United
      States Securities and Exchange Commission


Washington,
      d.c. 20549




FORM
      10-QSB




Quarterly
      Report of Small Business Issuers under Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the quarterly period ended December 31,
      2005




Commission
      File No. 000-14247




**IsoRay,
      Inc.**


(Exact
      name of registrant as specified in its charter)









Minnesota
              (State
                or other jurisdiction of incorporation or organization)
            41-1458152
              (I.R.S.
                Employer Identification No.)350
                Hills St., Suite 106
              Richland,
                Washington
              (Address
                of principal executive offices)
            99354
              (Zip
                Code)Issuer's
                telephone number, including area code:(509)
                375-1202




The
        issuer has (1) filed all reports required to be filed by Section 13 or 15(d)
        of
        the Exchange Act during the past 12 months (or for such shorter period that
        the
        registrant was required to file such reports), and (2) been subject to such
        filing requirements for the past 90 days.
 
 The
        registrant is not a shell company (as defined in Rule 12b-2 of the Exchange
        Act).




Number
                of shares outstanding of each of the issuer's classes of common
                equity:Class
            Outstanding
                as of February 10, 2006Common
                stock, $0.001 par value
            14,495,603The
                issuer is not using the Transitional Small Business Disclosure format.







**ISORAY,
      INC.**





**Table
      of Contents**


PagePART
                  I
              FINANCIAL
                  INFORMATION
              1Item
                  1.
              Consolidated
                  Unaudited Financial Statements
              1Consolidated
                  Unaudited Balance Sheets
              1Consolidated
                  Unaudited Statements of Operations
              2Consolidated
                  Unaudited Statements of Cash Flows
              3Notes
                  to Consolidated Unaudited Financial Statements
              4Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of Operations
              8Item
                  3.
              Controls
                  and Procedures
              14PART
                  II
              OTHER
                  INFORMATION
              15Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              15Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              16SIGNATURES
              
              17





i


**PART
      I.**  **FINANCIAL
      INFORMATION**





**Item
      1.**   **Financial
      Statements (Unaudited)**




**IsoRay,
          Inc. and Subsidiary**
 **Consolidated
          Balance Sheets**
  **(Unaudited)****December
                      31,**
                  
                  **June
                      30,****2005**
                  
                  **2005****ASSETS**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  648,684
                  
                  $
                  32,587Accounts
                      receivable, net
                  
                  
                  467,616
                  
                  
                  —Inventory
                  
                  
                  156,019
                  
                  
                  —Prepaid
                      expenses
                  
                  
                  208,942
                  
                  
                  —Total
                      current assets
                  
                  
                  1,481,261
                  
                  
                  32,587Fixed
                      assets, net of accumulated depreciation and amortization
                  
                  
                  1,627,443
                  
                  
                  —Other
                      assets, net of accumulated amortization
                  
                  
                  754,305
                  
                  
                  —Total
                      assets
                  
                  $
                  3,863,009
                  
                  $
                  32,587**LIABILITIES
                      AND SHAREHOLDERS' EQUITY**Current
                      liabilities:Accounts
                      payable
                  
                  $
                  425,048
                  
                  $
                  21,355Accrued
                      payroll and related taxes
                  
                  
                  222,958
                  
                  
                  —Accrued
                      interest payable
                  
                  
                  83,390
                  
                  
                  —Notes
                      payable, due within one year
                  
                  
                  244,219
                  
                  
                  —Capital
                      lease obligations, due within one year
                  
                  
                  174,930
                  
                  
                  —Total
                      current liabilities
                  
                  
                  1,150,545
                  
                  
                  21,355Notes
                      payable, due after one year
                  
                  
                  531,194
                  
                  
                  —Capital
                      lease obligations, due after one year
                  
                  
                  295,874
                  
                  
                  —Convertible
                      debentures payable, due after one year
                  
                  
                  530,000
                  
                  
                  —Total
                      liabilities
                  
                  
                  2,507,613
                  
                  
                  21,355Shareholders'
                      equity:Preferred
                      stock, $.001 par value; 6,000,000 shares authorized:Series
                      A: 1,000,000 shares allocated; no shares issued and outstanding
                  
                  
                  —
                  
                  
                  —Series
                      B: 5,000,000 shares allocated; 292,328 and no shares issued
                      and
                      outstanding
                  
                  
                  292
                  
                  
                  —Common
                      stock, $.001 par value; 194,000,000 shares authorized; 13,383,139
                      and2,498,319 shares issued and outstanding
                  
                  
                  13,383
                  
                  
                  2,498Subscriptions
                      receivable (Note 8)
                  
                  
                  (6,227,067
                  )
                  
                  —Additional
                      paid-in capital
                  
                  
                  16,835,833
                  
                  
                  7,307,600Accumulated
                      deficit
                  
                  
                  (9,267,045
                  )
                  
                  (7,298,866
                  )Total
                      shareholders' equity
                  
                  
                  1,355,396
                  
                  
                  11,232Total
                      liabilities and shareholders' equity
                  
                  $
                  3,863,009
                  
                  $
                  32,587
 *The
            accompanying notes are an integral part of the financial
            statements.*
  1
 **IsoRay,
            Inc and Subsidiary**
 **Consolidated
            Statements of Operations**
 **Three
            and Six Months Ended December 31, 2005 and 2004 (Unaudited)**
  **For
                          the three months ended**
                        **December
                          31,**
                        **2005**
                  
                  **December
                        31,**
                      **2004**
                  
                  **For
                          the six months ended**
                        **December
                          31,**
                        **2005**
                  
                  **December
                        31,**
                      **2004**Product
                      sales
                  
                  $
                  486,247
                  
                  $
                  —
                  
                  $
                  697,162
                  
                  $
                  —Cost
                      of product sales
                  
                  
                  916,274
                  
                  
                  —
                  
                  
                  1,636,440
                  
                  
                  —Gross
                      profit (loss)
                  
                  
                  (430,027
                  )
                  
                  —
                  
                  
                  (939,278
                  )
                  
                  —Operating
                      expenses:Research
                      and development
                  
                  
                  96,837
                  
                  
                  —
                  
                  
                  122,619
                  
                  
                  —Sales
                      and marketing expenses
                  
                  
                  340,532
                  
                  
                  —
                  
                  
                  655,571
                  
                  
                  —General
                      and administrative expenses
                  
                  
                  675,444
                  
                  
                  3,574
                  
                  
                  1,636,393
                  
                  
                  7,743Total
                      operating expenses
                  
                  
                  1,112,813
                  
                  
                  3,574
                  
                  
                  2,414,583
                  
                  
                  7,743Operating
                      loss
                  
                  
                  (1,542,840
                  )
                  
                  (3,574
                  )
                  
                  (3,353,861
                  )
                  
                  (7,743
                  )Non-operating
                      income (expense):Interest
                      income
                  
                  
                  3,193
                  
                  
                  —
                  
                  
                  10,152
                  
                  
                  —Financing
                      expense
                  
                  
                  (195,480
                  )
                  
                  —
                  
                  
                  (351,108
                  )
                  
