U.S. NeuroSurgical Holdings, Inc. - Annual Report: 2009 (Form 10-K)

form10k.htm

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, 2009

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 19, 2010, the aggregate market value of issuer's Common Stock held by non-affiliates was approximately $424,000, based upon the average of the bid and asked prices as reported on the OTC Bulletin Board.

As of March 19, 2010, there were outstanding 7,747,185 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, 2009

Table of Contents

PART I		3
Item 1.	Business.	3
Item 1A.	Risk Factors.	6
Item 2.	Properties.	9
Item 3.	Legal Proceedings.	9
Item 4.	Submission of Matters to a Vote of Security Holders.	10
PART II		11
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	11
Item 6.	Selected Financial Data.	12
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation.	12
Item 8.	Financial Statements and Supplementary Data.	15
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	15
Item 9A(T).	Controls and Procedures.	15
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

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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.

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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, 2009, there were approximately 131 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. The Company’s arrangement with RMC was modified and extended in 2004 when USN upgraded the Gamma Knife at that facility. 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, 2009, 2008 and 2007, USN derived revenues from the RMC center of approximately $790,000, $720,000 and $603,000, respectively, as a result of 60, 64 and 44 procedures performed, respectively, during such periods.

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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.

The Company installed a new Leksell Gamma Knife, the PERFEXION model, at the NYU Medical Center in March 2009 in replacement of the older Gamma Knife equipment. The net cost to the Company of the new machine was $3,200,000 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 $115,000 in connection with the installation of the equipment and the upgrades to the facility. The Company expects to pay $137,000 in additional construction costs which will be capitalized into the lease. 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.

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, 2009, 2008 and 2007, USN derived revenues from the NYU center of approximately $1,464,000, $1,031,000 and $1,031,000, respectively, as a result of 171, 163 and 164 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 participates 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 covering the renovation of the space in the hospital and the installation and operation of the 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 is entitled to fees for management services relating to the facility.

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Construction of the SACH Gamma Knife center was completed in December 2008 and the first patient was treated in January of 2009. Operations are continuing as planned and at a level sufficient to make the necessary financing payments, meet other obligations and support the growth of the center. 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.

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.

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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 and, in March 2009, the company installed a new PERFEXION model, at the NYU Medical Center in replacement of the older Gamma Knife equipment. 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.

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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.

Operating Losses.

We have experienced significant operating losses in recent periods and may incur losses in the future. We reported a net loss of $335,000 for the year ended December 31, 2007, but did return to breakeven for the year ended 2008 and reported a modest profit in 2009. Uncertainties in our business, particularly the prospects for the Kansas City center, make it difficult to plan for profitable growth.

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 the Company experiences operating losses in the future, we will be required to seek additional capital to support continued operations and the development of new centers, but we cannot assure you, however, that we will be able to raise such additional capital as and when required.

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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 approximately $1.9 million. On appeal, that judgment was affirmed in part and reversed in part, leading to a yet undetermined amount owing to the Company, which will be substantially less than the $1.9 million lower court verdict. Further appellate relief may be sought, and it is not possible at this time to quantify the amount that the Company will receive in the end.

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.

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Item 4.

Submission of Matters to a Vote of Security Holders.

None

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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, 2008 through December 31, 2009.

Period	High Bid	Low Bid

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

January 1 – March 31, 2009	.035	.03
April 1 - June 30, 2009	.055	.041
July 1 – September 30, 2009	.16	.12
October 1 – December 31, 2009	.19	.132

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

As of February 26, 2010, 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 2009, the Company did not purchase any of its own equity securities.

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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, 2005 through 2009. 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,
	2009		2008		2007			2006			2005
(in thousands, except per share amounts)

Revenue	$	2,261	$	1,751	$	1,638		$	2,002		$	2,108
Expenses:
Patient expense		901		671		766			908			816
General and administrative		918		961		1,052			1,245			1,447
Interest expense		375		126		168			228			252
Cumulative effect of accounting method change (net of applicable income tax of $56,000)
Net Income (loss)		72		4		(335	)		(383	)		(285	)

Basic and diluted Income (loss) per common share:	$	0.01	$	0.00	$	(0.04	)	$	(0.05	)	$	(0.04	)

	December 31,
	2009		2008		2007		2006		2005
Balance Sheet Data:
Cash and cash equivalents	$	673	$	605	$	372	$	297	$	422
Total assets		5,048		2,197		2,641		3,496		4,663
Long-term obligations		3,248		901		1,377		1,811		2,300
Stockholders equity		839		765		761		1,096		1,179

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operation.

