UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 FORM 10-KSB x
ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2006oro
TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
  from          to          . Commission file number: 0-15586 U.S. Neurosurgical, Inc. 
(Name of small
business issuer 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)

(Zip
  Code)  Issuers
  telephone number:

(301) 208-8998Securities registered
  under Section 12(b) of the Act:

NoneSecurities registered
  under Section 12(g) of the Act:

Common Stock, par value
  $.01 per share  Check whether the issuer (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               No
o
 Check if there is no
disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB.  x Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
 Yes o               No
x
 The issuers revenues for
its most recent fiscal year: $2,002,000 As of March 16, 2007, the
aggregate market value of issuers Common Stock held by non-affiliates was
approximately $600,000, based upon the average of the bid and asked prices as
reported on the OTC Bulletin Board. As of March 16, 2007, there
were outstanding 7,697,185 shares of the issuers Common Stock. $.01 par value. Documents incorporated by
reference: None Transitional Small Business
Disclosure Format (Check one):     Yes o          No
x    FORM 10-K

U.S. Neurosurgical, Inc.

Form 10-K for the Fiscal Year Ended December 31, 2006

Table of Contents

PART
  I


3Item 1.
Business

3Item 1A.
Risk Factors

6Item 2.
Properties

8Item 3.
Legal
Proceedings

8Item 4.
Submission of
Matters to a Vote of Security
  Holders

8PART
  II


9Item 5.
Market For Common
Equity and Related
  Stockholder Matters

9Item 6.
Managements
Discussion and Analysis or
  Plan of Operation

10Item 7.
Financial
Statements

13Item 8.
Changes in and
Disagreements With
  Accountants on Accounting and Financial Disclosure


13Item 8A.
Controls and Procedures

13Item 8B.
Other Information

14PART
  III


15Item 9.
Directors,
Executive Officers, Promoters ,
  Control Persons and Corporate Governance; Compliance With Section 16(a) of
  the Exchange Act

15Item 10.
Executive Compensation

16Item 11.
Security Ownership of Certain Beneficial
  Owners and Management and Related Stockholder Matters

17Item 12.
Certain Relationships and Related
  Transactions

18PART
  IV


19Item 13.
Exhibits

19Item 14.
Principal Accounting Fees and Services

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, 2006, there were
approximately 107 Gamma Knife treatment centers in the U.S.

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 City and New York Centers

In
July 1993, USN purchased its first Leksell Gamma Knife from Elekta Instruments,
Inc. (Elekta), for the purpose of installing it at RMC in Kansas City,
Missouri. USN paid approximately $3,000,000 for the Gamma Knife through a
capital lease financing.

USN
opened its first Gamma Knife Center on the premises of RMC in September 1994.
RMC is part of Hospital Corporation of America (HCA). USN formed a cooperative
venture with RMC in September, 1993. Per an agreement with RMC, GHS 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, 2006,
2005 and 2004, USN derived revenues from the RMC center of approximately
$901,000, $1,134,500 and $1,153,000, respectively, as a result of 67, 103 and
111 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, 2006, 2005, and 2004, USN derived revenues from the
NYU center of approximately $968,000, $973,500 and $1,250,000, respectively, as
a result of 152, 161 and 162 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.

Future Gamma Knife Centers

USN
is currently exploring other opportunities for Gamma Knife centers and centers
that provide related healthcare services located near hospitals throughout the
U.S. Discussions regarding such centers is preliminary and there can be no
assurance that any such discussions will result in the opening of new centers.

Employees

U.S.
Neurosurgical, Inc. has four full-time employees and relies on consultants for
certain services as required from time to time. Of its full-time employees,
three are engaged in sales, marketing and administration, and one is a
physicist.

5

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 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

6

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 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 from $3.0 to
$4.2 million, depending on features. 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.

7

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.

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 Common
Equity and Related Stockholder Matters.

The
Companys Common Stock is traded on the OTC Bulletin Board. The following table
displays the range of high and low bid quotations as reported by NASDAQ System
for the period from January 1, 2005 through December 31, 2006.

