SECURITIES AND
EXCHANGE COMMISSION                              WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER
SECTION 13 OR 15(D)                      OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended
June 30, 2005
        
        Commission file number
0-15586  U.S. NEUROSURGICAL,
INC.              (Exact name of Registrant as specified in its charter) Delaware
(State of other jurisdiction of
incorporation or organization)
        
        52-1842411
(I.R.S. Employer
Identification No.)  2400 Research Blvd,
Suite 325, Rockville, Maryland 20850                (Address of principal executive
offices) (Zip Code) Registrants telephone
number, including area code:  (301) 208-8998 Not Applicable
                             (Former name, former address and former fiscal year, if
changed since last report) Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 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 Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the latest
practicable date. Class
     Outstanding at August 3, 2005Common Stock, $.01 par value
     
     
     7,697,185 Shares    PART I
                              FINANCIAL INFORMATION                      U.S.
NEUROSURGICAL, INC. AND SUBSIDIARY                            CONSOLIDATED BALANCE SHEETS


June 30,2005
     
     December 31,2004ASSETSCurrent assets:Cash and cash equivalents
     $411,000
        
     $511,000Accounts receivable (net of allowance for doubtfulaccounts of $36,000 in 2005 and 2004)
     413,000
        
     404,000Accounts receivable-stockholder
     102,000
        
     57,000Other current assets
     177,000
        
     199,000Total current assets
     $1,103,000
        
     $1,171,000Gamma Knife (net of accumulated depreciation of$3,681,000 in 2005 and $7,147,000 in 2004)
     3,287,000
        
     965,000Leasehold improvements (net of accumulatedamortization of $1,575,000 in 2005 and $1,545,000 in 2004)
     467,000
        
     497,000Total property and equipment
     3,754,000
        
     1,462,000Progress payments - RMC Gamma Knife
     
        
     1,282,000Deferred tax asset
     180,000
        
     180,000Cash held in escrow
     107,000
        
     106,000TOTAL
     $5,144,000
        
     $4,201,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
     $48,000
        
     $39,000Obligations under capital leaseand loans payable- current portion
     726,000
        
     467,000Due to stockholder
     300,000
        
     300,000Deferred tax liability
     240,000
        
     240,000Other current liabilities
     39,000
        
     39,000Total current liabilities
     1,353,000
        
     1,085,000Obligations under capital lease and loans payable-netof current portion
     2,319,000
        
     1,452,000Asset retirement obligations
     200,000
        
     200,0003,872,000
        
     2,737,000Stockholders equity:Common stock
     77,000
        
     77,000Additional paid-in capital
     2,797,000
        
     2,797,000Accumulated deficit
     (1,602,000
        )
     (1,410,000
        )Total stockholders equity
     $1,272,000
        
     $1,464,000TOTAL
     $5,144,000
        
     $4,201,000The accompanying notes
to financial statements are an integral part hereof.



2


U.S. NEUROSURGICAL,
INC. AND SUBSIDIARY                       CONSOLIDATED STATEMENTS OF OPERATIONS


Three Months EndedJune 30,2005
     
     2004Revenue:Patient Revenue
     $664,000
        
     $774,000Expenses:Patient Expenses
     $209,000
        
     $161,000Selling, General and Administrative
     414,000
        
     367,000Total
     623,000
        
     528,000Operating Income
     $41,000
        
     $246,000Interest expense
     (85,000
        )
     (24,000
        )Interest Income
     3,000
        
     (Loss) income before income taxes
     (41,000
        )
     222,000Income tax provision
     
        
     91,000Net (Loss) income
     (41,000
        )
     131,000Proforma basic and diluted (loss) income per share
     $(.01
        )
     $.02Proforma weighted average shares outstanding
     7,697,185
        
     7,856,185The accompanying notes
to financial statements are an integral part hereof.


3


U.S. NEUROSURGICAL,
INC. AND SUBSIDIARY                       CONSOLIDATED STATEMENTS OF OPERATIONS


Six Months EndedJune 30,2005
     
     2004Revenue:Patient Revenue
     $1,140,000
        
     $1,303,000Expenses:Patient Expenses
     416,000
        
     333,000Selling, General and Administrative
     802,000
        
     684,000Total
     1,218,000
        
     1,017,000Operating (Loss) income
     (78,000
        )
     286,000Interest expense
     (119,000
        )
     (33,000
        )Interest income
     5,000Other Income
     
        
     24,000(Loss) income before income taxes
     (192,000
        )
     277,000Income tax provision
     
        
     113,000Net (Loss) income
     (192,000
        )
     164,000Proforma basic and diluted income per share
     $(.03
        )
     $.02Proforma weighted average shares outstanding
     7,697,185
        
     7,861,516The accompanying notes
to financial statements are an integral part hereof.


