement 123(R) in the first interim or reporting
          period that begins after December 15, 2005. In addition, compensation
          costs for the unvested portion of awards, issued prior to and outstanding
          as of June 15, 2005, would continue to be recognized at the grant-date
          fair value as the remaining requisite service is rendered. The Company
          does not currently have a stock compensation plan.In
          December 2004, the FASB issued Statement No, 153, Exchanges of
          Nonmonetary Assets  An Amendment of APB Opinion No. 29,
          which eliminates the exception from fair value measurement for nonmonetary
          exchanges of similar productive assets that do not culminate an earning
          process under APB Opinion No. 29, Accounting for Nonmonetary Transactions.
          Statement No. 153 requires that the measurement be based on the recorded
          amount of the assets relinquished for nonmonetary exchanges that do
          not have commercial substance. A nonmonetary exchange has commercial
          substance if the future cash flows of the entity are expected to change
          significantly as a result of the exchange. This standard is effective
          for nonmonetary asset exchanges occurring in fiscal periods beginning
          after June 15, 2005. The potential effect of Statement No. 153 on the
          financial statements is currently being considered.F-10

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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, 2005 and 2004,
          the escrow account balance was $108,000 and $106,000, respectively.
          The equipment agreement terminates automatically upon termination of
          the ground lease agreement (see Note B[2]). The Company derived patient
          revenue from the RMC center in the amounts of $1,134,500, $1,153,000,
          and $1,449,000 for the years ended December 31, 2005, 2004, and 2003,
          respectively.In April of
          2005, the Company purchased and installed a new Gamma Knife at RMC to
          replace the existing equipment. The cost to purchase and install the
          new equipment was $2,606,000.[2]
Ground lease agreement:USN
  constructed a facility in Kansas City, Missouri on property which the Company
  leases from RMC. The lease term is for a period of 21 years commencing
  September 1994. The lease provides for rent at $3,600 per annum. The terms of
  the lease include escalation clauses for increases in certain operating
  expenses and for payment of real estate taxes and utilities. Title to all
  improvements upon the land vests in RMC.NOTE C - AGREEMENT
WITH NEW YORK UNIVERSITY ON BEHALF OF NEW YORK UNIVERSITY MEDICAL CENTER (NYU)

During
November 1996, USN entered into a neuroradiosurgery equipment agreement (NYU
agreement) with NYU for a period of seven years (the term), with an option
for NYU to extend the term for successive three-year periods or to purchase the
Gamma Knife equipment at an appraised market value price. USN may negotiate the
purchase price and upon failure of the parties to agree may request that the
facility be closed. All costs associated with closing and restoring the
facility to its original condition are the responsibility of USN. The equipment
agreement, among other matters, requires USN to provide (i) the use of the
Gamma Knife equipment to NYU, (ii) training necessary for the proper operation
of the Gamma Knife equipment, (iii) sufficient supplies for the equipment, (iv)
the repair and maintenance of the equipment, (v) all basic hardware and
software upgrades to the equipment and, (vi) an uptime guarantee. In return,
NYU pays USN a scheduled fee based on the number of patient procedures performed.
The Company derived patient revenue from the NYU center in the amounts of
$973,500, $1,250,000, and $995,000 for the years ended December 31, 2005, 2004,
and 2003, 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.

F-11

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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 provided 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 bore interest at 10.7% per annum and were
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 bore
interest at 8.5% and was collateralized by the Gamma Knife at NYU. The lease
obligation has been satisfied.

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 bore interest at 9.479% and was
collateralized by the Gamma Knife at RMC. This loan has been repaid.

  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. The monthly payment for this loan is $2,897 and will be fully
    satisfied in July of 2006.

In August
2003, USN commenced payment on a $750,000 lease for the NYU cobalt reload,
which was originally thought to be fully funded by DVI. Also in August 2003,
DVI filed for protection under Chapter 11 of the U.S. Bankruptcy Code and it
was determined that DVI had failed to make payments of $150,000 to the cobalt
vendor, Elekta. Commencing September 2003, the Company made all loan and lease
payments, then owed to DVI or its successor, into an escrow account held by the
Companys attorney and commenced negotiations for a resolution to the underfunding
of the payments to Elekta. During February 2004, the Company paid $50,000 of
the amount owed to Elekta. The Company released the escrowed amounts to DVI or
its successor in payment of all loan and lease obligations through March 15,
2004 and reached an agreement that the amount owed to DVI or its successor for
the NYU cobalt reload was equal to $560,000 representing the amount funded by
DVI of $582,000 reduced by a payment made by USN during August 2003. In April
2004, the Company refinanced the lease for an amount of $728,000 which was used
to repay $560,000 owed to DVI or its successor, to pay the remaining $100,000
plus sales tax owed to Elekta and to refund $50,000 to the Company for the
payment made to Elekta during February 2004. The agreement with SMT Leasing
requires 36 monthly payments of $23,107, bears interest at 8.883% and is
collateralized by the Gamma Knife at NYU.

In 2004, the
Company has purchased a replacement Gamma Knife (Knife 3) at the RMC site and
has financed this purchase with a capital lease arrangement with SMT Leasing.
The lease agreement provides that any progress payments made to the Gamma Knife
manufacturer bear interest at the 60 day U.S. Treasury note rate, with interest
only payments every 30 days until installation is completed and accepted. Upon
equipment acceptance, the lease obligation repayment begins. Such lease terms
require 72 monthly payments of $46,602, at an implicit interest rate of 8.4%.