Period

High Bid

Low BidJanuary 1 
  March 31, 2005


.28


.16April 1 -
  June 30, 2005


.21


.18July 1 
  September 30, 2005


.18


.16October 1 
  December 31, 2005


.20


.15January 1 
  March 31, 2006


.15


.11April 1 -
  June 30, 2006


.15


.11July 1 
  September 30, 2006


.12


.09October 1 
  December 31, 2006


.11


.08The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.

As
of March 16, 2007, 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 2006, the Company did not purchase any of its own equity
securities.

9

Item 6.
          Managements Discussion
and Analysis or Plan of Operation.

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 13 in Part IV of this report. The information set forth in this table and
the discussion below should be read in conjunction with such financial
statements and the notes thereto.

Year Ended December 31,2006

2005

2004

2003

2002(in thousands, except per share amounts)











(As restated)Operating
Revenue

$
2,002

$
2,108

$
2,403

$
2,444

$
2,639Expenses:Patient
expense


908


816


780


820


930General and
administrative


1,219


1,447


1384


1411


1386Interest
expense


228


252


59


86


163Cumulative
effect of accounting method
  change (net of applicable income income tax of $56,000)











(84
)Net Income
(loss)


(383
)

(285
)

123


(23
)

98Basic and
diluted Income
  (loss) per common share:Income before
cumulative effect of
  accounting method change

$
(0.05
)
$
(0.04
)
$
0.02

$
0.01

$
0.01Cumulative
effect of accounting method
  change











$
(0.01
)Net income
(loss)

$
(0.05
)
$
(0.04
)
$
0.02

$
0.00

$
0.01December 31,2006

2005

2004

2003

2002Balance Sheet Data:Cash
  and cash equivalents

$
297

$
422

$
511

$
89

$
88Total
  assets


3,496


4,663


4,201


3,150


2,963Long-term
  obligations


1,811


2,300


1,652


542


101Stockholders
  equity


1,096


1,179


1,464


1,337


1,368Results of operations

2006
Compared to 2005

Patient
revenue declined 5% to $2,002,000 in 2006 as compared to $2,108,000 in 2005.
The decrease in revenue is primarily due to a decrease in patient volume at our
RMC site, resulting largely from competition from other stereotactic modalities
at other centers. This decrease was particularly significant in view of the
fact that RMC site was closed for 5 weeks in March/April of 2005 when the Gamma
Knife was replaced with a new model

10

Patient
expenses rose 5% to $908,000 in 2006 from $816,000 in 2005. The increase was
partly due to to higher depreciation charges beginning in the first half of
2005 resulting from the installation of the new machine at RMC. Selling, general
and administrative expense (SG&A) decreased 16% to $1,219,000 in 2006
from $1,447,000 in the previous year. This decrease in SG&A resulted
principally from lower marketing costs for the RMC site, as well as steps taken
by the Company to streamline overall administrative costs. Interest expense
decreased 10% to $228,000 in 2006 from $252,000 in 2005. This decrease was due
to the amortization of the gamma knifes and a loan was paid off completely
during 2006. As a result of the above, principally the decrease in revenues in
2006, the Company experienced a net loss of $383,000 as compared to net income
of $285,000 in the prior year.

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.

11

Liquidity and capital resources

At
December 31, 2006 the Company had working capital of $120,000 as compared to a
working capital deficit of $251,000 at December 31, 2005. This reduction is due
principally to the fact that the capital lease obligation relating to the
equipment at the NYU facility is scheduled to be satisfied at the end ot March
of 2007.

Cash
and cash equivalents at December 31, 2006 were $297,000 as compared to $422,000
at December 31, 2005. Net cash provided by operating activities was $535,000 in
2006 as compared with $420,000 for the same period a year earlier. Depreciation
and amortization was $709,000 in 2006 as compared to $682,000 in 2005. Accounts
receivable decreased $48,000 during the year as compared to a decrease of
$124,000 in 2005. Accounts payable increased by $61,000 during 2005 as compared
to a increase of $23,000 in 2005.