4


U.S. NEUROSURGICAL,
INC. AND SUBSIDIARY                       CONSOLIDATED STATEMENTS OF CASH FLOWS


Six Months EndedJune 30,2005
     
     2004Cash flows from operating activities:(Loss) income from continuing operations
     $(192,000
        )
     $164,000Adjustments to reconcile net income to net cash (used in) provided byoperating activities:Depreciation and amortization
     309,000
        
     244,000Changes in operating assets and liabilities:(Increase) in receivables
     (54,000
        )
     (70,000
        )Decrease (increase) in other current assets
     22,000
        
     (2,000
        )Increase in deferred tax asset
     
        
     (62,000
        )Increase (decrease) in payables and other current liabilitiesand deferred tax liability
     9,000
        
     (13,000
        )Net cash provided by operating activities
     94,000
        
     261,000Cash flows from investing activities:RMC Gamma Knife
     (2,601,000
        )
     Progress payments- RMC Gamma Knife
     1,282,000
        
     (Increase) decrease in cash held in escrow
     (1,000
        )
     211,000Net cash (used in) provided by investing activities
     (1,320,000
        )
     211,000Cash flows from financing activities:Proceeds from capital lease obligations and loans payable
     1,319,000
        
     625,000Repayment of capital lease obligations and loans payable
     (193,000
        )
     (781,000
        )Net cash provide by (used in) financing activities
     1,126,000
        
     (156,000
        )Net (decrease) increase in cash and cash equivalents
     (100,000
        )
     316,000Cash and cash equivalents - beginning of period
     511,000
        
     89,000CASH AND CASH EQUIVALENTS - END OF PERIOD
     $411,000
        
     $405,000Supplemental disclosures of cash flow information:Cash paid forInterest
     $119,000
        
     $33,000Taxes
     
        
     41,000The accompanying notes
to financial statements are an integral part hereof.


5


U.S. NEUROSURGICAL,
INC. AND SUBSIDIARIES                           NOTES TO FINANCIAL STATEMENTS


Note A - Basis of
Preparation


The
accompanying financial statements at June 30, 2005, and for the three and six months
ended June 30, 2005 and 2004, are unaudited. However, in the opinion of management, such
statements include all adjustments necessary for a fair statement of the information
presented therein. The balance sheet at December 31, 2004 has been derived from the
audited financial statements at that date appearing in the Companys Annual Report on
Form 10-K.


Pursuant
to accounting requirements of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, the accompanying financial statements and these notes do
not include all disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. Accordingly, these statements
should be read in conjunction with the Companys most recent annual financial statements.


Results
of operations for interim periods are not necessarily indicative of those to be achieved
for full fiscal years.


Note B - Treasury
Stock


During
June 2004, the Company retired 204,000 shares of its Common Stock.


6


U.S. NEUROSURGICAL,
INC. AND SUBSIDIARY                             MANAGEMENT DISCUSSION AND
                             ANALYSIS OF OPERATIONS                              AND
FINANCIAL CONDITION


Critical Accounting
Policies


Our condensed financial statements
have been prepared in accordance with accounting principles generally accepted in the
United States of America. As such, some accounting policies have a significant impact on
amounts reported in the financial statements. A summary of those significant accounting
policies can be found in our 2004 Annual Report on Form 10-K, filed, in the Notes to the
Financial Statements, Note A. In particular, judgment is used in areas such as
determining the allowance for doubtful accounts, and asset impairments.


The following discussion and
analysis provides information which the Companys management believes is relevant to an
assessment and understanding of the Companys results of operations and financial
condition. This discussion should be read in conjunction with the consolidated financial
statements and notes there to appearing elsewhere herein.


Second Quarter 2005
Compared to Second Quarter 2004 and Six Months Ended June 30, 2005 Compared to Six Months
Ended June 30, 2004


Results of Operations


Patient
revenue decreased 14% to $664,000 in the quarter ended June 30, 2005 from $774,000 for
the quarter ended June 30, 2004. The decrease was due to decreased revenues at both
centers. Patient expenses increased 30% to $209,000 for the quarter compared to $161,000
in the year ago period. The increase was due to increased depreciation on the knives.
Selling, general and administrative expense increased 13% to $414,000 from $367,000, for
the quarter ended June 30, 2005. The increase was due to increases in insurance and
professional fees. Interest expense increased to $85,000 from $24,000 in the same period
a year earlier. This was due to the new lease on the RMC Gamma Knife. For the quarter
ended June 30, 2005, the net loss was $41,000 as compared to income of 131,000 for the
same period a year earlier. The loss was due to decreased revenues and the related costs
of the new RMC Gamma Knife.


For
the six months ended June 30, 2005 revenue decreased 12% to $1,140,000 compared to
$1,303,000 in the same period a year earlier. The decrease was due to decreased revenues
at both facilities. Patient expenses increased 25% to $416,000 in 2005 from $333,000 in
the same period in 2004. The increase was all for depreciation. S,G & A increased 17% to
$802,000 as compared to $684,000 in the same period a year earlier. The reason for the
increase is the same as above. Interest expense increased to $119,000 from $33,000 in the
same period a year ago. The reason for the increase was due to the lease on the new RMC
Gamma Knife. As a result, the net loss was $192,000 for the six months ended June 30, as
compared to income of $164,000 for the six months ended June 30, 2004.


