UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 or
 £
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 For the transition period from                     to                     .
 
 Commission file number:  0-15586
 
 U.S. Neurosurgical, Inc.
 (Exact name of registrant as specified in its charter)
 
 Delaware

52-1842411(State of other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)
 
 2400 Research Blvd, Suite 325, Rockville, Maryland 20850
 (Address of principal executive offices)
 
 (301) 208-8998
 (Registrant's telephone number)
 
 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 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 TNo £
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer £

Accelerated filer £Non-accelerated filer £

Smaller reporting company T
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes £No T
 
 The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of April 29, 2011 was 7,747,185.
  
 
  TABLEOF CONTENTS
 
 PART I - FINANCIAL INFORMATION
3Item 1.  Financial Statements
3Item 2.  Management Discussion and Analysis of Financial Condition and Results of Operations.
9Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
12Item 4.  Controls and Procedures
12PART II - OTHER INFORMATION
15Item 1.  Legal Proceedings
15Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
15Item 3.  Defaults Upon Senior Securities
15Item 4.  Submission of Matters to a Vote of Security Holders
15Item 5.  Other Information
15Item 6.  Exhibits
16SIGNATURES
17
  2
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  PART I - FINANCIAL INFORMATION
 
 Item1.  Financial Statements
 
 U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
 March 31,


December 31,2011


2010ASSETSCurrent assets:Cash and cash equivalents

$
575,000


$
820,000Accounts receivable (net of allowance for doubtful accounts of $36,000 in 2011 and 2010)


494,000



421,000Other current assets


152,000



89,000Total current assets

$
1,221,000


$
1,330,000Investment in unconsolidated entities

$
200,000


$
200,000Gamma Knife (net of accumulated depreciation of $3,256,000 in 2011 and  $2,937,000 in 2010)


2,849,000



2,980,000Leasehold improvements (net of accumulated amortization of $811,000 in 2011 and $807,000 in 2010)


247,000



251,000Total property and equipment


3,096,000



3,231,000Cash held in escrow


51,000



51,000TOTAL

$
4,568,000


$
4,812,000LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable and accrued expenses

$
59,000


$
113,000Obligations under capital lease and loans payable- current portion


506,000



623,000Total current liabilities


565,000



736,000Obligations under capital lease and loans payable-net of current portion


2,569,000



2,568,000Asset retirement obligations


200,000



200,000Total liabilities


3,334,000



3,504,000Stockholders’ equity:Common stock


77,000



77,000Additional paid-in capital


3,099,000



3,099,000Accumulated deficit


(1,942,000
)


(1,868,000
)Total stockholders’ equity

$
1,234,000


$
1,308,000TOTAL

$
4,568,000


$
4,812,000
 
 The accompanying notes to financial statements are an integral part hereof.
  3
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  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 Three Months EndedMarch 31,2011


2010Revenue:Patient revenue

$
496,000


$
389,000Expenses:Patient expenses


179,000



117,000Selling, general and administrative


262,000



246,000Total


441,000



363,000Operating income


55,000



26,000Interest expense


(69,000
)


(92,000
)Interest income


-



3,000Loss from continuing operations


(14,000
)


(63,000
)Discontinued operationsLoss from operations of Kansas City Gamma Knife Center


(60,000
)


(4,000
)Net loss

$
(74,000
)

$
(67,000
)Basic and diluted loss per share

$
(0.01
)

$
(0.01
)Net loss per common share from continuing operations - basic and diluted

$
-


$
0.01Net loss per common share from discontinued operations - basic and diluted

$
0.01


$
-Weighted average shares outstanding


7,747,185



7,747,185
 
 The accompanying notes to financial statements are an integral part hereof.
  4
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  U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Three Months EndedMarch 31,2011


2010Cash flows from operating activities:Net loss

$
(74,000
)