Net
cash used in investing activities for the year ended 2006 was $5,000 as
compared to $1,323,000 in the year ago period. The large change in 2005 was due
to the upgrade of the equipment at RMC site during that year.

For
the year ended December 31, 2006, net cash used in financing activities was
$655,000 as compared to $814,000 net cash provided by financing activities in
2005. The change was due to the financing of the new equipment at the RMC site
during 2005.

Off-balance sheet arangements

None

Tabular disclosure of contractual obligations

The
following is a summary of the Companys contractual obligations at December 31,
2006:

Payments
        due by periodContractual
        Obligations
    
    Total
    
    Less
        than 1
        year
    
    1-3
        years
    
    3-5
        years
    
    More
        than
        5 yearsCapital
        (Finance) Lease Obligations
    
    $
    2,078,000
    
    $
    467,000
    
    $
    910,000
    
    $
    701,000Asset
        retirement obligation
    
    $
    200,000
    
    
    
    
    $
    100,000
    
    
    
    
    $
    100,000Total
    
    $
    2,278,000
    
    $
    467,000
    
    $
    1,010,00
    
    $
    701,000
    
    $
    100,00012

Critical accounting policies

Estimates
and assumptions

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

Asset retirement
obligations

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

Item
7.          Financial
Statements.

The
financial statements and supplementary data required by this item are set forth
in Item 13 in this Annual Report of Form 10-KSB beginning at page F-1.

Item
8.          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
8A.       Controls and Procedures.

Disclosure Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated,

13

can provide
only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We do realize
that we are a very small company and as a small company with only the officers
and directors participating in the day to day management, with the ability to
override controls, each officer and director has multiple positions and
responsibilities that would normally be distributed among several employees in
larger organizations with adequate segregation of duties to ensure the
appropriate checks and balances. Because the Company does not currently have a
separate chief financial officer, the Chief Executive Officer performs these
functions with the support of one of the Companys outside directors who
assists in the reporting and disclosure process (the Lead Director).

Management
of the Company, including the Chief Executive Officer and the Lead Director,
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, 2006 that have
materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.

Item
8B.       Other Information.

Not
applicable.

14

PART III

Item 9.
          Directors,
Executive Officers, Promoters , Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act.

The
directors and executive officers of the Company are as follows:

Name
Age
PositionAlan Gold
62
President
  & ChairmanWilliam F.
  Leimkuhler
55
DirectorCharles H.
  Merriman, III
72
DirectorSusan
  Greenwald
61
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.  Mr. Leimkuhler also serves as a director of
Speedus Corp. and Integral Systems, Inc.

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.

15

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             15 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, 2006, all filing requirements
applicable to its officers and directors were complied with by such
individuals.

Item 10.
          Executive
Compensation.

The
information below sets forth the compensation for the year ended December 31,
2006, 2005, and 2004, for the Chief Executive Officer of the Company.

Summary Compensation Table

Annual CompensationName and
  Principal Position

Year

Salary($)Alan Gold


2006

$
300,000President
  & Director


2005

$
300,0002004

$
300,00016

Director Compensation

During
2006, our Directors who are not officers or employees (Non-Employee
Directors) were entitled to an annual retainer of $3,000.  The Chairman of the Companys Audit
Committee, who also serves as th Lead Director, received a retainer of $3,000
per month in view of the higher level of activity required of him.  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.

Employment 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 11.
          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.
  Leimkuhler
  43 Salem Straits Road 
  Darien, CT 06820


100,000


1.3
%Charles H.
  Merriman III
  5507 Cary St. Road 
  Richmond, VA 23226


130,672


1.7
%Stanley S.
  Shuman (3) 
  711 Fifth Avenue 
  New York, NY 10022


2,688,000


34.2
%Allen &
  Company Incorporated
  711 Fifth Avenue 
  New York, NY 10022


1,847,000


23.4
%All
  Directors and Officers of USN 
  as a group (2) (three persons)


1,370,918


19.5
%17

(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 12.
          Certain
Relationships and Related Transactions.

