SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

U.S. NEUROSURGICAL, INC.
(Exact name of Registrant as specified in its charter)

PART I
FINANCIAL INFORMATION
U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

The accompanying notes to financial statements are an integral part hereof.

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

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

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

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U.S. NEUROSURGICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A - Basis of Preparation

                The accompanying financial statements at September 30, 2004, and for the three and nine months ended September 30, 2004 and 2003 are unaudited. However, in the opinion of management, such statements include all adjustments necessary for a fair statement of the information presented therein. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date appearing in the Company’s Annual Report on Form 10-K.

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

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

Note B – Treasury Stock

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

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

Critical Accounting Policies

Our condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. As such, some accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in our 2003 Annual Report on Form 10-K, filed, in the Notes to the Financial Statements, Note A. In particular, judgment is used in areas such as determining the allowance for doubtful accounts, and asset impairments.

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

Results of Operations

Third Quarter 2004 Compared to Third Quarter 2003 and Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

                Patient revenue increased 30% to $637,000 in the quarter ended September 30, 2004 from $490,000 for the quarter ended September 30, 2003. The reason for the increase was due to increased revenue from NYU due to some prior period adjustments. Patient expenses decreased 42% to $151,000 from $261,000 in the same period from a year earlier primarily due to decreased depreciation on our gamma knives. Selling, general and administrative expense for the quarter ended September 30 increased 4% to $401,000 from $386,000 a year ago. The increase was primarily due to higher insurance costs. Interest expense decreased 19% to $17,000 from $21,000 in the same period a year earlier due to repayment of our leases on the Gamma Knife properties. As a result of increased revenue and decrease in expenses for the quarter ended September 30, 2004, net income was $44,000 as compared to a loss of $110,000 for the same period a year earlier.

                For the nine months ended September 30, revenue increased 3% to $1,940,000 from $1,875,000 in the same period a year earlier due to the same reasons as explained above. Patient expenses decreased 33% to $484,000 in 2004 from $724,000 in the same period in 2003. Selling, general and administrative expenses decreased 2% to $1,085,000 as compared to $1,106,000 in the same period, a year earlier. Interest expense decreased 26% to $50,000 from $68,000 in the same period a year ago. The decrease was due to repayment of our leases on the Gamma Knife properties. Net income was $208,000 for the nine months ended September 30, 2004 as compared to a loss of 16,000 for the nine months ended September 30, 2003, due to the increased revenue and lowered expenses noted above.

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Liquidity and Capital Resources  

                At September 30, 2004 the Company had a working capital surplus of $81,000 as compared to a deficit of $359,000 at December 31, 2003. Cash and cash equivalents at September 30, 2004 were $474,000 as compared with $89,000 at December 31, 2003. Net cash provided by operating activities was $483,000 for the nine months ended September 30, 2004 as compared with $898,000 for the same period, a year earlier. The decrease was due to decreased depreciation and amortization of its Gamma Knives. Depreciation and amortization was $364,000 for the nine month period ended September 30, 2004 and was 697,000 in the 2003 period. There was an increase in accounts receivable of $102,000 in 2004 compared to a decrease of $59,000 during the nine months ended September 30, 2003. There was an increase in other current assets of $139,000 as compared to a decrease of $55,000 in the same period last year. Accounts payable and accrued expenses increased $124,000 for the nine months ended September 30, 2004 as compared to $94,000 for the same period in 2003.

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

                Net cash used in financing activities was $219,000 for the nine months ended September 30, 2004 as compared to $136,000 for the same period a year ago. The Company paid $263,000 towards repayment of its capital lease obligations and notes payable for the nine months ended September 30, 2004 as compared to $610,000 in the same period in 2003. The Company also refinanced its obligations as stated in the preceding paragraph.

                The Company expects cash flow from operations and cash on hand to be sufficient to finance the business for the next twelve months.

Disclosure Regarding Forward Looking Statements

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

                USN operates in a highly competitive and rapidly changing environment and business segments that are dependent on our ability to: achieve profitability; increase revenues; sustain our current level of operation; introduce on a timely basis new products; maintain satisfactory relations with our customers; attract and retain key personnel; maintain and expand our strategic alliances; and protect our know-how. USN’s actual results could differ materially from management’s expectations because of changes in such factors. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

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

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

ITEM 4.      CONTROLS AND PROCEDURES

                U.S. Neurosurgical management, including the President and the Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 within 90 days of the filing of this report. Based on that evaluation, the President and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the President and the Chief Financial Officer completed their evaluation.

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  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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