U.S. NeuroSurgical Holdings, Inc. - Annual Report: 2008 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For 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) 208-8998

Securities registered under Section 12(b) of the Act:		None

Securities registered under Section 12(g) of the Act:		Common Stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x

Indicate by check mark 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

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.


Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company 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

As of March 13, 2009, the aggregate market value of issuer’s Common Stock held by non-affiliates was approximately $182,000, based upon the average of the bid and asked prices as reported on the OTC Bulletin Board.

As of March 13, 2009, there were outstanding 7,697,185 shares of the issuer’s Common Stock. $.01 par value.

Documents incorporated by reference: None

FORM 10-K

U.S. Neurosurgical, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2008

Table of Contents


PART I			3
	Item 1.	Business	3
	Item 1A.	Risk Factors	6
	Item 2.	Properties	8
	Item 3.	Legal Proceedings	8
	Item 4.	Submission of Matters to a Vote of Security Holders	9
PART II			10
	Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
	Item 6.	Selected Financial Data	11
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	11
	Item 8.	Financial Statements and Supplementary Data	13
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	13
	Item 9A(T).	Controls and Procedures	14
	Item 9B.	Other Information	16
PART III			17
	Item 10.	Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act	17
	Item 11.	Executive Compensation	18
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	19
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	20
	Item 14.	Principal Accounting Fees and Services	20
PART IV			22
	Item 15.	Exhibits, Financial Statement Schedules	22

PART I


Item 1.	Business.

U.S. Neurosurgical, Inc. (“USN” or the “Company”) 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 subsidiaries, U.S. Neurosurgical Physics, Inc. and USN Corona, 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 are included in Item 1A, Risk Factors, and may also 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. In January 2009, the Company opened a new center, the Southern California Regional Gamma Knife Center, at the San Antonio Community Hospital (“SACH”) in Upland, California.

Management continues to explore opportunities to organize and participate in additional Gamma Knife centers. USN’s business strategy is to provide cost-effective approaches that allow hospitals, physicians, and patients 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. The Company’s business model is to own, or hold an interest in, the Gamma Knife units, and charge the medical facility, where the unit is housed and maintained, 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, NYU and SACH Gamma Knife centers, if circumstances support the opening additional centers, USN would seek cooperative ventures with these facilities,.

USN believes that, as of December 31, 2007, there were approximately 115 Gamma Knife treatment centers in the U.S.

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 credentialed 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, 2008, 2007 and 2006, USN derived revenues from the RMC center of approximately $720,000, $603,000 and $901,000, respectively, as a result of 64, 44 and 67 procedures performed, respectively, during such periods.

USN opened its second treatment center in July 1997 on the campus of NYU in New York, New York. Construction of the Gamma Knife suite was completed in July 1997. The Gamma Knife cost and the cost of the facility improvements totaled approximately $4,700,000. In August 2003, the cobalt source was reloaded in the New York Gamma Knife. In 2008, in consideration for the Company upgrading the Gamma Knife equipment to Leksell’s new Perfexion Gamma Knife system, NYU agreed to an extension of the arrangements with respect to the NYU center though 2021. The cost of the upgrade is approximately $3,600,000 and will be funded through a 7-year lease with Elekta Finance.

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, 2008, 2007, and 2006, USN derived revenues from the NYU center of approximately $1,031,000, $1,031,000 and $968,000, respectively, as a result of 163, 164 and 152 procedures performed, respectively, during such periods.

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 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, and USN’s investment to date in the SACH center has been minimal.

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.


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 $3 million each. The Company believes that its insurance is adequate for providing treatment facilities and non-medical services, although there can be no assurance that the coverage limits of such insurance will be adequate or that coverage will not be reduced or become unavailable in the future.

Competition

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

To date, USN has purchased all of its Gamma Knife equipment from 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. Elekta is responsible for the installation and testing of the equipment and the training of the hospital staff in the operation of the equipment. USN arranges for maintenance services for its Gamma Knives through Elekta. Any interruption in the supply of equipment 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. For example, the cobalt for the previous Gamma Knife in the NYU facility was reloaded in August 2003 and the costs were approximately $800,000.

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.