None

18

PART IV

Item
13.       Exhibits.

(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, 2006 and 2005


F-4Statements of
Operations for the years ended 
  December 31, 2006, 2005, and 2004.


F-5Statements of
Changes in Stockholders Equity 
  for the period January 1, 2004 through 
  December 31, 2006


F-6Statements of
Cash Flows for the year ended 
  December 31, 2006, 2005, and 2004.


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 betwwen 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 betwwen USN and Alan Gold, as amended March 7, 1986
  (incorporated by reference to Exhibit 10.3 of GHSs Registration Statement
  No. 33-4532-W on form S-18)(h)
Gamma Knife
  Neuroradiosurgery Equipment Agreement dated August, 1993 between Research
  Medical Center and USN (incorporated by reference to Exhibit 10h to GHSs
  Quarterly Report or Form 10-Q for the quarter ended September 30, 1993).(i)
Ground Lease Agreement
  dated August, 1993 between Research Medical Center and USN (incorporated by
  reference to Exhibit 10j to GHSs Quarterly Report on Form 10-Q for the
  quarter ended September 30, 1993).(j)
LGK Agreement dated July
  12, 1993 between Elekta Instruments, Inc. and USN (incorporated by reference
  to Exhibit 10k to GHSs Quarterly Report on Form 10-Q for the quarter ended
  September 30, 1993).19

(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. None

20

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, 2006, 2005 and 2004, the Company paid or accrued $39,336,
$47,586 and $40,000, respectively, for Audit Fees to Goodman and Company, 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, 2006, 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, 2006, 2005 and
2004, the Company paid $9,879, $0 and $5,586 for Tax Fees to Goodman and
Company, 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, 2006, 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.

21

SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

U.S. Neurosurgical, Inc.(Registrant)By
/s/ Alan GoldAlan GoldPresident and Chief
  Executive OfficerandPrincipal Financial
  OfficerDated: March 30, 2007In
accordance with 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 30, 2007
/s/ Alan GoldAlan GoldPresident and Director(Chief Executive Officer)March 30, 2007
/s/ William F. LeimkuhlerWilliam F. LeimkuhlerDirectorMarch 30, 2007
/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-2Consolidated balance sheets as of December 31, 2006 and
  2005
F-3Consolidated statements of operations for the years
  ended December 31, 2006, 2005 and 2004
F-4Consolidated statements of stockholders equity for the
  years ended December 31, 2006, 2005 and 2004
F-5Consolidated statements of cash flows for the years
  ended December 31, 2006, 2005 and 2004
F-6Notes to consolidated financial statements
F-7U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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 (the Company) as of December 31, 2006 and
2005, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the years in the three-year period ended
December 31, 2006. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis of designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements referred to above present fairly, in all
material respects, the financial position of U.S. NeuroSurgical, Inc. and
subsidiary as of December 31, 2006 and 2005, and the results of its operations
and its cash flows for each of the years ended in the three-year period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.

Goodman and Company, LLP 
Rockville, Maryland 
March 26, 2007

See notes
  to consolidated financial statements
F-2U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December
  31,2006

2005ASSETSCurrent assets:Cash and cash
equivalents

$
297,000

$
422,000Accounts
receivable (net of allowance for doubtful accounts of $36,000
  in 2006 and 2005)


119,000


280,000Accounts
receivable - RMC


175,000


79,000Other current
assets


119,000


152,000Total current
assets


710,000


933,000Property and
equipment:Gamma Knives
(net of accumulated depreciation of $4,599,000 in 2006
  and $3,987,000 in 2005)


2,370,000


2,982,000Leasehold
improvements (net of accumulated amortization of $1,739,000
  in 2006 and $1,641,000 in 2005)


303,000


400,000Office
furniture and computers (net of accumulated depreciation of
  $107,000 in 2006 and $107,000 in 2005)