                  —Debt
                      conversion expense (Note 7)
                  
                  
                  (244,097
                  )
                  
                  —
                  
                  
                  (244,097
                  )
                  
                  —Non-operating
                      income (expense), net
                  
                  
                  (436,384
                  )
                  
                  —
                  
                  
                  (585,053
                  )
                  
                  —Net
                      loss
                  
                  $
                  (1,979,224
                  )
                  $
                  (3,574
                  )
                  $
                  (3,938,914
                  )
                  $
                  (7,743
                  )Net
                      loss per weighted-average share of common stock
                  
                  $
                  (0.17
                  )
                  
                  Nil
                  
                  $
                  (0.36
                  )
                  
                  NilBasic
                      weighted average shares outstanding
                  
                  
                  11,852,047
                  
                  
                  2,415,214
                  
                  
                  10,844,913
                  
                  
                  2,415,214
  *The
            accompanying notes are an integral part of the financial
            statements.*





2


**IsoRay,
        Inc. and Subsidiary**
 **Consolidated
        Statements of Cash Flows**
 **Six
        Months Ended December 31, 2005 and 2004 (Unaudited)**




**For
                  the six months ended****December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**Net
                  loss
              
              $
              (3,938,914
              )
              $
              (7,743
              )Adjustments
                  to reconcile net loss to net cash used by operating activities:Depreciation
                  and amortization of fixed assets
              
              
              95,432
              
              
              —Amortization
                  of deferred financing costs and other assets
              
              
              103,546
              
              
              —Compensation
                  recorded in connection with issuance of common stock
              
              
              330,000
              
              
              —Rent
                  expense paid by issuance of common stock
              
              
              30,009
              
              
              —Repair
                  and maintenance expense paid by issuance of common stock
              
              
              14,752
              
              
              —Debt
                  conversion expense (Note 7)
              
              
              244,097
              
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (417,647
              )
              
              —Inventory
              
              
              (74,093
              )
              
              —Prepaid
                  expenses
              
              
              62,350
              
              
              —Accounts
                  payable
              
              
              (291,895
              )
              
              (75
              )Accrued
                  payroll and related taxes
              
              
              65,032
              
              
              —Accrued
                  interest payable
              
              
              42,065
              
              
              —Other
                  accrued expenses
              
              
              —
              
              
              395Net
                  cash used by operating activities
              
              
              (3,735,266
              )
              
              (7,423
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchases
                  of fixed assets
              
              
              (347,357
              )
              
              —Additions
                  to other assets
              
              
              (64,096
              )
              
              —Net
                  cash used by investing activities
              
              
              (411,453
              )
              
              —**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Funds
                  advanced by officer/shareholder
              
              
              —
              
              
              7,423Net
                  advances on line of credit
              
              
              200,000
              
              
              —Proceeds
                  from issuance of notes payable
              
              
              250,000
              
              
              —Proceeds
                  from sales of convertible debentures payable
              
              
              550,000
              
              
              —Principal
                  payments on notes payable
              
              
              (279,926
              )
              
              —Principal
                  payments on capital lease obligations
              
              
              (66,329
              )
              
              —Proceeds
                  from cash sales of common stock, net of issuance costs
              
              
              2,324,168
              
              
              —Proceeds
                  from cash sales of common stock, pursuant to exercise of warrants
              
              
              59,565
              
              
              —Proceeds
                  from cash sales of common stock, pursuant to exercise of options
              
              
              72,928
              
              
              —Payments
                  to common shareholders in lieu of issuing fractional shares
              
              
              (734
              )
              
              —Net
                  cash provided by financing activities
              
              
              3,109,672
              
              
              7,423Net
                  decrease in cash and cash equivalents
              
              
              (1,037,047
              )
              
              —Cash
                  and cash equivalents, beginning of period
              
              
              1,685,731
              
              
              —**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              648,684
              
              $
              —Supplemental
                  disclosures of cash flow information:Cash
                  paid for interest
              
              $
              205,497
              
              $
              —Non-cash
                  investing and financing activities:Exchange
                  of convertible debentures payable for shares of common stock
              
              $
              3,607,875Fixed
                  assets acquired by capital lease obligations
              
              $
              507,947Prepaid
                  rent paid by issuance of common stock
              
              $
              90,026





*The
      accompanying notes are an integral part of the financial
      statements.*


3


***NOTE
      1— ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES:***





*Organization:*




The
      accompanying consolidated financial statements are those of IsoRay, Inc. (“the
      Company”), formerly known as Century Park Pictures Corporation, and its
      subsidiary operating company, IsoRay Medical, Inc. (“IsoRay Medical”). Both
      companies are headquartered in Richland, Washington.





The
      accompanying consolidated financial statements should be read in conjunction
      with the Company’s audited financial statements and the notes thereto as of June
      30, 2005, and for the nine months then ended, as contained in the Company’s
      transitional report on Form 10-KSB filed on October 11, 2005, and with the
      audited financial statements of IsoRay Medical as of June 30, 2005 and 2004,
      and
      for the years then ended, filed on Form 8-K on November 3, 2005.







*Segment
      Reporting and Major Customers:*




IsoRay
      Medical operates in a single segment: isotope-based medical devices. IsoRay
      Medical began production and sales of its initial FDA approved product, the
      IsoRay 131 Cs
      brachytherapy seed, in October 2004 for the treatment of prostate cancer. Sales
      of the 131 Cs
      brachytherapy seed comprise all operating revenues of the combined companies.
      Two customers individually comprised more than 10% of product sales for the
      three month period ended December 31, 2005: Chicago Prostate Cancer Center
      and
      Community Hospital of Los Gatos.





*Summary
      of Significant Accounting Policies:*





*Basis
      of presentation* - The
      accompanying unaudited consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America and reflect all normal recurring adjustments which, in the opinion
      of
      management of the Company, are necessary for a fair presentation of the results
      for the periods presented. The results of operations for such periods are not
      necessarily indicative of the results expected for the full fiscal year or
      for
      any future period.





The
      accompanying consolidated financial
      statements should be read in conjunction with the Company’s audited financial
      statements and the notes thereto as of June 30, 2005, and for the nine months
      then ended ,
      as
      contained in the Company’s transitional report on Form 10-KSB filed on October
      11, 2005, and with
      the audited financial statements of IsoRay Medical as of June 30, 2005 and
      2004,
      and for the years then ended, filed
      on
      Form 8-K on November 3, 2005 .





*Basis
      of consolidation* -
      The
      accompanying unaudited consolidated financial statements reflect the balance
      sheets of IsoRay, Inc. and its subsidiary as of December 31, 2005, and the
      results of operation and statements of cash flows for the three and six months
      then ended net of all adjustments for inter-company transactions.





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





*Cash
      and cash equivalents* - Such
      assets consist of demand deposits, including interest-bearing money market
      accounts, held in one financial institution. These amounts are potentially
      subject to concentration of credit risk. The accounts are guaranteed by the
      Federal Deposit Insurance Corporation (FDIC) up to $100,000. At December 31,
      2005, uninsured cash balances totaled $615,246.