Dependence on Hospital, Healthcare Organizations and Others

USN business model is to reach an arrangement with a hospital or other medical centers for the installation and operation of a Gamma Knife facility and then to purchase the Gamma Knife equipment and construct and operate the facility. Before entering into such an agreement, USN must make an assessment of the economic feasibility of operating the Gamma Knife at that location. The Company retains no control or influence over the medical staff or decisions regarding the treatment of patients. In that regard, USN’s economic success is highly dependent on its initial determinations of the viability of the Gamma Knife’s location. Should the medical center or the physicians at that medical center ultimately use the Gamma Knife facility for significantly fewer patients than initially projected, the Company could be required to operate the Gamma Knife Center at a loss for an extended period of time.


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 in 2008 and now expires in 2021.


Item 3.	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. The Circuit Court ordered that judgment be entered in favor of the Company in that amount. The defendant’s request for a new trial was denied, and the defendant has appealed the verdict. With this appeal pending, the prospects for payment of any amounts to the Company remain uncertain.

Patients continue to receive treatment at the Kansas City center, but payments for those treatments are being calculated by RMC according to the method that USN has contested, and which is the subject of the lawsuit. Management believes that the only issue is the extent to which USN will benefit through this lawsuit with respect to prior periods.

Although patients continue to be treated in Kansas City, it is not clear how the presence, or the ultimate outcome, of the lawsuit will impact the Company’s working relationship with RMC. RMC is a unit of HCA, Inc., a very large health services organization which has substantially greater resources than are available to USN. Nevertheless, USN has made a substantial investment in Kansas City to build its business and provide quality healthcare to patients in the Kansas City community in reliance on the RMC’s performance under their agreement, and thus USN intends to pursue its rights aggressively in an effort to protect that business.


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

None

PART II


Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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, 2007 through December 31, 2008.


Period	High Bid	Low Bid


January 1 – March 31, 2007	.11	.08
April 1 - June 30, 2007	.08	.05
July 1 – September 30, 2007	.06	.05
October 1 – December 31, 2007	.07	.04

January 1 – March 31, 2008	.05	.05
April 1 - June 30, 2008	.35	.09
July 1 – September 30, 2008	.25	.15
October 1 – December 31, 2008	.19	.04

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

As of March 13, 2009, 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 2008, the Company did not purchase any of its own equity securities.


Item 6.	Selected Financial Data.

Set forth below is the selected financial data pertaining to the financial condition and operations of the Company for the years ended December 31, 2004 through 2008. 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,

	2008		2007			2006			2005			2004


(in thousands, except per share amounts)

Operating Revenue	$	1,751	$	1,638		$	2,002		$	2,108		$	2,403
Expenses:
Patient expense		671		766			908			816			780
General and administrative		961		1,052			1,245			1,447			1384
Interest expense		126		168			228			252			59
Cumulative effect of accounting method change (net of applicable income tax of $56,000)
Net Income (loss)		4		(335	)		(383	)		(285	)		123

Basic and diluted Income (loss) per common share:	$	0.00	$	(0.04	)	$	(0.05	)	$	(0.04	)	$	0.02


	December 31,
	2008		2007		2006		2005		2004

Balance Sheet Data:
Cash and cash equivalents	$	605	$	372	$	297	$	422	$	511
Total assets		2,197		2,641		3,496		4,663		4,201
Long-term obligations		901		1,377		1,811		2,300		1,652
Stockholders equity		765		761		1,096		1,179		1,464


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Results of operations

2008 Compared to 2007

Patient revenue increased 7% to $1,751,000 in 2008 as compared to $1,638,000 in 2007. The increase in revenue is primarily due to an increase in patient volume at both the NYU and RMC centers.

Patient expenses declined 12% to $671,000 in 2008 from $766,000 in 2007. The decrease was primarily due to lower maintenance costs for the equipment. Selling, general and administrative expense (“SG&A”) decreased 9% to $961,000 in 2008 from $1,052,000 in the previous year. This decrease in SG&A resulted principally from lower payroll costs, as

well as continued steps taken by the Company to streamline overall administrative costs. Interest expense decreased 25% to $126,000 in 2008 from $168,000 in 2007. This decrease was due to repayment of the NYU loan. The Company reported a net profit of $4,000 in 2008, which compares to the net loss of $335,000 in the prior year. This improvement was due to the increase in patient revenue and decrease in patient expense and interest expense in 2008.