Results of operations

2009 Compared to 2008

Patient revenue increased 29% to $2,261,000 in 2009 as compared to $1,751,000 in 2008. This increase in patient revenue was largely due to increased volume at the New York center following the reopening of the center with the new PERFEXION Gamma Knife. This newer technology allowed for an increase in the number of procedures performed at the Company’s New York center during the second half of 2009 as compared to the same period a year ago. Revenue was also higher due to the higher reimbursement per procedure negotiated in connection with the extension of the contract with NYU.

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Patient expenses increased 34%% to $901,000 in 2009 from $671,000 in 2008. Patient expenses do not vary materially with the number of procedures performed, but are tied to depreciation, maintenance and other fixed expenses. The increase experienced in 2009 over 2008 was due largely to increased depreciation costs following the installation of the new equipment at the New York center. Selling, general and administrative expense (“SG&A”) decreased 4% to $918,000 in 2009 from $961,000 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 increased 198%% to $375,000 in 2009 from $126,000 in 2008. This increase was due to the significant increase in capital lease obligations resulting from the financing of the new Gamma Knife at the Company’s New York center. (The Company had no lease expense for most of 2008.) These expenses are expected to remain at this higher level, at least until the termination of the lease arrangement at the Kansas City center. The Company reported a net profit of $72,000 in 2009, which compares to a profit of $4,000 in the prior year. This improvement was due primarily to the increase in patient revenue at the New York center, which was only partially offset by the new capital lease obligations at that location.

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 2009.

Liquidity and capital resources

At December 31, 2009 the Company had working capital of $49,000 as compared to $164,000 at December 31, 2008. Cash and cash equivalents at December 31, 2009 were $673,000 as compared to $605,000 at December 31, 2008.

Net cash provided by operating activities was $715,000 in 2009 as compared with $668,000 for 2008. Depreciation and amortization was $780,000 in 2009 as compared to $574,000 in 2008. This significant increase in depreciation and amortization was the result of the capital lease obligations relating to the new Gamma Knife installation at the New York center.

There was no net cash provided by investing activities for the year ended 2009 or 2008.

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For the year ended December 31, 2009, net cash used in financing activities was $647,000 as compared to $435,000 in 2008.

Off-balance sheet arrangements

None

Tabular disclosure of contractual obligations

The following is a summary of the Company’s contractual obligations at December 31, 2009:

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Capital (finance) lease obligations	$	3,942,000	$	894,000	$	1,606,000	$	1,442,000	$	0
Asset retirement obligation	$	200,000							$	200,000
Total	$	4,142,000	$	894,000	$	1,606,000	$	1,442,000	$	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"), now ASC 410-20, 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.

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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.

None.

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:

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(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, 2009. 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. Based on our assessment, management concluded that, as of December 31, 2009, our internal control over financial reporting is effective based on these criteria.

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

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, 2009 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.

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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	65	President & Chairman

William F. Leimkuhler	58	Director

Charles H. Merriman, III	75	Director

Susan Greenwald	64	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 of USN’s Board of Directors. 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.

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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. In view of the small size of the Company’s Board, it does not operate through committees. Instead, the full Board of Directors performs the functions typically performed by the audit, compensation and nominating committees.

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	Annual Compensation
Principal Position	Year	Salary ($)
Alan Gold	2009	$	300,000
President & Director	2008	$	300,000
	2007	$	225,000

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Director Compensation

During 2009, our Directors who are not officers or employees (“Non-Employee Directors”) were entitled to an annual retainer of $3,000. 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		14.7	%
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)		2,523,000		32.6	%
711 Fifth Avenue
New York, NY 10022

Allen & Company Incorporated	1,682,000	21.7	%
711 Fifth Avenue
New York, NY 10022

All Directors and Officers of USN	1,370,918	17.7	%
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 1,682,000 shares owned by Allen & Company Incorporated, Mr. Shuman disclaims beneficial ownership in such shares, except to the extent of his pecuniary interest therein.

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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, 2009, 2008 and 2007, the Company paid or accrued $60,000, $70,000 and $56,052, 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, 2009, 2008 and 2007, 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, 2009, 2008 and 2007, the Company paid $11,000, $9,700 and $9,500 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, 2009, 2008 and 2007, the Company did not pay or accrue any amounts for these services.