4


*Inventory
      -* Inventory
      is reported at the lower of cost, determined using the weighted average method,
      or net realizable value.




*Revenue
      recognition -* Revenue
      for the three and six months ended December 31, 2005 was derived solely from
      sales of the 131 Cs
      brachytherapy seed. This product is shipped FOB shipping point, and is invoiced
      and the sale recorded in accounts receivable at the time of
      shipment.




*Stock-based
      compensation -* The
      Company currently provides stock-based compensation under two equity incentive
      plans approved by the Board of Directors on July 28, 2005: the Amended And
      Restated 2005 Employee Stock Option Plan, and the Amended and Restated 2005
      Stock Option Plan. As of December 31, 2005, there were 2,817,774 options to
      purchase common stock outstanding, and 982,226 options remaining available
      for
      issuance under the Company’s equity incentive plans. Under the terms of the two
      plans, stock option grants are required to be granted with an exercise price
      equal to the market value of the underlying Company common stock at the date
      of
      grant. Options granted expire ten years after the grant date, and have various
      vesting periods.





In
      December 2002, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* (“FAS
      148” *)* ,
      which
      amends Statement No. 123, *Accounting
      for Stock-Based Compensation* (“FAS
      123”). FAS 148 requires companies to provide expanded footnote disclosures
      regarding stock-based expense, but still allows companies to retain the approach
      set forth in Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (APB
      25),
      provided that expanded footnote disclosure is presented. As of December 31,
      2005, the Company had not yet adopted the fair value method of accounting for
      stock-based compensation under SFAS No. 123, and accounts for stock-based
      compensation for employees under APB 25. No compensation expense was recognized
      in net earnings, as all options had an exercise price equal to, or above, the
      market value of the common stock on the date of grant. In accordance with SFAS
      No. 148, the following table presents the effect on net earnings and net
      earnings per share had compensation cost of the Company’s stock plans been
      determined consistent with fair valuation rather than intrinsic
      valuation:


**For
                  the three months ended**
              
              **For
                  the six months ended****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  loss, as reported
              
              $
              (1,979,224
              )
              $
              (3,574
              )
              $
              (3,938,914
              )
              $
              (7,743
              )Less:
                  Stock-based compensation expense determined under fair value method
                  for
                  all stock options, net of related tax benefit
              
              $
              (3,254
              )
              $
              —
              
              
              (159,254
              )
              $
              -Profoma
                  net loss
              
              $
              (1,982,478
              )
              $
              (3,574
              )
              $
              (4,098,168
              )
              $
              (7,743
              )*Basic
                  net loss per common share:*As
                  reported
              
              $
              (0.17
              )
              $
              (0.00
              )
              $
              (0.36
              )
              $
              (0.00
              )Proforma
              
              $
              (0.17
              )
              $
              (0.00
              )
              $
              (0.38
              )
              $
              (0.00
              )*Diluted
                  net loss per common share:*As
                  reported
              
              $
              (0.17
              )
              $
              (0.00
              )
              $
              (0.36
              )
              $
              (0.00
              )Proforma
              
              $
              (0.17
              )
              $
              (0.00
              )
              $
              (0.38
              )
              $
              (0.00
              )





*Income
      tax* -
      Deferred taxes are provided, when material, on a liability method whereby
      deferred tax assets are recognized for deductible temporary differences and
      deferred tax liabilities are recognized for taxable temporary differences.
      Temporary differences are the differences between the reported amounts of assets
      and liabilities and their tax bases. There were no material temporary
      differences for the periods presented. Deferred tax assets, subject to a
      valuation allowance, are recognized for future benefits of net operating losses
      being carried forward.




*Earnings
      per share*  - Statement
      of Financial Accounting Standards No. 128, “Earnings per Share,” requires dual
      presentation of basic earnings per share (“EPS”) and diluted EPS on the face of
      all income statements issued after December 15, 1997 for all entities with
      complex capital structures. Basic EPS is computed as net loss divided by the
      weighted average number of common shares outstanding for the period. Diluted
      EPS
      reflects the potential dilution that could occur from common shares issuable
      through stock options, warrants, and other convertible securities. For the
      periods ended December 31, 2005 and 2004, the effect of the Company’s
      outstanding options and common stock equivalents would have been anti-dilutive.
      Accordingly, only basic EPS is presented, and is computed
      on the basis of the weighted-average number of common shares outstanding during
      the period presented. At December 31, 2005, the Company had 292,329 shares
      of
      preferred stock which are exchangeable, on a one-to-one basis, with common
      stock; debentures which could be converted into 127,711 shares of common stock;
      options and warrants to purchase 4,615,801 shares of common stock; and warrants
      to purchase 77,138 shares of preferred stock (which could be exchanged to common
      stock) issued and outstanding. If the Company had been profitable as of the
      end
      of the period, these 5,112,979 derivatives that are convertible, exercisable
      or
      exchangeable into common stock would have been included in a separate
      calculation for diluted EPS.




***NOTE
      2 — RELATED-PARTY TRANSACTIONS:***





On
      July
      28, 2005, the Board of Directors granted 100,000 options to purchase common
      stock to each of its three independent Directors: Thomas Lavoy, Stephen
      Boatwright, and Robert Kauffman. The requisite Form 4 has been filed with the
      SEC for each grantee. Additionally, the Board voted to compensate each of the
      independent Directors $1,000 per meeting for their attendance at the Board
      meetings. Directors who are also serving as management of the Company were
      not
      granted stock options for Director service, and will not be paid for attendance
      at Board meetings.




Mr.
      Boatwright is a member of Keller Rohrback, PLC, which provides legal services
      to
      the Company and IsoRay Medical. During the three and six months ended December
      31, 2005, IsoRay Medical paid Keller Rohrback, PLC approximately $97,800, and
      $238,400 for legal services, respectively.




***NOTE
      3 - INCOME TAX:***





As
      of
      December 31, 2005, the deferred tax asset related to the Company’s net operating
      loss carryforward is fully reserved. Due to the provisions of Internal Revenue
      Code Section 338, the Company may have limited net operating loss carryforwards
      available to offset financial statement or tax return taxable income in future
      periods as a result of the July 28, 2005 merger which involved a change in
      control of more than 50 percentage points of the issued and outstanding
      securities of the Company.





***NOTE
      4 - GOING CONCERN:***





The
      financial statements have been prepared assuming that the Company will continue
      as a going concern. Certain conditions indicate substantial doubt that the
      Company will continue as a going concern. These conditions include the Company’s
      cash balance of $648,684 at December 31, 2005, coupled with its cash expenditure
      rate of approximately $620,000 per month, excluding capital items that have
      recently been approximately $70,000 per month. Management has implemented plans
      to obtain additional cash for the Company (see Notes 8 and 9). However, there
      is
      no assurance these plans will be successful in providing the Company with the
      cash it needs on a timely basis through the end of the current fiscal year.
      The
      accompanying financial statements do not include any adjustments that might
      be
      necessary should the Company be unable to continue as a going
      concern.