2007 Compared to 2006

Patient revenue declined 18% to $1,638,000 in 2007 as compared to $2,002,000 in 2006. 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.

Patient expenses declined 16% to $766,000 in 2007 from $908,000 in 2006. The decrease was primarily due to lower maintenance costs for the equipment. Selling, general and administrative expense (“SG&A”) decreased 16% to $1,052,000 in 2007 from $1,245,000 in the previous year. This decrease in SG&A resulted principally from lower payroll costs, as well as continued steps taken by the Company to streamline overall administrative costs. Interest expense decreased 26% to $168,000 in 2007 from $228,000 in 2006. This decrease was due to repayment of the NYU loan. As a result of the above, principally the decrease in revenues in 2007, the Company experienced a net loss of $335,000, which compares to the net loss of $333,000 in the prior year.

Liquidity and capital resources

At December 31, 2008 the Company had working capital of $164,000 as compared to $62,000 at December 31, 2007. Cash and cash equivalents at December 31, 2008 were $605,000 as compared to $372,000 at December 31, 2007.

Net cash provided by operating activities was $658,000 in 2008 as compared with $501,000 for the same period a year earlier. Depreciation and amortization was $574,000 in 2008 as compared to $649,000 in 2007.

Net cash provided by investing activities for the year ended 2008 was $10,000 as compared to $41,000 in the year ago period.

For the year ended December 31, 2008, net cash used in financing activities was $435,000 as compared to $467,000 in 2007.

Off-balance sheet arrangements

None

Tabular disclosure of contractual obligations

The following is a summary of the Company’s contractual obligations at December 31, 2008:



Contractual Obligations	Payments due by period

	Total		Less than 1 year		1-3 years		3-5 years	More than 5 years

Capital (finance) lease obligations	$	1,176,000	$	475,000	$	701,000

Asset retirement obligation	$	200,000						$	200,000

Total	$	1,376,000	$	475,000	$	701,000		$	200,000

Critical accounting policies

Estimates and assumptions

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

Asset retirement obligations

In June 2001, the Financial Accounting Standards Board (“FASB”), issued Statement No. 143, “Accounting for Asset Retirement Obligations,” (“FAS 143”) 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 8.	Financial Statements and Supplementary Data.

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


Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

There have been no disagreements between the Company and its former accountant during the past two fiscal years on any matter of accounting principles or practices, financial

statement disclosure, or auditing scope of procedure, which have not been resolved to the satisfaction of the former accountant.


Item 9A(T).	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, 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”).

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 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.

Management’s Annual Report on 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.

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, including our Chief Executive Officer, and assisted by our Lead Director, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. 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, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management has identified as of December 31, 2008 that the Company did not maintain a sufficient complement of personnel with the appropriate level of knowledge, experience and training in the application of GAAP and in internal controls over financial reporting commensurate with its financial reporting requirements. This material weakness contributed to control deficiencies, as well as a material audit adjustment to the 2008 annual consolidated financial statements in the financial reporting and close process. Additionally, the material weakness noted above could result in a material misstatement to the Company’s interim or annual consolidated financial statements and disclosures which would not be prevented or detected. As a result of this material weakness, management has concluded that as of December 31, 2008, the Company’s internal control over financial reporting was not effective based on the framework issued by COSO.

As noted above, the Company’s business and management infrastructure is relatively small – only four full-time employees, and only two of which have accounting and financial reporting responsibilities. In the interests of efficiency, and given the Company’s current size and the state of its operations, the Company’s Chief Executive Officer functions as chief financial officer and chief accounting officer. An inherent challenge in a small business such as this is that effective financial reporting is necessarily dependent upon the performance of one or two individuals. Additionally, segregation of duties is in most cases impractical. The Company endeavors to mitigate these limitations by relying on and the Lead Director to assist in oversight of critical corporate, accounting and financial reporting functions. With these limitations in mind, management is taking steps to remediate the control deficiencies noted

above through the use of additional outside contractors with the requisite experience and expertise in GAAP accounting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

During 2008, the Company did maintain effective controls over the determination and reporting of its income tax payable, deferred income tax assets and liabilities, the related valuation allowances and income tax expenses. Effective controls were designed and in place to ensure that management maintained the appropriate level of personnel resources with an adequate experience and expertise in the area of GAAP accounting for income taxes.