$
(67,000
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


323,000



223,000Loss on impairment of Gamma Knife equipment at Kansas City center


89,000



-Changes in:Accounts receivable


(73,000
)


75,000Other current assets


(63,000
)


(20,000
)Accounts payable and accrued expenses


(54,000
)


52,000Net cash provided by operating activities


148,000



263,000Cash flows from financing activities:Repayment of capital lease obligations and loans payable


(393,000
)


(215,000
)Net cash used in financing activities


(393,000
)


(215,000
)Net change in cash and cash equivalents

$
(245,000
)

$
48,000CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

$
820,000


$
673,000CASH AND CASH EQUIVALENTS - END OF PERIOD

$
575,000


$
721,000Supplemental disclosures of cash flow information:Cash paid forInterest

$
84,000


$
107,000Supplemental disclosure of noncash investing and financing activitiesEquipment acquired through a capital lease

$
277,000


$
-
 
 The accompanying notes to financial statements are an integral part hereof.
  5
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  U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note A - Basis of Preparation
 
 The accompanying condensed consolidated financial statements of U.S. Neurosurgical and subsidiaries (the “Company”) at March 31, 2011, and for the three month periods ended March 31, 2011 and 2010, 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, 2010 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 consolidated financial statements and 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.
 
 Consolidated results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.
 
 Certain reclassifications have been made to the prior year consolidated financial statements in order for them to be in conformity with the current year presentation.  Such reclassifications had no effect on consolidated net loss or total stockholders’ equity as previously reported.
 
 
 Note B – Sale of Kansas City Gamma Knife Center and Focus on Continuing Businesses
 
 In April 2011, the Company finalized certain transactions and agreements with Midwest Division – RMC, LLC (“RMC”), which owns the property and operates the medical facilities in Kansas City at which the Company’s Gamma Knife center is located.
 
 Sale of Gamma Knife Equipment at Kansas City Center
 
 The Company sold to RMC the Leksell Gamma Knife radiosurgery equipment, along with related supplies and inventory, located at the Kansas City Center for an aggregate purchase price of $250,000.  RMC has also indicated its intention to employ the physicist who, up to the time of the sale, operated the Gamma Knife equipment on the Company’s behalf.  The Company will, upon request of RMC and at RMC’s cost and expense, assist RMC in replenishing the Gamma Knife equipment’s radioactive cobalt 60 as is necessary for the proper operation of the Gamma Knife.
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  Termination of Arrangements with RMC and Settlement of Outstanding Claims
 
 In connection with the sale of the Gamma Knife equipment described above, the Company and RMC entered into an agreement terminating the Gamma Knife Neuroradiosurgery Equipment Agreement and the Ground Lease Agreement, each originally entered into between the parties in 1993, and concluded all arrangements between the parties relating to the operation of the Gamma Knife center and the lease of the premises.  Immediately preceding the termination of these agreements, the Company and RMC satisfied all outstanding obligations between the parties, resulting in a net payment of $385,355 to the Company.  In connection with the agreement, the parties also entered into a mutual release respecting all other outstanding claims and disputes between them relating to the Kansas City center.
 
 The Company agreed with RMC that through September 2015, it will not participate in Gamma Knife operations in the states of Missouri, Kansas, Nebraska, Iowa and Arkansas.
 
 Effect of Discontinued Kansas City Operations
 
 The major classes of the assets and liabilities included as part of the disposal group are as follow:
 
 March 31,


December 31,2011


2010AssetsGamma Knife (net of accumulated depreciation of $2,229,000 in 2011 and $2,136,000 in 2010)

$
282,000


$
464,000Leasehold improvements (net of accumulated amortization of $668,000 in 2011 and $658,000 in 2010)


139,000



150,000$
421,000


$
614,000LiabilitiesAsset retirement obligations

$
100,000


$
100,000
  The amounts of revenue and pretax profit or loss reported in discontinued operations are as follow:
 
 Three Months EndedMarch 31,


March 31,2011


2010Revenue

$
183,000


$
143,000Pretax loss


(57,000
)


(4,000
)
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  Included in the pretax loss for the three months ended March 31, 2011 is an impairment recorded on the Gamma Knife for the Kansas City Center totaling $161,000.  This impairment loss is being offset by $71,000 received by the Company attributed to revenues from prior years which had been disputed by RMC, and, as such, never recorded by the Company due to the uncertainty of collection.
 