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The Board of Directors has established a policy requiring pre-approval by the Board of Directors 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 Board.

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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
Consolidated Balance Sheets as of December 31, 2009 and 2008	F-3
Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007.	F-4
Consolidated Statements of Changes in Stockholders' Equity for the period January 1, 2007 through December 31, 2009	F-5
Consolidated Statements of Cash Flows for the year ended December 31, 2009, 2008, and 2007	F-6
Notes to Consolidated 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)

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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

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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, 2010

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, 2010	/s/ Alan Gold
	Alan Gold
	President and Director
	(Chief Executive Officer)

March 30, 2010	/s/ William F. Leimkuhler
	William F. Leimkuhler
	Director

March 30, 2010	/s/ Charles H. Merriman III
	Charles H. Merriman III
	Director

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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, 2009 and 2008	F-3

Consolidated statements of operations for the years ended December 31, 2009, 2008, and 2007	F-4

Consolidated statements of stockholders' equity for the years ended December 31, 2009, 2008, and 2007	F-5

Consolidated statements of cash flows for the years ended December 31, 2009, 2008, and 2007	F-6

Notes to consolidated financial statements	F-7

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

U.S. NeuroSurgical, Inc.

Rockville, Maryland

We have audited the accompanying consolidated balance sheets of U.S. NeuroSurgical, Inc. and subsidiaries (Company) as of December 31, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years ended in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

Goodman and Company, LLP

March 30, 2010

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	673,000		$	605,000
Accounts receivable (net of allowance for doubtful accounts of $36,000 in 2009 and 2008)		232,000			4,000
Accounts receivable - RMC		48,000			44,000
Other current assets		57,000			42,000

Total current assets		1,010,000			695,000

Property and equipment:
Gamma Knives (net of accumulated depreciation of $2,108,000 in 2009 and $5,780,000 in 2008)		3,693,000			1,220,000
Leasehold improvements (net of accumulated amortization of $730,000 in 2009 and $1,812,000 in 2008)		293,000			230,000

		3,986,000			1,450,000

Cash held in escrow		52,000			52,000

	$	5,048,000		$	2,197,000

LIABILITIES
Current liabilities:
Accounts payable and accrued expenses	$	67,000		$	56,000
Obligations under capital leases and loans payable - current portion		894,000			475,000

Total current liabilities		961,000			531,000

Asset retirement obligations		200,000			200,000
Obligations under capital leases and loans payable - net of current portion		3,048,000			701,000

Total liabilities		4,209,000			1,432,000

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; 7,747,185 and 7,697,185 shares issued at December 31, 2009 and 2008		77,000			77,000
Additional paid-in capital		3,097,000			3,097,000
Accumulated deficit		(2,335,000	)		(2,409,000	)

		839,000			765,000

	$	5,048,000		$	2,197,000

See notes to consolidated financial statements

F-3

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Year Ended December 31,
	2009			2008			2007



Revenue (Notes C and D)	$	2,261,000		$	1,751,000		$	1,638,000

Costs and expenses:
Patient expenses		901,000			671,000			766,000
Selling, general and administrative		918,000			961,000			1,052,000

		1,819,000			1,632,000			1,818,000

Income (loss) from operations		442,000			119,000			(180,000	)

Interest expense		(375,000	)		(126,000	)		(168,000	)
Interest income		5,000			11,000			11,000
Other Income		-			-			2,000

		(370,000	)		(115,000	)		(155,000	)

Income (loss) before income taxes		72,000			4,000			(335,000	)

Provision for income tax expense		-			-			-


Net income (loss)	$	72,000		$	4,000		$	(335,000	)


Basic and diluted net income (loss) per share	$	0.01		$	0.00		$	(0.04	)

Weighted average common shares outstanding		7,704,465			7,697,185			7,697,185

See notes to consolidated financial statements

F-4

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

	Common Stock
	Number				Additional
	of				Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance - January 1, 2007		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
Issuance of common stock as compensation		50,000		-		2,000		-			2,000
Net income for the year ended December 31, 2009		-		-		-		72,000			72,000
Balance - December 31, 2009		7,747,185	$	77,000	$	3,099,000	$	(2,337,000	)	$	839,000