Other than the foregoing, 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, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Item 9B.	Other Information.

Not applicable.

PART III


Item 10.	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	Position


Alan Gold	64	President & Chairman

William F. Leimkuhler	57	Director

Charles H. Merriman, III	74	Director

Susan Greenwald	63	Vice President and Secretary

Alan 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 currently serves as lead director and as chairman of USN’s audit committee. 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., Integral Systems, Inc and Argan, 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.

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 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, 2008, the Board of Directors held one meeting, which was 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, 2008, all filing requirements applicable to its officers and directors were complied with by such individuals.


Item 11.	Executive Compensation.

The information below sets forth the compensation for the year ended December 31, 2008, 2007, and 2006, for the Chief Executive Officer of the Company.


Summary Compensation Table

Name and Principal Position	Annual Compensation

		Year	Salary($)

Alan Gold		2008	$	300,000
President & Director		2007	$	225,000
		2006	$	300,000

Director Compensation

During 2008, 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 the 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 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth, as of March 14, 2008, 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 Class


Alan Gold (2)	1,140,246	14.5	%
2400 Research Blvd.
Rockville, MD 20850

William F. Leimkuhler	100,000	1.3	%
43 Salem Straits Road
Darien, CT 06820

Charles H. Merriman III	130,672	1.7	%
5507 Cary St. Road
Richmond, VA 23226

Stanley S. Shuman (3)	2,688,000	34.2	%
711 Fifth Avenue
New York, NY 10022

Allen & Company Incorporated	1,847,000	23.4	%
711 Fifth Avenue
New York, NY 10022

All Directors and Officers of USN	1,370,918	19.5	%
as a group (2) (three persons)




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

(2)	Includes 1,140,246 shares held jointly by Mr. Gold and his wife, Susan Greenwald, as joint tenants with right of survivorship.

(3)	Includes 1,847,000 shares owned by Allen & Company Incorporated, Mr. Shuman disclaims beneficial ownership in such shares, except to the extent of his pecuniary interest therein.


Item 13.	Certain Relationships and Related Transactions, and Director Independence.

None


Item 14.	Principal Accounting Fees and Services.

Audit Fees. 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, 2008, 2007 and 2006, the Company paid or accrued $70,000, $56,052 and $39,336, respectively, for Audit Fees to Goodman and Company, LLP.

Audit-Related Fees. 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, 2008, 2007 and 2006, the Company did not pay or accrue any amounts for Audit Related Fees.

Tax Fees. Tax Fees represent fees for services rendered in connection with tax compliance, tax advice and tax planning. For the years ended December 31, 2008, 2007 and 2006, the Company paid $9,700, $9,500 and $9,879 for Tax Fees to Goodman and Company, LLP.

All Other Fees. 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, 2008, 2007 and 2006, 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.

PART IV


Item 15.	Exhibits, Financial Statement Schedules.

(a) Financial Statements and Financial Statement Schedules. The following are filed as part of this report:


	Page No.

Consolidated Financial Statements of the Company		F-1
Report of Independent Registered Public Accounting Firm		F-2
Balance Sheets as of December 31, 2008 and 2007		F-3
Statements of Operations for the years ended December 31, 2008, 2007, and 2006.		F-4
Statements of Changes in Stockholders’ Equity for the period January 1, 2006 through December 31, 2008		F-5
Statements of Cash Flows for the year ended December 31, 2008, 2007, and 2006		F-6
Notes to Financial Statements		F-7

All schedules have been omitted as the conditions requiring their filing are not present or the information required therein has been included in the notes to the financial statements.

(b) Exhibits:


	3.1	Form of Amended and Restated Certificate of Incorporation of U.S. Neurosurgical, Inc. (“USN”) (incorporated herein by reference to Exhibit 3.1 to our Form 10 Registration Statement as filed July 1, 1999)

	3.2	Form of Amended and Restated Bylaws of USN (incorporated herein by reference to Exhibit 3.2 to our Form 10 Registration Statement as filed July 1, 1999)

	4.1	Form of Stock Certificate of Common Stock (incorporated herein by reference to Exhibit 4.1 to our Form 10 Registration Statement as filed July 1, 1999)