 
 Continuing Businesses and Business Strategy
 
 These transactions will affect the Company’s operations beginning with the quarter ended June 30, 2011.  While Company management believes that these transactions are in the best interests of the Company, and will improve the Company’s financial position, the Kansas City Gamma Knife center represented in the past a source of revenue that will no longer be available to it.  The Company will continue to own and operate the Gamma Knife center at NYU Hospital and participate in the newer Gamma Knife and radiosurgery centers in California and Florida.
 
 USN is currently exploring other opportunities for Gamma Knife centers and centers that provide related healthcare services located near hospitals throughout the United States.  Discussions regarding such centers is preliminary and there can be no assurance that any such discussions will result in the opening of new centers.
 
 As a result of the Company’s experiences over the past few years, The Company has expanded its focus to the broader based cancer treatment market.  In order to reduce the risk and broaden its opportunities for profitable growth, the Company, where possible, has been pursuing partnerships with local investors/providers to develop and operate oncology centers that utilize linear accelerators (LINACs) to treat cancers in the whole body.  The Company also continues to evaluate opportunities to also develop additional Gamma Knife facilities.  Florida Oncology Partners and the Southern California Regional Gamma Knife Center typify this new strategy.
 
 
 Note C – The Southern California Regional Gamma Knife Center
 
 During 2007, the Company managed the formation of the Southern California Regional Gamma Knife center at San Antonio Community Hospital (“SACH”) in Upland, California.  The Company will participate in the ownership and operation of the center through its wholly-owned subsidiary, USN Corona, Inc. (“USNC”).  Corona Gamma Knife, LLC (“CGK”) is party to a 14-year agreement with SACH to renovate space in the hospital and install and operate a Leksell Perfexion Gamma Knife.  CGK leased the Gamma Knife from Neuropartners LLC, which purchased the Gamma Knife equipment.  USNC is a 27% owner of CGK and a 20% owner of Neuropartners LLC.  In addition, USNC will receive fees for management services relating to the facility.
 
 Construction of the SACH Gamma Knife center was completed in December 2008 and the first patient was treated in January of 2009.  The project has been funded principally by outside investors.  While USN has led the effort in organizing the business and overseeing the development and operation of the SACH center, its investment to date in the SACH center has been minimal.
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  Note D –Gamma Knife at NYU Medical Center
 
 The Company installed a Leksell Gamma Knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older Gamma Knife equipment at that location.  The net cost to the Company of the machine was $3,593,000 after a credit for the trade-in of the older machine.  The purchase price was financed through a capital lease with Elekta Capital.  The Company incurred construction costs of $251,000 in connection with the installation of the equipment and the upgrades to the facility.  In connection with this upgrade, the Company modified its arrangement with NYU to extend the term for 12 years from March 2009.  The Company is responsible under the lease agreement with Elekta Capital for 81 months of lease payments which began in July 2009 of approximately $61,000 per month.  In addition, lease payments of $2,379 per month began in July 2010 and continue through June 2017 to cover construction costs.
 
 
 Note E – Florida Oncology Partners
 
 During the quarter ended September 30, 2010, the Company participated in the formation of Florida Oncology Partners, LLC (“FOP”).  USNC owns a 20% interest in FOP and invested $200,000.  The remaining 80% is owned by other outside investors.  FOP will own and operate a cancer center in West Kendall, Florida.  The center will utilize a Varian Rapid Arc linear accelerator and a GE CT scanner.  Plans are for the center to open in May 2011.
 