***NOTE
      5 -AMENDMENT OF PRIOR FILING:***





The
      10-QSB report for the three month period ended March 31, 2005 contained an
      overstatement of net income.  The overstatement was caused by an expense
      reversal of $304,500 of officer compensation, the actual amount forgiven by
      the
      Company’s CEO during the three month period ended March 31, 2005.  Although
      this amount was forgiven, the expense should not have been reversed.
 Actual net loss for the three month period was ($6,034).  This
      expense reversal caused additional paid-in capital and accumulated deficit
      to be
      overstated by $304,500 for all financial periods, until the Company’s balance
      sheet was recapitalized by the accounting adjustments made pursuant to the
      merger with IsoRay Medical, Inc.   The balance sheet correctly
      reflected the financial position of the Company as of the three month period
      ended September 30, 2005 as shown in the financial statements provided in the
      Form 10-QSB report filed with the SEC on November 11, 2005.  Management
      believes the Company will need to amend the 10-QSB filing for the three month
      period ended March 31, 2005 and amend the Form 10-KSB filing for the
      transitional nine month period ended June 30, 2005 to reflect these changes.





5


***NOTE
      6 - CONTINGENCIES:***





On
      December 14, 2005, the Company entered into an Economic Development Agreement
      (“Agreement”) with the Pocatello Development Authority ("PDA"), an urban renewal
      agency formed under the laws of the State of Idaho. Pursuant to the Agreement,
      the PDA has provided the Company with $200,000 of funding, to be used for costs
      associated with testing of production methods for Cesium-131 at Idaho's Advanced
      Test Reactor. This agreement stipulates that, pending successful test outcomes,
      and approval for reactor use, the Company will attempt to construct a
      manufacturing facility within the city limits of Pocatello so that operations
      begin no later than January 1, 2008. If the Company declines to build the
      manufacturing facility, it will be required to repay the $200,000 funding plus
      5% interest from the date of disbursement, within 30 days demand from the
      PDA.





***NOTE
      7 - INDUCEMENT TO CONVERT DEBENTURES:***





On
      December 13, 2005, the Board of Directors announced a short-term conversion
      inducement to current holders of IsoRay Medical, Inc. convertible debentures,
      originally issued in conjunction with the January 31, 2005 Private Placement
      Offering. Holders were permitted two conversion options: 1) convert under the
      original terms of the debenture to the Company’s common stock at a $4.15
      conversion price, and register the newly issued shares in the Form SB-2
      Registration Statement filed with the SEC on November 10, 2005, or 2) convert
      under terms essentially identical to those offered to purchasers of Units in
      the
      Offering of October 17, 2005: a $4.00 conversion price and one callable warrant
      to purchase one share of the Company's common stock at an exercise price of
      $6.00 per share for each share issued upon conversion (waiving registration
      rights for approximately one year). As of December 31, 2005, holders of
      $2,562,876 of debentures had converted to common stock of the Company responding
      to the inducement of the second exercise method described above. As of December
      31, 2005, the Company had issued 640,719 shares of common stock (including
      approximately 23,160 incremental shares not previously available to holders
      of
      debentures under the original terms), and 640,719 warrants to purchase shares
      of
      common, exercisable at $6.00 per share. The Company recognized $244,097 in
      non-cash short-term inducement expense, in accordance with FASB Statement of
      Financial Accounting Standards No. 84.





***NOTE
      8 -SUBSCRIPTIONS RECEIVABLE:***





On
      December 7, 2005, the Company entered into a SICAV ONE Securities Purchase
      Agreement and a SICAV TWO Securities Purchase Agreement (collectively, the
      "Purchase Agreements") with Mercatus & Partners, Limited, a United Kingdom
      private limited company ("Mercatus"). Pursuant to the Purchase Agreements,
      Mercatus has agreed, subject to receipt of sufficient funding, to purchase
      1,778,146 shares of the Registrant's common stock at a purchase price of $3.502
      per share. In the event sufficient funding is not received to enable Mercatus
      to
      purchase the shares within thirty days (which was extended through Friday,
      February 17, 2006 and may be further extended by management) from the date
      of
      delivery of the share certificates to the custodial bank, the share certificates
      will be returned to the Company and each party will have no further obligations
      under the Purchase Agreements. As of February 16, 2006, no funding had been
      received by the Company.





As
      part
      of the Purchase Agreements, the Company has agreed to amend, within sixty days
      of the date of the Purchase Agreements (this date has also been extended),
      its
      Registration Statement on Form SB-2, filed with the Securities and Exchange
      Commission on November 10, 2005, to provide for registration of the shares
      being
      purchased by Mercatus.





6


***NOTE
      9 - SUBSEQUENT EVENTS:***





*Closure
      of October 17, 2005 Offering* - ** On
      January 30, 2006 the Company closed an offering of Investment Units (“Units”)
      for sale, pursuant to a Private Placement Offering (the “Offering”) of October
      17, 2005. The Offering consisted of a maximum of 200 Units, each Unit consisting
      of 5,000 shares of common stock and a warrant to purchase 5,000 shares of common
      stock at an exercise price of $6.00 per share. This maximum was increased,
      pursuant to the terms of the Offering, at the sole discretion of the Company,
      to
      a maximum of 300 Units. The Units were sold for $20,000 per Unit. The $6,000,000
      maximum amount was fully subscribed as of January 30.





*Commencement
      of February 1, 2006 New Offering* *-* On
      February 1, 2006 the Company commenced an offering of Investment Units (“Units”)
      for sale, pursuant to a Private Placement Offering (the “New Offering”) of
      February 1, 2006. The New Offering consists of a maximum of 89 Units, each
      Unit
      consisting of 5,000 shares of common stock and a warrant to purchase 5,000
      shares of common stock at an exercise price of $6.50 per share. This maximum
      may
      be increased at the sole discretion of the Company, to a maximum of 178 Units.
      The Units are being sold for $22,500 per Unit. As of February 10, 2006,
      approximately $1.15 Million had been raised under the New Offering.





*Continuing
      conversion of debentures -* As of
      February 10, 2006, two additional convertible debenture holders converted under
      the short-term inducement method provided by the Board of Directors on December
      13, 2005. This brought the total debentures converted to $3,682,875, leaving
      $455,000 of the original debentures. As of February 10, 2006, the Company had
      issued 911,276 shares of common stock to all converting debenture holders,
      including those who chose the short-term inducement method, and those electing
      to convert under the original terms. As of February 10, 2006 the Company had
      issued approximately 23,840 incremental shares under the short-term inducement
      method not previously available to holders of debentures under the original
      terms.





*Temporary
      ordering disruption by primary customer* *-* On
      January 5, 2006, IsoRay Medical was notified by one of its primary customers,
      Chicago Prostate Cancer Center (CPCC), that it would no longer accept 131 Cs products
      from the radiopharmacy exclusively used by IsoRay Medical at that time due
      to
      quality control concerns. The role of the radiopharmacy is to provide third
      party assay, preloading, and sterilization of the 131 Cs
      seeds
      which are then shipped directly to customers for use in patient implants. IsoRay
      immediately began negotiations with Advanced Care Medical, Inc. (“ACM”), an
      approved CPCC supplier, and expects to execute a contract with ACM for
      radiopharmacy services using our 131 Cs
      seed.
      IsoRay anticipates CPCC will resume ordering and using our 131 Cs
      seed
      product as soon as ACM receives an amendment to its radioactive materials
      license to process products containing the 131 Cs
      isotope. Although this temporary suspension of seed orders by CPCC has had
      a
      negative impact on revenue in the near term, the Company’s management believes
      any long-term impact will be non-material.