See notes to consolidated financial statements

F-5

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2009			2008			2007

Cash flows from operating activities:
Net income (loss)	$	72,000		$	4,000		$	(335,000	)
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization		780,000			574,000			649,000
Stock based compensation expense		2,000
Interest expense paid through a capital lease obligation		96,000			-			-
Changes in:
Accounts receivable		(228,000	)		93,000			23,000
Accounts receivable - stockholder		(4,000	)		-			130,000
Other current assets		(14,000	)		10,000			87,000
Accounts payable and accrued expenses		11,000			(13,000	)		(53,000	)
Net cash provided by operating activities		715,000			668,000			501,000

Cash flows from investing activities:
Investment in unconsolidated entities		-			-			(20,000	)
Decrease (increase) in cash held in escrow		-			-			61,000
Net cash used in investing activities		-			-			41,000

Cash flows from financing activities:
Repayment of capital lease and loan obligations		(647,000	)		(435,000	)		(467,000	)

Net change in cash and cash equivalents		68,000			233,000			75,000
Cash and cash equivalents - beginning of year		605,000			372,000			297,000
Cash and cash equivalents - end of year	$	673,000		$	605,000		$	372,000

Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	279,000		$	126,000		$	168,000

Supplemental disclosures of noncash activities:
Equipment and leasehold improvements acquired through a capital lease	$	3,315,000		$	-		$	-

See notes to consolidated financial statements

F-6

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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 2009, 2008, and 2007 was $780,000, $574,000, and $649,000, respectively.

F-7

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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 2009, 2008, and 2007, 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 2009, 2008, or 2007.

[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:

[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, 2009 and 2008 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, 2009 and 2008.

[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 $405,000 at December 31, 2009. Accounts receivable consist primarily of amounts due from two medical centers. Historically, credit losses on accounts receivable have not been significant.

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Note B - The Company and its Significant Accounting Policies (continued)

[13]	Asset retirement obligations:

The Company records 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 Pronouncements

In August 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-05, Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value. This update provides clarification for circumstances in which a quoted price in an active market for the identical liability is not available. In such circumstances a reporting entity is required to measure fair value using one or more of the following techniques: (1) A valuation technique that uses: (a) the quoted price of the identical liability when traded as an asset; or (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of Topic 820 such as an income approach or a market approach. The guidance in this update was effective for the quarter beginning October 1, 2009 and did not have a significant impact on the Company’s financial statements.

In June 2009, the FASB issued guidance that establishes the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the source of authoritative GAAP recognized by the FASB for nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also included in the Codification as sources of authoritative GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. Following this effective date, instead of issuing new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts, the FASB issues Accounting Standards Updates, which serves only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. The Company started following the guidelines in the Codification effective July 1, 2009.

In June 2009, the FASB issued ASU 2009-16 (formerly FASB 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”), to improve the relevance, faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for periods beginning after November 15, 2009, did not have a significant effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASU 2009-17 (formerly FASB 167, “Amendments to FASB Interpretation No. 46(R)”). This statement amends Interpretation 46(R) to require an enterprise to replace the quantitative-based analysis in determining whether the enterprise’s variable interest or interests give it controlling financial interest in a variable interest entity with a more qualitative approach by providing additional guidance regarding considerations for consolidating an entity. This guidance also requires enhanced disclosures to provide users of financial information with more transparent information about the enterprise’s involvement in a variable interest entity. This statement is effective for periods beginning after November 15, 2009, and is not expected to have a significant effect on the Company’s consolidated financial statements.

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Note B - The Company and its Significant Accounting Policies (continued)

In May 2009, the FASB issued guidance (ASC 855-10) that establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, it sets forth: a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted the subsequent event guidance in the quarter ended June 30, 2009, which did not have a significant impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued guidance (ASC 805) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The implementation of this guidance did not a material impact on the Company’s consolidated financial statements. However, this standard could have a significant effect on the accounting for future business combinations.

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, 2009 and 2008, 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 $790,000 $ 720,000, and $603,000 for 2009, 2008, and 2007, respectively.

In April 2005, the Company purchased and installed a new Gamma Knife at RMC to replace the existing equipment. The cost to purchase and install the new equipment was $2,606,000.

[2]	Ground lease agreement:

USN constructed a facility in Kansas City, Missouri on property which the Company leases from RMC. The lease term is for a period of 21 years commencing September 1994. The lease provides for rent at $3,600 per annum. The terms of the lease include escalation clauses for increases in certain operating expenses and for payment of real estate taxes and utilities. Title to all improvements upon the land vests in RMC.