	10.1	Distribution Agreement dated May 27, 1999 between GHS, Inc. (“GHS”) and USN (incorporated herein by reference to Exhibit 10.1 to our Form 10 Registration Statement as filed July 1, 1999)

	10.2	Tax Matters Agreement dated May 27,1999 between GHS and USN (incorporated herein by reference to Exhibit 10.2 to our Form 10 Registration Statement as filed July 1, 1999)

	10.3	Assignment and Assumption Agreement dated May 27, 1999 between GHS and USN (incorporated herein by reference to Exhibit 10.3 to our Form 10 Registration Statement as filed July 1, 1999)

	10.4	Employment Agreement dated December 14,1984 between USN and Alan Gold, as amended March 7, 1986 (incorporated by reference to Exhibit 10.3 of GHS’s Registration Statement No. 33-4532-W on form S-18)

	10.5	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)

	10.6	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)

	10.7	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)

	10.8	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)

	10.9	Agreement dated August 1, 1996 between USN and DVI, Inc. (incorporated by reference 10j to GHS’s 1997 Annual Report on form 10-K)

	10.10	Gamma Knife Neuroradiosurgery Equipment dated as of November 26, 1996 between New York University on behalf of New York University Medical Center and USN (incorporated herein by reference to Exhibit 10.10 to our Form 10 Registration Statement as filed July 1, 1999)

	21.1	List of Subsidiaries (incorporated herein by reference to Exhibit 21.1 to our Form 10 Registration Statement as filed July 1, 1999)

	31.1*	Certifications of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1*	Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



*	Filed herewith


(c)	Financial Statement Schedules. None

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 Gold

			Alan Gold
			President and Chief Executive Officer
			and
			Principal Financial Officer

	Dated: March 30, 2009

In 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, 2009		/s/ Alan Gold

		Alan Gold
		President and Director
		(Chief Executive Officer)

March 30, 2009		/s/ William F. Leimkuhler

		William F. Leimkuhler
		Director

March 30, 2009		/s/ Charles H. Merriman III

		Charles H. Merriman III
		Director

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Contents


	Page


Consolidated Financial Statements	F-1

Report of independent registered public accounting firm	F-2

Consolidated balance sheets as of December 31, 2008 and 2007	F-3

Consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006	F-4

Consolidated statements of stockholders’ equity for the years ended December 31, 2008, 2007 and 2006	F-5

Consolidated statements of cash flows for the years ended December 31, 2008, 2007 and 2006	F-6

Notes to consolidated financial statements	F-7

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of U.S. NeuroSurgical, Inc. and subsidiaries (Company) as of December 31, 2008 and 2007, 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, 2008. U.S. NeuroSurgical, Inc. and subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. NeuroSurgical, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years ended in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

Goodman and Company, LLP
March 30, 2009

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	December 31,

	2008			2007

ASSETS
Current assets:
Cash and cash equivalents	$	605,000		$	372,000
Accounts receivable (net of allowance for doubtful accounts of $36,000 in 2008 and 2007)		4,000			96,000
Accounts receivable - RMC		44,000			45,000
Other current assets		42,000			52,000


Total current assets		695,000			565,000


Property and equipment:
Gamma Knives (net of accumulated depreciation of $5,780,000 in 2008 and $5,242,000 in 2007)		1,220,000			1,758,000
Leasehold improvements (net of accumulated amortization of $1,812,000 in 2008 and $1,771,000 in 2007)		230,000			266,000


		1,450,000			2,024,000


Cash held in escrow		52,000			52,000


	$	2,197,000		$	2,641,000


LIABILITIES
Current liabilities:
Accounts payable and accrued expenses	$	56,000		$	69,000
Obligations under capital leases and loans payable - current portion		475,000			434,000


Total current liabilities		531,000			503,000

Asset retirement obligations		200,000			200,000
Obligations under capital leases and loans payable - net of current portion		701,000			1,177,000


Total liabilities		1,432,000			1,880,000


Commitments, litigation and other matters (Notes B[10], D, F, I and J)

STOCKHOLDERS’ EQUITY
Common stock - par value $.01; 25,000,000 shares authorized; 7,697,185 shares issued at December 31, 2008 and 2007		77,000			77,000
Additional paid-in capital		3,097,000			3,097,000
Accumulated deficit		(2,409,000	)		(2,413,000	)