7


**ITEM
      2.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
      RESULTS OF OPERATIONS**




IsoRay,
      Inc. (formerly known as Century Park Pictures Corporation; the “Company” or
“IsoRay”) is a medical technology company focusing on innovative treatments for
      prostate cancer and other solid cancer tumors, with a goal of improved patient
      outcomes. Our wholly-owned subsidiary, IsoRay Medical, Inc., a Delaware
      corporation (“IsoRay Medical”), began selling its initial product, the Food and
      Drug Administration approved IsoRay Cesium-131 brachytherapy seed (the “IsoRay 131 Cs
      seed”), in October 2004 for the treatment of prostate cancer. Our management
      believes that the clinical benefits of using Cesium-131 will enable us to
      capture market share within the existing brachytherapy market, which uses
      Palladium-103 and Iodine-125. We are also in the process of developing a second
      product, Yttrium-90, which is a radioisotope that is already in use for the
      treatment of certain forms of metastasized, or “spread throughout the body,”
cancers.




The
      physical characteristics of the Cesium-131 (Cs-131 or 131 Cs)
      isotope are expected to decrease radiation exposure to the patient and reduce
      the severity and duration of side effects, while treating cancer cells as
      effectively, if not more so than other isotopes used in seed brachytherapy.
      Cesium-131 could also enable meaningful penetration in other solid tumor
      applications such as breast, lung, liver, brain and pancreatic cancer, expanding
      the total available market opportunity. The second radioisotope, Yttrium-90
      (Y-90 or 90 Y),
      is
      currently being used in the treatment of non-Hodgkin’s lymphoma and is in
      clinical trials for other applications, including brachytherapy. Other
      manufacturers have received FDA approval for 90 Y
      and
      IsoRay Medical believes production will not require clinical trials or an
      extensive FDA application process. Production is expected to begin in
      2006.




Brachytherapy
      seeds are small devices used in an internal radiation therapy procedure. In
      recent years the procedure has become one of the primary treatments for prostate
      cancer and is now used more often than surgical removal of the prostate. The
      brachytherapy procedure places radioactive seeds as close as possible to (in
      or
      near) the cancer tumor (the word “brachytherapy” means close therapy). The seeds
      deliver therapeutic radiation by killing the tumor cells and cells located
      in
      the immediate vicinity of the tumor while minimizing exposure to adjacent
      healthy tissue. This allows doctors to administer a higher radioisotope sealed
      within a welded titanium capsule. Approximately 85 to 135 seeds are permanently
      implanted in the prostate in a 45-minute outpatient procedure. The isotope
      decays over time and the seeds become inert. The seeds may be used as a primary
      treatment or, in conjunction with other treatment modalities such as external
      beam radiation therapy, chemotherapy, or as treatment for residual disease
      after
      excision of primary tumors.




Management
      believes that the IsoRay 131 Cs
      seed
      represents the first major advancement in brachytherapy technology in over
      18
      years with attributes that could make it the long term “seed of choice” for
      internal radiation procedures. The 131 Cs
      seed
      has FDA approval for treatment of malignant disease (e.g. cancers of the head
      and neck, brain, liver, lung, breast, prostate, etc.) and may be used in
      surface, interstitial, and intracavity applications for tumors with known
      radiosensitivity.




IsoRay
      was incorporated under Minnesota law in 1983 as Century Park Pictures
      Corporation. Since 1998 and until our recent merger with IsoRay Medical, we
      had
      no significant operations. On July 28, 2005, our subsidiary, Century Park
      Transitory Subsidiary, Inc. merged into IsoRay Medical, Inc., making IsoRay
      Medical our wholly-owned subsidiary.




**Results
      of Operations.**




**Three
      and six month periods ended December 31, 2005 and 2004.**





**Revenues.** During
      the three month period ended December 31, 2005, the company generated $486,247
      in sales of its 131 Cs
      seed.
      This represents an increase of $275,332 or 131% over sales in the three months
      ended September 30, 2005 (the “Prior Quarter”) of $210,915. Sales for the six
      month period ended December 31, 2005 were $697,162. No revenue was recorded
      by
      the Company in the three month and six month periods ended December 31, 2004
      as
      the Company had no operations then. IsoRay Medical began sales of its 131 Cs
      seed
      on October 26, 2004, prior to its merger with the Company, with one medical
      center customer. By December 31, 2005 the number of medical center customers
      who
      have ordered the 131 Cs
      seed
      had grown to seventeen.




8


On
      January 5, 2005, IsoRay Medical was notified by one of its primary customers,
      Chicago Prostate Cancer Center (“CPCC”), that it would no longer accept 131 Cs
      products from the radiopharmacy exclusively used by IsoRay Medical at that
      time
      due to quality control concerns. The role of the radiopharmacy is to provide
      third party assay, preloading, and sterilization of the 131 Cs
      seeds
      which are then shipped directly to customers for use in patient implants. IsoRay
      immediately began negotiations with Advanced Care Medical, Inc. (“ACM”), an
      approved CPCC supplier, and expects to execute a contract with ACM for
      radiopharmacy services using our 131 Cs
      seed.
      IsoRay anticipates CPCC will resume ordering and using our 131 Cs
      seed
      product as soon as ACM receives an amendment to its radioactive materials
      license to process products containing the 131 Cs
      isotope. Although this temporary suspension of seed orders by CPCC has had
      a
      negative impact on revenue in the near term, the Company’s management believes
      any long-term impact will be non-material.




**Gross
      loss.** Gross
      loss was $(430,027) for the three month period ended December 31, 2005.
 This represents an improvement of $79,224, or 16% over the Prior Quarter’s
      gross loss of $(509,251).  Gross loss was $(939,278) for the six month
      period ended December 31, 2005. Cost of products sold was $916,274 for the
      three
      month period.  This was an increase in cost of products sold of $196,108 or
      27% more than the Prior Quarter. Of this, approximately $356,000 was paid to
      Pacific Northwest National Laboratory (PNNL) under our contract with them for
      use of their facilities and personnel to support production. In the three month
      period ended December 31, 2005, we spent in excess of $109,000 for production
      materials and small tools, none of which individually exceeded the $2,500
      threshold we use in determining whether to capitalize production equipment.
       These materials and small tools were needed to commence production in our
      independent production facility, the PEcoS-IsoRay Radioisotope Laboratory
      (“PIRL”).  Most are long-lived items, and will not need replacing in the
      current fiscal year.  According to plan, during the quarter ended December
      31, 2005 we moved essentially all Cs-131 production operations to PIRL. We
      will
      continue to use the PNNL facility only for certain research and development
      and
      quality assurance activities, but in the next quarter, we expect to
      substantially reduce the PNNL expense. Cost of products sold for the six month
      period was $1,636,440. As the Company had no operations for several years prior
      to its merger with IsoRay Medical, no cost of sales was reported for the three
      and six month periods ended December 31, 2004.