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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 $1,464,000, $1,031,000, and $1,031,000, for 2009, 2008, and 2007, 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 $3,411,000 in total (including $96,000 of accrued interest), 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 $3,411,000 in total, including $96,000 of accrued interest. The monthly payment is $61,000 per month.

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. 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,
	2009			2008

Capital leases - Gamma Knife	$	3,942,000		$	1,176,000

Less current portion		(894,000	)		(475,000	)

	$	3,048,000		$	701,000

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Note E - Obligation Under Capital Lease and Loans Payable (continued)

Future payments as of December 31, 2009 on the equipment leases and loans are as follows:

Year Ending
December 31,

2010	$	1,289,000
2011		916,000
2012		729,000
2013		729,000
2014		729,000
Thereafter		915,000
		5,307,000
Less interest		(1,365,000	)
Present value of net minimum obligation	$	3,942,000

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 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.

No change in the estimate for asset retirement obligations was necessary in conjunction with the 2005 and 2009 Gamma Knife replacements.

Note G - Stock Based Compensation

During 2009, the Company awarded 50,000 shares of its common stock to an employee as additional compensation. The fair value of the total shares was determined by management to be $2,500. Compensation expense of $2,500 (common stock of $500 and additional paid in capital of $2,000) was recorded by the Company to account for this transaction.

Note H - Concentrations

For 2008, 2008, and 2007, 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, 2009 and 2008.

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

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Note I - Taxes

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

	Year Ended December 31,
	2009		2008		2007
Current:
Federal	$	-	$	-	$	-
State		-		-		-
		-		-		-

Deferred:
Federal		-		-		-
State		-		-		-
		-		-		-
	$	-	$	-	$	-

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

	Year Ended December 31,
	2009			2008			2007

Income tax (benefit) at the federal statutory rate	$	25,000		$	2,000		$	(114,000	)
State income tax (benefit), net of federal taxes		4,000			-			(17,000	)
Other		(16,000	)		40,000			(8,000	)
Change in valuation allowance		(13,000	)		(42,000	)		139,000

Income tax provision (benefit)	$	-		$	-		$	-

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

	December 31,
	2009			2008
Deferred tax asset:
Net operating loss	$	302,000		$	174,000
Excess of book depreciation over tax depreciation		40,000			88,000
		342,000			262,000
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		(100,000	)		(7,000	)
		242,000			255,000
Valuation allowance		(242,000	)		(255,000	)
Net deferred tax asset	$	-		$	-

The Company adopted the accounting provisions for Accounting for Uncertainty in Income Taxes, effective January 1, 2007. It 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 had no uncertain material tax positions at December 31, 2009 and 2008.

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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 2006.

Note J - Litigation

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

Note K – 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, 2009, 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,

2010	$	44,000
2011		45,000
2012		47,000
2013		12,000
	$	148,000

Rent expense was approximately $45,000, $45,000, and $52,000, and for 2009, 2008, and 2007 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.

In 2009, the Company installed a new Gamma Knife Perfexion model at the NYU Medical Center. This new equipment and certain space improvements, costing approximately $3,411,000 in total (including $96,000 of accrued interest), was financed through a seven-year lease arrangement.

To maintain efficient operation, the Company is required to reload cobalt for each Gamma Knife every 5 to 10 years. The cobalt at RMC was reloaded in 2000 at a cost of approximately $800,000.

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. In 2014, Neuropartners, LLC has the option to purchase the Gamma Knife for $490,000.

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Product liability:

Note L - 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 IRA contribution for 2009 and 2008.

Note M - Related Party Transactions

[1]

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 2009, 2008, and 2007, was $300,000, $300,000, and $225,000, respectively. The president voluntarily accepted reduced compensation for three months in 2007.

Note N – Quarterly Results of Operations (unaudited)

The following is a summary of the unaudited 2009 quarterly results of operations: (in thousands)

	Three Months Ended
	March 31			June 30			September 30		December 31
2009
Revenue	$	366		$	693		$	657	$	545
Income (loss) from operations		(9	)		202			157		94
Net income (loss)		(33	)		86			40		(21	)
Basic and diluted income (loss) per common share	$	0.00		$	(0.01	)	$	0.01	$	0.01

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

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