2,673,000


3,382,000Cash held in escrow


113,000


108,000Deferred tax asset





240,000$
3,496,000

$
4,663,000LIABILITIESCurrent liabilities:Accounts
payable and accrued expenses

$
122,000

$
62,000Obligations
under capital leases and loans payable - current portion


467,000


632,000Due to
stockholder





300,000Deferred tax
liability





190,000Total current
liabilities


589,000


1,184,000Asset retirement
obligations


200,000


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


1,611,000


2,100,000Total
liabilities


2,400,000


3,484,000Commitments, litigation and
other matters (Notes B[10], D, F and I)STOCKHOLDERS
EQUITYCommon stock - par value $.01;
25,000,000 shares authorized;
  7,697,185 shares issued at December 31, 2006 and 2005


77,000


77,000Additional paid-in
capital


3,097,000


2,797,000Accumulated deficit


(2,078,000
)

(1,695,000
)1,096,000


1,179,000$
3,496,000

$
4,663,000See notes
  to consolidated financial statements
F-3U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

Consolidated Statements of Operations

Year Ended
  December 31,2006

2005

2004Revenue (Notes C and D)

$
2,002,000

$
2,108,000

$
2,403,000Costs and expenses:Patient
expenses


908,000


816,000


780,000Selling,
general and administrative


1,245,000


1,447,000


1,384,0002,153,000


2,263,000


2,164,000Income (loss) from
  operations


(151,000
)

(155,000
)

239,000Interest expense


(228,000
)

(252,000
)

(59,000
)Interest income


20,000


12,000


3,000Other Income


26,000





(182,000
)

(240,000
)

(56,000
)Income (loss) before income
  taxes


(333,000
)

(395,000
)

183,000Provision for income tax
  expense (benefit)


50,000


(110,000
)

60,000Net
  income (loss)

$
(383,000
)
$
(285,000
)
$
123,000Basic and
  diluted net income (loss) per share:Net
  income (loss)

$
(0.05
)
$
(0.04
)
$
(0.02
)Weighted
  average common shares outstanding


7,697,185


7,697,185


7,767,100See notes
  to consolidated financial statements
F-4U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders Equity

Common
  Stock





Treasury
  StockNumber
  of
  Shares

Amount

Additional
  Paid-in
  Capital

Accumulated
  Deficit

Number
  of
  Shares

Amount

TotalBalance
  - January 1, 2004


7,866,185

$
79,000

$
2,808,000

$
(1,533,000
)

(204,000
)
$
(17,000
)
$
1,337,000Retirement of
  treasury stock


(204,000
)

(2,000
)

(15,000
)




204,000


17,000


Issuance of
  common stock as compensation


35,000





4,000











4,000Net income for
  the year ended December 31, 2004











123,000








123,000Balance
  - December 31, 2004


7,697,185


77,000


2,797,000


(1,410,000
)







1,464,000Net 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
)







1,179,000Conversion of due
  to stockholder to paid-in capital








300,000











300,000Net loss for the
  year ended December 31, 2006












(383,000
)







(383,000
)Balance
  - December 31, 2006


7,697,185

$
77,000

$
3,097,000

$
(2,078,000
)



$


$
1,096,000See notes
  to consolidated financial statements
F-5U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Year Ended December 31,2006

2005

2004Cash flows
  from operating activities:Net income
(loss)

$
(383,000
)
$
(285,000
)
$
123,000Adjustments to
reconcile to net cash provided by operating activities:Issuance of
stock as compensation








4,000Depreciation
and amortization


709,000


682,000


566,000Deferred
income tax provision


50,000


(110,000
)

14,000Changes
in:Accounts
receivable


48,000


124,000


(32,000
)Accounts
receivable - stockholder


17,000


(22,000
)

39,000Other current
assets


33,000


47,000


(55,000
)Accounts
payable and accrued expenses


61,000


23,000


(159,000
)Other current
liabilities





(39,000
)

(3,000
)Net
  cash provided by operating activities


535,000


420,000


497,000Cash flows
  from investing activities:Property and
equipment





(2,603,000
)