**Research
      and development.** Research
      and development expenses for the three month period ended December 31, 2005
      were
      $96,837. This represents an increased expenditure of $71,055, or a 276% increase
      over the Prior Quarter’s expense of $25,782. Of this amount, $82,500 was paid in
      conjunction with the ongoing protocol study on the results of 100 patients
      who
      have recently been implanted with the Company’s 131 Cs
      brachytherapy seed. Research and development expenses for the six month period
      ended December 31, 2005 were $122,619. The Company had no research and
      development activities for several years prior to its merger with IsoRay
      Medical, accordingly no research and development cost was recorded for the
      three
      and six month periods ended December 31, 2004.





**Sales
      and marketing expenses.** Sales
      and
      marketing expenses were $340,532 for the three-month period ended December
      31,
      2005. This represents an increase of $25,493 or 8% compared to the Prior
      Quarter’s expenditure of $315,039 for sales and marketing. Of this amount,
      approximately $236,000 was paid for wages, including payroll-related taxes,
      travel, office and other support expenses on behalf of our sales and marketing
      and customer service staff. This represents a $4,600, or 2% increase of
      expenditure over the prior quarter. The balance was spent on advertising, market
      research, and trade shows and conferences. Sales and marketing expense for
      the
      six month period ended December 31, 2005 was $655,571. As the Company had no
      sales for several years prior to its merger with IsoRay Medical, no sales and
      marketing expenses were recorded for the three or six month periods ended
      December 31, 2004.




**General
      and administrative expenses.** General
      and administrative expenses for the three month period ended December 31, 2005
      amounted to $675,444. This represents an expense reduction of $285,505 or 30%
      in
      comparison to the Prior Quarter’s expense of $960,949. The reduction is mostly
      due to the prior quarter’s recognition of a one-time compensation expense of
      $330,000, representing the value of 168,472 shares of IsoRay common stock issued
      to an individual as a finder’s fee in conjunction with the merger of the Company
      and IsoRay Medical, Inc.





9


Approximately
      $199,040 was paid in wages and related benefits and taxes during the period.
      This represented a decrease of approximately $29,750, or 13% compared to the
      Prior Quarter. Legal expenses were $104,110 for the period, representing a
      reduction of $57,220 or a 35% reduction in legal expense as compared to the
      Prior Quarter’s expense of $161,330. This reduction was almost entirely due to
      approximately $56,000 spent in the Prior Quarter in conjunction with a
      successful out-of-court settlement of an employment dispute. General and
      administrative expenses for the six month period ended December 31, 2005
      amounted to $1,628,661. General and administrative expenses for the three and
      six month period ended December 31, 2004 were $3,574 and $7,743,
      respectively.





**Operating
      (loss).** Due to
      our significant research and development expenditures, additional
      responsibilities as a reporting company, rapid structural growth, and nominal
      product revenues, we have not been profitable, and have generated operating
      losses since our inception. In the three month period ended December 31, 2005,
      the Company had an operating loss of $(1,542,840). This represents a reduced
      loss of $268,181 or 15%, in comparison with the prior quarter’s operating loss
      of $(1,811,021). Operating loss for the six month period ended December 31,
      2005
      was $(3,346,130) Operating loss for the three and six month periods ended
      December 31, 2004 was $(3,574) and $(7,743), respectively.




**Non-operating
      income (expense).** Total
      non-operating income (expense) was $(436,384) for the three month period ended
      December 31, 2005. This represents an increase in net expense of $(287,715)
      or
      194% over the Prior Quarter’s non-operating income (expense) of $(148,669). This
      increase in non-operating income (expense) was largely due to the one-time
      recognition of $244,097 expense in short-term inducement to convert debentures
      (see Note 7). The Company earned $3,193 interest income on funds held in certain
      near-liquid accounts. This was $3,766, or 54% less, than the Prior Quarter’s
      interest income of $6,959. During this period, financing expense was $195,480,
      or an increased expense of $39,852 or 26% over the Prior Quarter’s financing
      expense of $155,628. Of this amount, $143,706 was paid as interest on loans,
      notes and convertible debentures outstanding. The balance of the financing
      expense was amortization of pre-paid financing expense, primarily the January
      2005 issuance of common stock to guarantors of certain loans made to the
      Company, and commissions and legal costs paid in conjunction with the issuance
      of convertible debentures. Total non-operating income (expense) for the six
      month period ended December 31, 2005 was $(585,053). No non-operating income
      (expense) was recorded by the Company for the three and six month periods ended
      December 31, 2004.




**Liquidity
      and capital resources** .
      At
      December 31, 2005, cash and cash equivalents amounted to $648,684. During the
      three months ended December 31, 2005, the Company issued 645,500 shares of
      common stock and granted warrants to purchase 645,500 shares of common stock
      pursuant to the October 17, 2005 Offering. This issuance of common stock
      provided the Company $2,324,168, in cash, net of legal costs and commissions
      paid pursuant to the October 17, 2005 Offering. Additionally, the Company issued
      5,488 shares of common stock pursuant to the exercise of options to purchase
      common stock, and options to purchase preferred stock, which were exchanged
      for
      common stock immediately upon exercise. This exercise of options provided the
      Company with $5,009. Also during the three months ended December 31, 2005,
      the
      Company issued 10,000 shares of common stock in exchange for $40,000 of
      production equipment repair and maintenance, certain capital production
      equipment, and consulting, and 24,007 shares of common stock in exchange for
      one
      year’s lease of the PIRL facility.




On
      January 30, 2006, IsoRay closed a round of private financing under its October
      17, 2005 private placement memorandum, as amended, which was fully sold at
      $6
      million. In February, IsoRay commenced a new round of private financing under
      its February 1, 2006 private placement memorandum, and had raised approximately
      $1.15 million under that offering as of February 10, 2006




The
      Company had approximately $3.7 million cash on hand as of February 10,
      2006 **.** As of
      that date the Company's monthly required cash operating expenditures were
      approximately $620,000, and capital expenditures were approximately $70,000.
      As
      of February 10, 2006, management believes that assuming expenditures continue
      at
      approximately the same monthly rate that the Company's cash on hand would fund
      operating expenditures through the beginning of August 2006.




10


On
      December 7, 2005, the Company entered into a SICAV ONE Securities Purchase
      Agreement and a SICAV TWO Securities Purchase Agreement (collectively, the
      “Purchase Agreements”) with Mercatus & Partners, Limited, a United Kingdom
      private limited company (“Mercatus”). Pursuant to the Purchase Agreement,
      Mercatus has agreed, subject to receipt of sufficient funding, to purchase
      1,778,146 shares of the Company’s common stock at a purchase price of $3.502 per
      share, or an aggregate payment of $6,227,067.29. In the event Mercatus does
      not purchase the shares, the share certificates will be returned to the
      Company and each party will have no further obligations under the Purchase
      Agreements. To date no funding has been received by the Company and there can
      be
      no assurance that any funding will be received as the funding is contingent
      upon
      factors outside of the Company’s control.