 
 Item2.  Management Discussion and Analysis of Financial Condition and Results of Operations.
 
 Critical Accounting Policies
 
 The condensed consolidated financial statements of U.S. Neurosurgical, Inc. (“USN” or the “Company”) 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 consolidated financial statements.  A summary of those significant accounting policies can be found in the Notes to the Consolidated Financial Statements, Note B, in our 2010 Annual Report on Form 10-K.  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 thereto appearing elsewhere herein.
  9
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  Results of Operation
 
 Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 
 In April 2011, the Company finalized certain transactions and agreements with Midwest Division – RMC, LLC, which resulted in the disposition of its assets and business at the Kansas City Gamma Knife center, as described in Note B to the unaudited condensed, consolidated financial statements of the Company included in this report.  Previous Kansas City center operations are excluded in the computation of loss from continuing operations for the quarters ended March 31, 2011 and 2010.
 
 Patient revenue increased 28% to $496,000 in the quarter ended March 31, 2011 from $ 389,000 for the quarter ended March 31, 2010.  This increase was due to an increase in patient treatments at the New York center.  Patient expenses increased 53% to $179,000 for the first quarter of 2011 compared to $117,000 in the same period a year ago.  Patient expenses do not vary materially with the number of procedures performed, but are tied to depreciation, maintenance and other fixed expenses.  The increase in patient expenses for the first quarter of 2011 was due to an increase in Gamma Knife maintenance at the New York center (due to the expiration in August 2010 of the warranty period for the new equipment) and an increase in depreciation.
 
 Selling, general and administrative expense of $262,000 was 7% higher than the $246,000 incurred during the comparable period in 2010.  The increase in SG&A expenses was partly due to an increase in marketing expenses over the comparable period in 2010.  For the quarter ended March 31, 2011, the Company reported a net loss of $74,000 as compared to a net loss of $67,000 for the same period a year earlier.
 
 
 Liquidity and Capital Resources
 
 At March 31, 2011, the Company had working capital of $656,000 as compared to $594,000 at March 31, 2010.  Cash and cash equivalents at March 31, 2011 were $575,000 as compared with $820,000 at December 31, 2010.  While cash is down significantly in the recent quarter as compared to 2010, obligations under the capital lease for the New York center were paid down significantly over the past year.
 
 Net cash provided by operating activities for the three months ended March 31, 2011 was $148,000 as compared to the $263,000 that was provided in the same period a year earlier.  Depreciation and amortization was $323,000 for the three months ended March 31, 2011, as compared with $223,000 the first three months of 2010.
 
 The Company paid $393,000 towards its capital lease obligations during the three months ended March 31, 2011 as compared to $215,000 in the same period a year ago.  With our current cash position, and continued collection on our accounts receivable, the Company believes that its cash position will be sufficient to support operations for at least the next twelve months.
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  Risk Factors
 
 We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  The following factors, as well as the factors listed under the caption “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2010, have affected or could affect our actual results and could cause such results to differ materially from those expressed in any forward-looking statements made by us.  Investors should carefully consider these risks and speculative factors inherent in and affecting our business and an investment in our common stock.
 
 Recent Operating Losses.  We have experienced significant operating losses in recent periods and may continue to do so in the future.  We reported a net profit of $469,000 for the year ended December 31, 2010, but a net loss of $74,000 for the first three months of 2011. The reported profit in 2010 was solely due to the settlement payment from the lawsuit in Kansas City.  With the increased obligations in connection with the capital lease financing established during 2009 for the new Gamma Knife at the New York center, the Company must now operate at a higher level of revenues to generate positive net income.
 
 While the Company is taking steps to improve long term profitability, it is possible that the Company will experience material losses in the future periods.
 