Progress
payments - RMC Gamma Knife





1,282,000


(1,282,000
)Decrease
(increase) in cash held in escrow


(5,000
)

(2,000
)

211,000Net
  cash used in investing activities


(5,000
)

(1,323,000
)

(1,071,000
)Cash flows
  from financing activities:Repayment of
capital lease and loan obligations


(655,000
)

(505,000
)

(1,014,000
)Cash received
on financing of equipment





1,319,000


2,010,000Net
  cash used in financing activities


(655,000
)

814,000


996,000Net change
  in cash and cash equivalents


(125,000
)

(89,000
)

422,000Cash and cash equivalents -
  beginning of year


422,000


511,000


89,000Cash and
  cash equivalents - end of year

$
297,000

$
422,000

$
511,000Supplemental
  disclosures of cash flow information:Cash paid
for:Interest

$
228,000

$
252,000

$
59,000Income
taxes

$


$


$
44,000Supplemental
  disclosures of noncash activities:Issuance of
stock as compensation

$


$


$
4,000Conversion of
due to stockholder to paid-in-capital

$
300,000

$


$
See notes to
  consolidated financial statements
F-6U.S. NEUROSURGICAL, INC. AND SUBSIDIARY


NOTE A  ORGANIZATION AND BUSINESS

US
NeuroSurgical, Inc., a Delaware Corporation, was organized in July 1993 for the
purpose of owning and operating 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.

NOTE B - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

[1]
Basis of Presentation and ConsolidationThe
  consolidated financial statements include the accounts of the Company and its
  wholly owned subsidiary, US NeuroSurgical Physics. All significant
  intercompany balances and transactions have been eliminated in consolidation.[2]
Cash and cash equivalents:The Company
  considers all highly liquid debt instruments purchased with a maturity of
  three months or less to be cash equivalents.[3]
Revenue recognition:Patient
  revenue is recognized when the Gamma Knife procedure is rendered.[4]
Long-lived assets:The Company
  reviews its long-lived assets for impairment whenever events or changes in
  circumstances indicate that the carrying
  amount of an asset may not be recoverable.[5]
Depreciation and amortization:The Gamma
  Knives are being depreciated on the straight-line method over an estimated
  useful life of seven years. The related costs incurred to reload the cobalt
  are being amortized on a straight-line method over an estimated useful life
  of five years. Leasehold improvements are being amortized on the
  straight-line method over 7 to 20 years, the shorter of useful life, or the
  life of the leases. Office furniture and computers are being depreciated on
  the straight-line method over their estimated useful lives ranging from 3 to
  7 years. Depreciation expense for
  2006, 2005 and 2004 was $ 709,000, $ 682,000, and $ 566,000,
  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. Valuation allowances are established when necessary to
  reduce tax assets to amounts more likely than not to be realized.F-7

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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

[7]
Earnings per share:Earnings per
  share are computed by dividing earnings available to common stockholders by
  the weighted average shares outstanding for the period. There were no common
  stock equivalents during 2006, 2005, and 2004, 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. There were no advertising costs in 2006, 2005, or 2004.[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
  market information and appropriate valuation methodologies. The carrying
  amounts of cash, accounts receivable, other current assets and accounts
  payable approximate fair value at December 31, 2006 and 2005 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, 2006 and 2005.[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. The uninsured portion of
  cash balances held in two banks totals $88,464 at December 31, 2006. 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.F-8