F-12

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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


The
obligations under the capital leases and loans payable are as follows:

December 31,2005

2004Capital leases - Gamma
Knife

$
2,701,000

$
1,845,000Loans payable - leasehold
improvements


31,000


74,0002,732,000


1,919,000Less current portion


(632,000
)

(467,000
)$
2,100,000

$
1,452,000Future
payments as of December 31, 2005
on the equipment leases and loans are as follows:

Year
  Ending
         December 31,2006

$
849,0002007


652,0002008


559,0002009


559,0002010


559,0002011
  and thereafter


187,0003,365,000Less
  interest


(633,000
)Present
  value of net minimum obligation

$
2,732,000The Companys
Gamma Knives are held under capital leases and amortization is included in
depreciation expense.

NOTE E  ASSET
RETIREMENT OBLIGATIONS

During 2003,
the Company adopted FAS 143 and recorded asset retirement obligations of
$200,000 based upon estimated amounts, consisting principally of removal of
Gamma Knives and disposal of regulated materials and the restoration of
facilities at NYU and RMC. The pro forma amount of the liability as of January
1, 2002 and December 31, 2002 would also approximate $200,000. Such liabilities
have been measured using current information, current assumptions and current
interest rates and have been recorded with a corresponding increase in the
carrying value of the Gamma Knives. The Company is amortizing such costs over
the lives of the respective useful lives from inception.

Upon initial
application of FAS 143, the Company has recognized $140,000 of accumulated
depreciation and a deferred tax asset of $56,000 and a decrease in net income
of $84,000 as the cumulative effect of the accounting method change during the
year ended December 31, 2003.

F-13

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTE F - CONCENTRATIONS

For the years
ended December 31, 2005, 2004, and 2003,, 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, 2005 and 2004.

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 (benefit) are as follows:

  Year
          Ended December 31,2005
      
      2004
      
      2003Current:Federal
      ****
      $
      
      ****
      $
      32,000
      
      $
      (15,000
      )State
      ****
      ****
      
      ****
      ****
      14,000
      
      
      41,000****
      
      
      ********
      ****
      ****
      ****
      ****
      ********
      ****
      
      ****
      ****
      46,000
      
      
      26,000****
      
      
      ********
      ****
      ****
      ****
      ****
      ****Deferred:
      ****
      ****
      ****
      ****
      ****
      ****Federal
      ****
      ****
      (78,000
      )
      ****
      10,000
      
      
      35,000State
      ****
      ****
      (32,000
      )
      ****
      4,000
      
      
      6,000****
      
      
      ********
      ****
      ****
      ****
      ****
      ********
      ****
      (110,000
      )
      ****
      14,000
      
      
      41,000****
      
      
      ********
      ****
      ****
      ****
      ****
      ********
      
      (110,000
      )
      ****
      60,000
      
      
      67,000****
      
      
      ****A
reconciliation of the tax provision (benefit) calculated at the statutory
federal income tax rate with amounts reported follows:

Year Ended December 31,2005

2004

2003Income tax (benefit) at the
federal
  statutory rate

$
(92,000
)
$
64,000

$
44,000State income tax (benefit), net
of federal
  taxes


(18,000
)

9,000


23,000Other





(13,000
)

Income tax provision
(benefit)

$
(110,000
)
$
60,000

$
67,000Items which
give rise to deferred tax assets and liabilities are as follows:

December 31,2005

2004Deferred tax asset:Net operating
loss

      $
142,000

      $
      Asset
retirement obligations recorded for
  financial reporting relating to cumulative change in accounting principles





60,000Excess of book
depreciation over tax depreciation


98,000


120,000Deferred tax
liability:Net effect of
the conversion from accrual
  basis of accounting to cash basis accounting for tax purposes (1)


(190,000
)

(240,000
)Net deferred tax asset
(liability)

$
50,000

$
(60,000
)(1)
In
  January 2003, the Company filed with the Internal Revenue Service to compute
  its taxable income utilizing the cash basis of accounting rather than the
  accrual basis.F-14

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTE H - LITIGATION

The Company is
involved in certain claims and legal actions from time to time arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of any such matters has not, and is not expected to, have a
material adverse effect on the financial position of the Company.

NOTE I  COMMITMENTS
AND CONTINGENCIES

Leases:

The Company
leases office space under an operating lease expiring March 2008. The terms of
the lease include an escalation clause for a portion of certain operating
expenses. At December 31, 2005,
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 31,2006

$
40,0002007


40,0002008


10,000$
90,000Rent expense
was approximately $39,000, $41,000, and $36,000 for the years ended December
31, 2005, 2004, and 2003, respectively.

Gamma Knives:

The Company
purchased and installed a new Gamma Knife for $2,606,000 to replace the
existing equipment at the RMC site. The Company has obtained lease financing in
connection with this purchase of the Gamma knife.

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 2005,
2004, and 2003 were approximately $58,000, $61,000, and $45,000, respectively.

F-15

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, 2005, 2004, and 2003 was $300,000, $300,000 and $300,000,
          respectively.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, 2005, 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-Dec2005Revenue
      
      
      476
      
      
      664
      
      
      546
      
      
      432Income
          (loss) from operations
      
      
      (119
      )
      
      41
      
      
      38
      
      
      (115
      )Net
          income (loss)
      
      
      (151
      )
      
      (41
      )
      
      (3
      )
      
      (90
      )Basic
          and diluted income per common share
      
      $
      (0.02
      )
      $
      (0.01
      )
      $
      0.00
      
      $
      (0.01
      )2004Revenue
      
      
      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
      
      $
      -0.012003Revenue
      
      
      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 (as restated - See note A[1])
      
      
      
      
      
      
      
      
      
      
      
      (84
      )Net
          income (loss)
      
      
      136
      
      
      (41
      )
      
      (110
      )
      
      (8
      )Basic
          and diluted income per common share
      
      $
      0.02
      
      $
      -0.01
      
      $
      -0.01
      
      $
      0.00F-16