 Availability of Working Capital.  To date, we have earned sufficient income from operations to fund periodic operating losses and support efforts to pursue new Gamma Knife centers.  If losses were to continue, we will be required to seek additional capital to support continued operations and the development of new centers, but we cannot assure you that we will be able to raise such additional capital as and when required and on terms that will be acceptable.
 
 
 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 the Company 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.
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  The Company operates in a highly competitive and rapidly changing environment and in business segments that are dependent on our ability to: achieve profitability; increase revenues; sustain our current level of operations; introduce new products on a timely basis; maintain satisfactory relations with our customers; attract and retain key personnel; maintain and expand our strategic alliances; and protect our know-how.  The Company'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, the Company’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 the Company’s plans, strategies and intentions.
 
 
 Item3.  Quantitative and Qualitative Disclosures About Market Risk.
 
 Not applicable.
 
 
 Item4.  Controls and Procedures
 
 Evaluation of 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, as appropriate, to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, 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”).
  12
 Table of Contents
  Our management 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 not 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, due to the material weakness in internal control over financial reporting described below.
 
 Internal Control over Financial Reporting
 
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The Company’s internal control over financial reporting includes those policies and procedures that:
 
 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
 (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
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  Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
  Our management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. A material weakness is a control deficiency, or a combination of control deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the assessment described above, management has identified the following material weakness as of March 31, 2011: the Company did not maintain sufficient qualified personnel with the appropriate level of knowledge, experience and training in the application of generally accepted accounting principles and in internal controls over financial reporting commensurate with its financial reporting requirements. Specifically, effective controls were not designed and in place to ensure that the Company maintained, or had access to, appropriate resources with adequate experience and expertise in the area of financial reporting for discontinued operations. This material weakness resulted in a financial statement misstatement being made and going uncorrected until brought to management’s attention during the review of the quarterly financial information by the Company’s registered independent public accounting firm
 
 Changes in Internal Control over Financial Reporting
 
 While 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 March 31, 2011, management is in the process of developing plans to remediate the material weakness identified above.
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 Table of Contents
  PART II - OTHER INFORMATION
 
 Item1.  Legal Proceedings
 
 During 2007, USN instituted a lawsuit against Midwest Division – RMC LLC, in the Circuit Court of Jackson County, Missouri seeking damages against the defendant as successor to USN’s agreement with RMC relating to the Kansas City Gamma Knife center.  This lawsuit arose out of USN’s agreement with RMC, executed in December 1993.  In the course of an audit, USN discovered that the defendant had failed to make proper payments to USN under that agreement.  USN sought to recover amounts representing such underpayments.
 
 On July 3, 2008, following the trial at the Circuit Court, the jury found in favor of USN and assessed damages at $1,919,124.  On March 2, 2010, the decision in favor of USN was affirmed on appeal, but the award of damages was reduced substantially.  The result was a net payment to USN, after costs of litigation, of $459,000.
 
 In January 2011, RMC initiated additional legal action to compel the Company to resource the cobalt in the Kansas City Gamma Knife.  However, the Company felt that such demand was inappropriate.  Ultimately, all matters between the parties were resolved in April 2011 in connection with the sale by the Company to RMC of the Gamma Knife equipment at the Kansas City Center and the termination of all arrangements with RMC, which is described in Note B to the unaudited financial statements of the Company included in this report.
 
 
 Item2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 Not applicable.
 
 
 Item3.  Defaults Upon Senior Securities
 
 Not applicable.
 
 
 Item4.  Submission of Matters to a Vote of Security Holders
 
 Not applicable.
 
 
 Item5.  Other Information
 
 Not applicable.
 
 15
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 Item6.  Exhibits
 
 31.1
Rule 13a-14(a)/15d-14(a) Certification
 32.1
Section 1350 Certifications
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 Table of Contents
  SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 U.S. Neurosurgical, Inc.(Registrant)Date:  May 13, 2011
By :
/s/ Alan GoldAlan GoldDirector, President andChief Executive OfficerandPrincipal Financial Officerof the Registrant







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