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

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

[15]
Recent Accounting and Regulatory PronouncementsCurrently EffectiveIn May 2005,
  the Financial Accounting Standards Board (FASB) issued Statement of
  Financial Accounting Standard (SFAS) No. 154, Accounting Changes and
  Error Corrections, which changes the accounting for and reporting of a
  change in accounting principle. This statement applies to all voluntary
  changes in accounting principles and changes required by an accounting
  pronouncement in the unusual instance that the pronouncement does not include
  specific transition provisions. This statement requires retrospective
  application to prior period financial statements of changes in accounting
  principle, unless it is impractical to determine either the period-specific
  or cumulative effects of the change. SFAS 154 is effective for accounting
  changes made in fiscal years beginning after December 15, 2005. The
  adoption of this standard did not have a material effect on the Companys
  financial condition, results of operations, or cash flows.In September
  2006, the Securities and Exchange Commission (the SEC) released Staff
  Accounting Bulletin No. 108, Considering the Effects of Prior Year
  Misstatements When Quantifying Misstatements in Current Year Financial
  Statements (SAB 108), which provides detail in the quantification and
  correction of financial statement misstatements. SAB 108 specifies that
  companies should apply a combination of therollover and iron curtain
  methodologies when making determinations of materiality. The rollover method
  quantifies a misstatement based on the amount of the error originating in the
  current year income statement. The iron curtain approach quantifies
  misstatements based on the effects of correcting the misstatement existing in
  the balance sheet at the end of the current year, regardless of the year(s)
  of origination. SAB 108 instructs companies to quantify the misstatement
  under both methodologies and, if either method results in the determination
  of a material error, the Company must adjust its financial statements to
  correct the error. SAB 108 also reminds preparers that a change from an
  accounting principle that is not generally accepted to a principle that is
  generally accepted is a correction of an error. The Bulletin is effective for
  annual financial statements covering the first fiscal year ending after
  November 15, 2006. The adoption of this Bulletin did not have a material
  effect on the Companys financial condition or results of operations.Effective in
  Future YearsIn February
  2006, The FASB issued SFAS No. 155, Accounting for Certain Hybrid
  Financial Instrumentsan amendment of FASB Statements No. 133 and 140.
  This statement amends Statements No. 133 and 140 by: permitting fair
  value remeasurement for any hybrid financial instrument with an embedded
  derivative that otherwise would require bifurcation; clarifying which
  interest-only strips and principal-only strips are not subject to the
  requirements of Statement No. 133; establishing a requirement to
  evaluate interests in securitized financial assets to identify interests that
  are freestanding derivatives or that are hybrid financial instruments that
  contain an embedded derivative requiring bifurcation; clarifying that
  concentrations of credit risk in the form of subordination are not embedded
  derivatives; and amending Statement No. 140 to eliminate the prohibition
  on a qualifying special-purpose entity from holding a derivative financial
  instrument that pertains to a beneficial interest other than another
  derivative financial instrument. The statement is effective for fiscal years
  beginning after September 15, 2006. The adoption of this standard is not
  anticipated to have a material impact on financial condition, results of
  operations or cash flows.In July
  2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting
  for Uncertainty in Income Taxesan interpretation of FASB Statement 109,
  which provides guidance on the measurement, recognition, and disclosure of
  tax positions taken or expected to be taken in a tax return. The
  interpretation also provides guidance on derecognition, classification,
  interest and penalties, and disclosure. FIN 48 prescribes that a tax position
  should only be recognized if it is more-likely-than-not that the position
  will be sustained upon examination by the appropriate taxing authority. A tax
  position that meets this threshold is measured as the largest amount of
  benefit that is more likely than not (greater than 50 percent) realized upon
  ultimate settlement. The cumulative effect of applying FIN 48 is to be
  reported as an adjustment to the beginning balance of retained earnings in
  the period of adoption. FIN 48 is effective for fiscal years beginning after
  December 15, 2006. The Company is assessing the impact, if any, that
  adoption may have on its financial statements.F-9

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTE C - 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, 2006 and 2005, the
  escrow account balance was $113,000 and $108,000, 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 of $1,015,000, $1,134,500, and $1,153,000 for 2006, 2005, and
  2004, respectively.In April,
  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 D - 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 of $968,000, $973,500, and $1,250,000 for 2006, 2005, and 2004,
respectively.

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-10

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTEE- OBLIGATIONUNDERCAPITALLEASE ANDLOANS PAYABLE

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 Financial Services, Inc. (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
$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. The final payment for this
lease will be paid in April, 2007.

In 2005, the Company
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%.