		765,000			761,000


	$	2,197,000		$	2,641,000


See notes to consolidated financial statements	F-3

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Statements of Operations


	Year Ended December 31,

	2008			2007			2006


Revenue (Notes C and D)	$	1,751,000		$	1,638,000		$	2,002,000


Costs and expenses:
Patient expenses		671,000			766,000			908,000
Selling, general and administrative		961,000			1,052,000			1,245,000


		1,632,000			1,818,000			2,153,000


Income (loss) from operations		119,000			(180,000	)		(151,000	)


Interest expense		(126,000	)		(168,000	)		(228,000	)
Interest income		11,000			11,000			20,000
Other Income		—			2,000			26,000


		(115,000	)		(155,000	)		(182,000	)


Income (loss) before income taxes		4,000			(335,000	)		(333,000	)

Provision for income tax expense		—			—			50,000


Net income (loss)	$	4,000		$	(335,000	)	$	(383,000	)


Basic and diluted net income (loss) per share	$	0.00		$	(0.04	)	$	(0.05	)


Weighted average common shares outstanding		7,697,185			7,697,185			7,697,185


See notes to consolidated financial statements	F-4

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity


	Common Stock

	Number of Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Total


Balance - January 1, 2006	7,697,185		77,000		2,797,000		(1,695,000	)		1,179,000
Conversion of due to stockholder to paid-in capital	—		—		300,000		—			300,000
Net 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	)		1,096,000

Net loss for the year ended December 31, 2007	—		—		—		(335,000	)		(335,000	)

Balance - December 31, 2007	7,697,185		77,000		3,097,000		(2,413,000	)		761,000

Net income for the year ended December 31, 2008	—		—		—		4,000			4,000

Balance - December 31, 2008	7,697,185	$	77,000	$	3,097,000	$	(2,409,000	)	$	765,000


See notes to consolidated financial statements	F-5

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	Year Ended December 31,

	2008			2007			2006


Cash flows from operating activities:
Net income (loss)	$	4,000		$	(335,000	)	$	(383,000	)
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization		574,000			649,000			709,000
Deferred income tax provision		—			—			50,000
Changes in:
Accounts receivable		93,000			23,000			48,000
Accounts receivable - stockholder		—			130,000			17,000
Other current assets		10,000			87,000			33,000
Accounts payable and accrued expenses		(13,000	)		(53,000	)		61,000

Net cash provided by operating activities		668,000			501,000			535,000


Cash flows from investing activities:
Investment in unconsolidated entities		—			(20,000	)		—
Decrease (increase) in cash held in escrow		—			61,000			(5,000	)

Net cash used in investing activities		—			41,000			(5,000	)


Cash flows from financing activities:
Repayment of capital lease and loan obligations		(435,000	)		(467,000	)		(655,000	)


Net change in cash and cash equivalents		233,000			75,000			(125,000	)
Cash and cash equivalents - beginning of year		372,000			297,000			422,000

Cash and cash equivalents - end of year	$	605,000		$	372,000		$	297,000


Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	126,000		$	168,000		$	228,000

Supplemental disclosures of noncash activities:
Conversion of due to stockholder to paid-in capital	$	—		$	—		$	300,000


See notes to consolidated financial statements	F-6

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

NOTE A – ORGANIZATION AND BUSINESS

U.S. NeuroSurgical, Inc. (USN), 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.

During the fourth quarter of 2007, USN formed a new wholly owned subsidiary, USN Corona, Inc., which carries investments in Corona Gamma Knife, LLC and Neuropartners, LLC. Those subsidiaries were formed to develop and manage a Gamma Knife center in California.

NOTE B - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES


[1]	Basis of presentation and consolidation

	The consolidated financial statements include the accounts of USN and its wholly owned subsidiaries, U.S. NeuroSurgical Physics, Inc. and USN Corona, Inc. 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 2008, 2007, and 2006 was $574,000, $649,000, and $709,000 respectively.

F-7

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

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


[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.

[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 2008, 2007, and 2006, 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 2008, 2007, or 2006.

[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, 2008 and 2007 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, 2008 and 2007.

[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 $215,000 at December 31, 2008. Accounts receivable consist primarily of amounts due from two medical centers. Historically, credit losses on accounts receivable have not been significant.