Our
      growth plan for 2006 includes expanding sales to existing customers, continuing
      a trend that has improved in the second quarter of FY 2006; discontinuing
      production efforts at Pacific Northwest National Laboratory, which should
      decrease operating costs; enhancing efforts to reduce internal production costs;
      and expanding the base of suppliers of direct materials and value added services
      to direct materials.




On
      February 9, 2006, IsoRay signed a definitive license agreement with
      International Brachytherapy s.a. (“IBt”) covering North America and providing
      IsoRay with access to IBt’s Ink Jet production process and its proprietary
      polymer seed technology for use in brachytherapy procedures using Cesium-131.
      IsoRay intends to apply for FDA approval for the use of IBt’s proprietary
      technology in tandem with IsoRay’s Cesium-131 proprietary technology following
      completion of initial milestones designed to determine whether the two
      technologies are compatible. This agreement will require a cash outlay of
      approximately $225,000 in March 2006.




IsoRay
      Medical has four outstanding loans. The first, from Tri-City Industrial
      Development Council, with an original principal amount of $40,000, was funded
      in
      2001 and requires a final principal only payment of $10,000 in August 2006.
      It
      is non-interest bearing and unsecured. The second loan is from the
      Benton-Franklin Economic Development District in an original principal amount
      of
      $230,000 and was funded in December 2004. It bears interest at eight percent
      and
      has a sixty month term with a final balloon payment. As of December 31, 2005,
      the principal balance owed was $212,893. This loan is secured by certain
      equipment, materials and inventory of IsoRay Medical, and also required personal
      guarantees, for which the guarantors were issued approximately 70,455 shares
      of
      our common stock. The third loan is a line of credit from Columbia River Bank,
      which provides credit in the amount of $395,000. It bears interest at a floating
      prime plus two percent rate, and is secured by certain accounts receivable
      and
      inventory and personal guarantees, for which the guarantors were issued
      approximately 107,401 shares of our common stock. As of December 31, 2005,
      $200,000 was owed on the line of credit. The fourth loan is with Columbia River
      Bank in the amount of $150,000, of which $50,000 was funded as of October 31,
      2005. This loan is to be used for equipment purchases only and is secured by
      the
      equipment purchased with the borrowed funds. It bears interest at seven percent
      for thirty-six months. As of December 31, 2005, the principal balance owed
      was
      approximately $36,156.




IsoRay
      Medical also had $530,000 in principal amount of convertible debentures
      outstanding as of December 31, 2005, which were issued between February and
      July
      2005. As of February 10, 2006, the amount of convertible debentures outstanding
      had been reduced to $445,000, with holders of $75,000 in convertible debentures
      converting subsequent to the end of the three month period ended December 31,
      2005. **** These
      debentures could be converted into 127,711 shares of common stock at a
      conversion rate of $4.15 per share. Each debenture bears interest at an annual
      rate of eight percent (not compounded), and has a twenty-four month term with
      accrued interest paid quarterly.




IsoRay
      Medical also had $316,364 in principal amount of notes payable outstanding
      as of
      December 31, 2005, which were issued in a private placement to a predecessor
      IsoRay company between October 2003 and September 2004. Each note bears interest
      at an annual rate of ten percent (not compounded), and has a thirty-six month
      term with accrued interest paid quarterly. The Company intends to retire these
      note payable obligations with part of the proceeds received from the New
      Offering of February 1, 2006.




On
      April
      4, 2005 a capital lease agreement was executed by IsoRay Medical with Nationwide
      Funding LLC, whereby the lessor funded the $75,000 acquisition of a glove box
      built to the Company's specifications by Premier Technology, Inc. of Pocatello,
      ID. This is a 48 month agreement with minimum monthly lease payments of
      $2,475.




11


On
      May
      16, 2005 a capital lease agreement was executed by IsoRay Medical with Vencore
      Solutions LLC. This is a capital lease for a hot cell with a lease line in
      the
      amount of $430,000. This is a 36 month lease, with a purchase option at fair
      market value, defined in the lease agreement as not more than 15% of the initial
      fair value purchase price. Based on this amount, for the first five months,
      the
      minimum monthly lease payment will be $8,349. The minimum monthly lease payment
      increases to $17,500 for the remaining 31 months, based on the entire value
      of
      the $430,000 lease line. In connection with the lease agreement, IsoRay granted
      warrants to purchase 5,692 shares of its common stock at $4.15/share.




We
      expect
      to finance our future cash needs through the sale of equity securities,
      solicitation to warrant holders to exercise their warrants, and possibly
      strategic collaborations or debt financing or through other sources that may
      be
      dilutive to existing shareholders. If we need to raise additional money to
      fund
      our operations, funding may not be available to us on acceptable terms, or
      at
      all. If we are unable to raise additional funds when needed, we may not be
      able
      to market our products as planned or continue development and regulatory
      approval of our future products. If we raise additional funds through equity
      sales, these sales may be dilutive to existing investors.




We
      have
      no material commitments for capital expenditures and no off-balance sheet
      arrangements.




12


**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS**




*The
      Company's Form 10-KSB, any Form 10-QSB or any Form 8-K of the Company or any
      other written or oral statements made by or on behalf of the Company may contain
      "forward-looking statements" within the meaning of Section 27A of the Securities
      Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
      1934,
      as amended, and subject to the safe harbor created by the Private Securities
      Litigation Reform Act of 1995, which reflect the Company's current views with
      respect to future events and financial performance. The words "believe,"
      "expect," "anticipate," "intends," "estimate," "forecast," "project," and
      similar expressions identify forward-looking statements. All statements other
      than statements of historical fact are statements that could be deemed
      forward-looking statements, including any statements of the plans, strategies
      and objectives of management for future operations; any statements concerning
      proposed new products, services, developments or industry rankings; any
      statements regarding future economic conditions or performance; any statements
      of belief; and any statements of assumptions underlying any of the
      foregoing.*  *Such
      "forward-looking statements" are subject to risks and uncertainties set forth
      from time to time in the Company's SEC reports and are generally set forth
      below
      and particularly discussed in the Company's Form 10-KSB for the transition
      period ended June 30, 2005 and in the Company's Registration Statement on Form
      SB-2 filed on November 10, 2005.*




*Readers
      are cautioned not to place undue reliance on such forward-looking statements
      as
      they speak only of the Company's views as of the date the statement was made.
      The Company undertakes no obligation to publicly update or revise any
      forward-looking statements, whether as a result of new information, future
      events or otherwise.*




**Risk
      Factors**




**You
      should consider the following discussion of risks as well as other information
      regarding our operations. The risks and uncertainties described below are not
      the only ones. Additional risks and uncertainties not presently known to us
      or
      that we currently deem immaterial also may impair our business operations.**




·
            Our
                independent accountants have expressed uncertainty about our ability
                to
                continue as a going concern.