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

December
  31,2006

2005Capital leases - Gamma
Knife

$
2,078,000

$
2,701,000Loans payable - leasehold
improvements





31,0002,078,000


2,732,000Less current portion


(467,000
)

(632,000
)$
1,611,000

$
2,100,000Future payments as of
December 31, 2006 on the equipment leases and loans are as follows:

Year
  Ending
  December 31,2007

$
629,0002008


559,0002009


559,0002010


559,0002011 and thereafter


187,0002,493,000Less interest


(415,000
)Present value of net
  minimum obligation

$
2,078,000The Companys Gamma Knives
are held under capital leases and amortization is included in depreciation
expense.

F-11

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTEF ASSETRETIREMENTOBLIGATIONS

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.

NOTEG- CONCENTRATIONS

For 2006, 2005, and 2004,
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,
2006 and 2005.

The Company has been dependent
on one manufacturer who sells, supplies and services the Gamma Knife.

NOTEH- TAXES

The components of the income
tax provision (benefit) are as follows:

Year Ended
  December 31,2006

2005

2004Current:Federal

$


$


$
32,000State








14,000





46,000Deferred:Federal


40,000


(78,000
)

10,000State


10,000


(32,000
)

4,00050,000


(110,000
)

14,000$
50,000

$
(110,000
)
$
60,000A reconciliation of the tax
provision (benefit) calculated at the statutory federal income tax rate with
amounts reported follows:

Year Ended
  December 31,2006

2005

2004Income tax (benefit) at the
  federal statutory rate

$
(113,000
)
$
(92,000
)
$
64,000State income tax (benefit),
  net of federal taxes


(17,000
)

(18,000
)

9,000Other


22,000





(13,000
)Change in valuation
  allowance


158,000





Income tax provision
  (benefit)

$
50,000

$
(110,000
)
$
60,000F-12

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTEHTAXES(CONTINUED)

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

December
  31,2006

2005Deferred tax asset:Net operating
loss

$
260,000

$
142,000Excess of book
depreciation over tax depreciation


15,000


98,000275,000


240,000Deferred tax
liability:Net effect of
the conversion from accrual basis of accounting to cash
  basis accounting for tax purposes primarily related to accounts receivable,
  prepaid expenses, and accounts payable


(117,000
)

(190,000
)158,000


50,000Valuation
Allowance


(158,000
)

Net deferred
tax asset

$


$
50,000NOTEI- 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.

NOTEJCOMMITMENTS ANDCONTINGENCIES

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, 2006, the annual future minimum rental payments under the
operating lease and the ground lease referred to in Note B(2) are as follows:

Year
  EndingDecember
  31,2007

$
40,0002008


10,000$
50,000Rent expense was
approximately $41,000, $39,000, and $41,000, for 2006, 2005, and 2004,
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 at 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.

F-13

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY

NOTE J  COMMITMENTS
AND CONTINGENCIES (CONTINUED)

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 K - 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 made no discretionary matching 401(k)
contribution for the year ended 2006. The discretionary matching 401(k)
contribution for 2005 and 2004 were approximately $58,000 and $61,000,
respectively.

NOTE L - RELATED
PARTY TRANSACTIONS

[1]
The amount
  due to stockholder is due on demand without interest. This amount was
  converted to paid-in capital during 2006.[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 2006, 2005, and 2004, was
  $300,000, $300,000 and $300,000, respectively.NOTE M - 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, 2006,
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.

F-14

U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTE N  QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of
operations: (in thousands)

Three Months Ended31-Mar

30-Jun

30-Sep

31-Dec2006Revenue


506


528


414


554Income (loss)
from operations


(68
)

(24
)

(117
)

84Net
loss


(86
)

(113
)

(169
)

35Basic and
diluted income (loss) per common share

$
(0.01
)
$
(0.01
)
$
(0.02
)
$
0.012005Revenue


476


664


546


432Income (loss)
from operations


(119
)

41


38


(115
)Net
loss


(151
)

(41
)

(3
)

(90
)Basic and
diluted loss 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 (loss) per common share

$
0.00

$
0.02

$
0.01

$
(0.01
)F-15