F-8

U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

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


[13]	Asset retirement obligations:

	In June 2001, the Financial Accounting Standards Board (FASB), issued Statement No. 143, “Accounting for Asset Retirement Obligations,” (FAS143) effective for the fiscal years beginning after June 15, 2002. Accordingly, the Company recorded liabilities for legal obligations associated with the retirement of tangible long-lived assets based on the estimated fair value of such liabilities. The estimated costs of these obligations is capitalized as costs of the assets subject to the retirement obligations and amortized over the lives of the assets.

[14]	Reclassifications:

	Certain prior year balances have been reclassified to conform to current year presentation.

[15]	Recent Accounting and Regulatory Pronouncements

	Currently Effective

	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

	In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”, which permits entities to choose to measure many financial instruments and certain other items at fair value and also establishes fair presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has not elected to implement fair value accounting for any balance sheet item as allowed by SFAS 159.

	Effective in Future Years

	In December 2007, the FASB issued SFAS 141(R), Business Combinations, which replaces SFAS 141. This Statement establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired in the business combination, liabilities assumed and any noncontrolling interest in the acquiree as well as the goodwill acquired in a business combination. SFAS 141(R) also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combinations. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of the adoption of SFAS 141(R) on the Company’s consolidated financial position and results of operations.

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

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


	In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes expanded disclosure requirements that clearly identify and distinguish between the interest of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 160 on the Company’s consolidated financial position and results of operations.

	In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS 133. The standard requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS 133 and related interpretations. The standard will be effective for periods beginning after November 15, 2008, with early adoption permitted. The standard expands the disclosure requirements for derivatives and hedged items and is not expected to have a material effect on the Company’s consolidated financial position and results of operations.

	On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active. The FSP clarified the position of SFAS 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key consideration in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective upon issuance, including prior periods for which the financial statements have not been issued. The provisions of FSP FAS 157-3 did not have an impact on the Company’s consolidated financial position and results of operations.

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, 2008 and 2007, the escrow account balance was $52,000. The equipment agreement terminates automatically upon termination of the ground lease agreement (see Note C[2]). The Company derived patient revenue from the RMC center of $720,000, $603,000, and $901,000 for 2008, 2007, and 2006, 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

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES


	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 $ 1,031,000, $1,031,000, and $968,000, for 2008, 2007, and 2006, respectively.

In 2004, the NYU agreement was extended through March 2009. In 2008, the NYU agreement was extended for an additional 12 years through March 2021. To secure this extension, USN agreed to install a new Gamma Knife Perfexion model. The new equipment and certain space improvements, costing approximately $3,600,000 in total, was financed through a seven-year lease arrangement. The amendment provides for a payment to USN of a flat fee for each patient procedure performed.

NOTE E - OBLIGATION UNDER CAPITAL LEASE AND LOANS PAYABLE

In August 2003, USN commenced payment on a $750,000 lease for the NYU cobalt reload, which was paid off in April 2007. In March 2009 the Company installed a Perfexion model Gamma Knife at the NYU center with a seven year lease form Elekta Finance. The amount financed, covering the cost of the new gamma knife equipment and certain space improvements, is approximately $3,600,000. The final monthly payment amount has not yet been finalized.

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,

	2008			2007


Capital leases - Gamma Knife	$	1,176,000		$	1,611,000

Less current portion		(475,000	)		(434,000	)


	$	701,000		$	1,177,000

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

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

Future payments as of December 31, 2008 on the equipment leases and loans are as follows:


Year Ending December 31,


2009	$	559,000
2010		559,000
2011 and thereafter		187,000

		1,305,000
Less interest		(129,000	)

Present value of net minimum obligation	$	1,176,000

The Company’s Gamma Knives are held under capital leases and amortization is included in depreciation expense.

NOTE F – ASSET RETIREMENT OBLIGATIONS

During 2003, the Company adopted FAS 143 and recorded asset retirement obligations of $200,000 based upon estimated amounts, consisting principally of removal of Gamma Knives and disposal of regulated materials and the restoration of facilities at NYU and RMC. 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.

NOTE G - CONCENTRATIONS

For 2008, 2007, and 2006, 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, 2008 and 2007.