7


Liquidity and Capital
Resources


At
June 30, 2005 the Company had a working capital deficit of $250,000 as compared to a
surplus of $86,000 at December 31, 2004. Cash and cash equivalents at June 30, 2005 were
$411,000 as compared with $511,000 at December 31, 2004.


Net
cash provided by operating activities was $94,000 as compared to net cash provided by of
$261,000 for the same period, a year earlier. Net loss was $192,000 as compared to net
income of $164,000 in the same period, a year earlier. Depreciation and amortization was
$309,000 for the six months ended June 30, 2005 as compared to $244,000 in the same
period, one year earlier. There was an increase in accounts receivables of $54,000 as
compared to an increase of $70,000 in the same period in 2004.


During
the first quarter the Company completed a replacement to the RMC Gamma Knife. The cost
was $2,601,000. The lease has payments of $46,600 for 72 months at 8.8 percent. The
$211,000 that was held in escrow at December 31, 2003 was paid to US Bank Corp. and
Elekta Instruments in March 2004. The reason for the escrow was a lease that had been
underfunded by DVI in August 2003. DVI filed for protection under Chapter 11 of the U.S.
Bankcruptcy Code in August 2003. USN began making all lease payments into an escrow
account and continued to negotiate with the successor. The Company secured new financing
from SMT Leasing to pay off the obligations. The lease has payments of $23,000 for 36
months at 8.8 percent.


Net
cash provided by financing activities was $1,126,000 as compared to net cash used in of
$156,000 for the same period a year earlier. The cost of new Gamma Knife was $2,601,000.
The Company paid $193,000 towards its capital lease obligations and loans payable as
compared to $781,000 in the year ago period. We anticipate that with our current cash
position, and collection on our accounts receivable, the Company believes that the cash
position is sufficient for the next twelve months.


Disclosure Regarding
Forward Looking Statements


The
Securities and Exchange Commission encourages companies to disclose forward-looking
information so that investors can better understand a companys future prospects and
make informed investment decisions. This document contains such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, particularly statements anticipating future growth in revenues and cash flow. Words
such as anticipates,estimates, expects, projects, intends, plans, believes, will
be,will continue, will likely result, and words and terms
of similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those forward-looking
statements are based on managements present expectations about future events. As
with any projection or forecast, they are inherently susceptible to uncertainty and
changes in circumstances, and USN is under no obligation to (and expressly disclaims any
such obligation to) update or alter its forward-looking statements whether as a result of
such changes, new information, future events or otherwise.


USN
operates in a highly competitive and rapidly changing environment and business segments
that are dependent on our ability to: achieve profitability; increase revenues; sustain
our current level of operation; introduce on a timely basis new



8


products; maintain satisfactory
relations with our customers; attract and retain key personnel; maintain and expand our
strategic alliances; and protect our know-how. USNs actual results could differ
materially from managements expectations because of changes in such factors. New risk
factors can arise and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the companys business or the
extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as
a prediction of actual results.


Investors
should also be aware that while the company might, from time to time, communicate with
securities analysts, it is against the companys policy to disclose to them any material
non-public information or other confidential commercial information. Accordingly,
investors should not assume that the company agrees with any statement or report issued
by any analyst irrespective of the content of the statement or report. Furthermore, the
company has a policy against issuing or confirming financial forecasts or projections
issued by others. Thus, to the extent that reports issued by securities analysts or
others contain any projections, forecasts or opinions, such reports are not the
responsibility of the company.


In addition, USNs overall financial
strategy, including growth in operations, maintaining financial ratios and strengthening
the balance sheet, could be adversely affected by increased interest rates, failure to
meet earnings expectations, significant acquisitions or other transactions, economic
slowdowns and changes in USNs plans, strategies and intentions


ITEM 4.  CONTROLS AND
PROCEDURES


U.S.
Neurosurgical management, including the President and the Chief Financial Officer,
conducted an evaluation of the effectiveness of disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15e within 90 days of the filing of this report. Based
on that evaluation, the President and the Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to them in
a timely fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the date the
President and the Chief Financial Officer completed their evaluation.


PART II
                OTHER INFORMATION


Item 6.         Exhibits and
Reports on Form 8-K


(a) None


9


SIGNATURES


Pursuant to the requirements 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.



U.S. Neurosurgical, Inc.Date August 1, 2005
        By
        /s/ Alan Gold
    Alan Gold
    Director and President
    Chief Executive OfficerDate August 1, 2005
        By
        /s/ Howard Grunfeld
    Howard Grunfeld
    Vice President of Finance10