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

NOTE H - TAXES

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


	Year Ended December 31,

	2008		2007		2006


Current:
Federal	$	—	$	—	$	—
State		—		—		—

		—		—		—


Deferred:
Federal		—		—		40,000
State		—		—		10,000

		—		—		50,000

	$	—	$	—	$	50,000

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

NOTE H – TAXES (CONTINUED)

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


	Year Ended December 31,

	2008			2007			2006


Income tax (benefit) at the federal statutory rate	$	2,000		$	(114,000	)	$	(113,000	)
State income tax (benefit), net of federal taxes		—			(17,000	)		(17,000	)
Other		40,000			(8,000	)		22,000
Change in valuation allowance		(42,000	)		139,000			158,000


Income tax provision (benefit)	$	—		$	—		$	50,000

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


	December 31,

	2008			2007

Deferred tax asset:
Net operating loss	$	174,000		$	310,000
Excess of book depreciation over tax depreciation		88,000			35,000

		262,000			345,000
Deferred 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		(7,000	)		(48,000	)

		255,000			297,000
Valuation allowance		(255,000	)		(297,000	)

Net deferred tax asset	$	—		$	—

The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, effective January 1, 2007. FIN 48 provides a comprehensive model for how the Company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on tax return. The Company does not have any unrecognized tax benefits as defined by FIN 48 and therefore there was no effect on the Company’s financial position or results of operations as a result of implementing FIN 48.

The Company files income tax returns in the U.S. federal jurisdiction and the State of Maryland. With few possible exceptions, the Company is no longer subject to U.S. or state income tax examinations by tax authorities for years before 2005.

NOTE I - 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.

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

NOTE J – COMMITMENTS AND CONTINGENCIES

Leases:

The Company leases office space under an operating lease expiring March 2013. The terms of the lease include an escalation clause for a portion of certain operating expenses. At December 31, 2008, the annual future minimum rental payments under the operating lease and the ground lease referred to in Note C(2) are as follows:


Year Ending December 31,


2009	$	43,000
2010		44,000
2011		45,000
2012		47,000
2013		12,000

	$	191,000

Rent expense was approximately $ 45,000, $52,000, and $41,000, for 2008, 2007, and 2006, respectively.

Gamma Knives:

In 2005, 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.

To enable them to operate effectively, the radioactive cobalt in the Gamma Knives must be replaced periodically – typically between five and seven 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.

Guarantee of Lease Obligation

USN Corona, Inc., the Company’s wholly owned subsidiary that carries the investments in Corona Gamma Knife, LLC and Neuropartners, LLC., is a 20% guarantor on Neuropartners, LLC’s $3.5 million seven-year lease with respect to the Gamma Knife equipment and certain leasehold improvements at the San Antonio Community Hospital (“SACH”) in Upland, California, where the equipment is located. At the end of the seventh year, Neuropartners, LLC has the option to purchase the Gamma Knife for $490,000.

Product liability:

NOTE K - EMPLOYEES’ 401(K) AND IRA PLANS

The Company discontinued its 401(k) on December 31, 2006. The Company established a Company IRA covering all employees. 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) or IRA contribution for 2008 and 2007.

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NOTE L - RELATED PARTY TRANSACTIONS


[1]	An amount due to stockholder of $300,000 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 2008, 2007, and 2006, was $300,000, $225,000, and $300,000, respectively. The president voluntarily accepted reduced compensation for three months in 2007.

NOTE M – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited 2008 quarterly results of operations: (in thousands)


	Three Months Ended
	March 31			June 30			September 30			December 31

2008
Revenue	$	535		$	390		$	497		$	329
Income (loss) from operations		65			(23	)		110			(33	)
Net income (loss)		31			(51	)		82			(58	)
Basic and diluted income (loss) per common share	$	0.00		$	(0.01	)	$	0.01		$	0.00

2007
Revenue	$	462		$	392		$	376		$	408
Income (loss) from operations		(87	)		(157	)		62			2
Net income (loss)		(131	)		(196	)		26			(34	)
Basic and diluted income (loss) per common share	$	(0.02	)	$	(0.03	)	$	0.00		$	0.00

2006
Revenue	$	506		$	528		$	414		$	554
Income (loss) from operations		(68	)		(24	)		(117	)		84
Net income (loss)		(86	)		(113	)		(169	)		35
Basic and diluted income (loss) per common share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	0.01

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