·
            Our
                revenues depend upon one product, our131Cs
                brachytherapy seed, which is used to treat only one type of cancer
                as of
                the date of this report, although it is approved to treat any malignant
                tissue.




·
            We
                have limited data on the clinical performance of the131Cs
                seed.




·
            We
                will need to raise additional capital to fund our operations through
                2006.




·
            The
                passage of Initiative 297, which may in the future impose restrictions
                on
                sites generating certain types of radioactive wastes in Washington,
                may
                result in the relocation of our manufacturing
                operations.




·
            We
                have limited manufacturing experience and may not be able to meet
                future
                demand without increasing our supply of the isotopes used to manufacture
                our product and also increasing our level of
                staffing.




·
            We
                have limited specific experience with the sales and marketing of
                the131Cs
                seed.




·
            Our
                quarterly operating results will be subject to significant
                fluctuations.




·
            We
                rely heavily on a limited number of
                suppliers.




·
            We
                are subject to uncertainties regarding reimbursement for use of our
                product.




·
            It
                is possible that other treatments may be deemed superior to brachytherapy
                for the treatment of cancer and if this were to occur, demand for
                our
                product would decline.




13


·
            Our
                industry is intensely competitive, and many of our competitors are
                larger
                than we are and possess greater
                resources.




·
            We
                may be unable to adequately protect or enforce our intellectual property
                rights or secure rights to third-party patents, the value of our
                granted
                patent and our patents pending is uncertain, and one of our licensed
                patents may be terminated under certain
                conditions.




·
            Failure
                to comply with government regulations, which are quite complex, could
                harm
                our business.




·
            Our
                business exposes us to product liability claims and also involves
                environmental risks.




·
            We
                rely heavily upon our executive officers and key scientific
                personnel.




·
            Our
                ability to expand into foreign markets is
                uncertain.




·
            Our
                ability to successfully commercialize our product is
                uncertain.




·
            Our
                reporting obligations as a public company are
                costly.




·
            There
                is a limited market for our common stock, and our stock price is
                likely to
                be volatile.




·
            Our
                common stock may be subject to penny stock regulation.




·
            Future
                sales by shareholders of the shares available for sale in the public
                market, or the perception that such sales may occur, may depress
                the price
                of our common stock.




**ITEM
      3.**  **CONTROLS
      AND PROCEDURES**




(a)  Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of the design and operation of our disclosure controls and
      procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
      promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
      Act"), as of December 31, 2005. Based on that evaluation, our principal
      executive officer and our principal financial officer concluded that the design
      and operation of our disclosure controls and procedures were effective in timely
      alerting them to material information required to be included in the Company's
      periodic reports filed with the SEC under the Exchange Act. The design of any
      system of controls is based in part upon certain assumptions about the
      likelihood of future events, and there can be no assurance that any design
      will
      succeed in achieving its stated goals under all potential future conditions,
      regardless of how remote.




(b)  In
      connection with the review of our consolidated financial statements for the
      period ended September 30, 2005, our independent registered public accounting
      firm advised the Board of Directors and management of certain significant
      internal control deficiencies that they considered to be, in the aggregate,
      a
      material weakness. In particular, our independent registered public accounting
      firm identified the following weaknesses in our internal control system: (1)
      a
      lack of segregation of duties and (2) a lack of formal procedures relating
      to
      all areas of financial reporting. The independent registered public accounting
      firm indicated that they considered these deficiencies to be reportable
      conditions as that term is defined under standards established by the American
      Institute of Certified Public Accountants. A material weakness is a significant
      deficiency in one or more of the internal control components that alone or
      in
      the aggregate precludes our internal controls from reducing to an appropriately
      low level of risk that material misstatements in our financial statements will
      not be prevented or detected on a timely basis. The Company considered these
      matters in connection with the period end closing of accounts and preparation
      of
      the related consolidated financial statements and determined that no prior
      period financial statements were materially affected by such matters.
      Notwithstanding the material weaknesses identified by our independent registered
      public accountants, we believe that the financial statements, and other
      financial information included in this report, fairly present in all material
      respects, the financial condition, results of operation and cash flows of the
      Company as of, and for, the periods represented in this report.




The
      size
      of the Company has prevented us from being able to employ sufficient resources
      at this time to enable us to have an adequate level of supervision and
      segregation of duties within our internal control system. Set forth below is
      a
      discussion of the significant internal control deficiencies that had not been
      remediated as of the end of the period covered by this report.




14


*Lack
      of segregation of duties* .
      Our
      size has prevented us from being able to employ sufficient resources to enable
      us to have an adequate level of segregation of duties within our internal
      control system. There are one full-time and three part-time persons involved
      in
      processing of transactions. Therefore, it is difficult to effectively segregate
      accounting duties. While we strive to segregate duties as much as practicable,
      budgetary considerations have not previously allowed the additional of full
      time
      staff. We currently are interviewing candidates for the controller position,
      but
      have not yet hired anyone. As a result, this significant internal control
      deficiency had not been remediated as of the end of the period covered by this
      report, nor do we know if we will be able to remediate this weakness during
      the
      current quarter.




*Lack
      of formal procedures relating to all areas of financial reporting including
      a
      lack of review by management* .
      Due to
      the size of our Company, and as a consequence of the lack segregation of duties,
      we do not have formal month end close procedures. As a result, there is a lack
      of timely review of the financial statements and Form 10-QSB. This significant
      internal control deficiency has not been remediated as of the end of the period
      covered by this report.




If
      we are
      unable to remediate the identified material weaknesses, there is a more than
      remote likelihood that a material misstatement to our SEC reports will not
      be
      prevented or detected, in which case investors could lose confidence in the
      accuracy and completeness of our financial reports, which could have an adverse
      effect on our ability to raise additional capital and could also have an adverse
      effect on our stock price.






**PART
      II - OTHER INFORMATION**






**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES**




In
      the
      three month period ended December 31, 2005, the Company sold 645,500 shares
      of
      common stock pursuant to the October 17, 2005 Offering, in exchange for a cash
      payment of 2,582,000 (less commissions of ten percent (10%) on securities placed
      by broker/dealers). This common stock was sold as part of a unit offering
      including one share of common stock and a callable warrant to purchase one
      share
      of common stock at $6.00 per share with a two-year term. These sales were made
      between October 20 and December 31, 2005 and were effected pursuant to the
      exemption from registration provided by Regulation D promulgated under the
      Securities Act of 1933, as amended (the “Securities Act”), and Section 4(2) of
      the Securities Act.





The
      Company also issued 10,000 shares of common stock, on November 18, 2005, to
      Intellegration LLC **** in
      exchange for $40,000 of capital production equipment, consulting services,
      and
      repair and maintenance services on production equipment used in the PIRL
      facilities pursuant
      to the exemption from registration provided by Section 4(2) of the Securities
      Act .
      Additionally, on October 6, 2005, the Company issued 24,007 shares of common
      stock to Nuvotec USA, Inc. as payment for one year’s lease of the PIRL
      facilities pursuant to the exemption from registration provided by Section
      4(2)
      of the Securities Act.





On
      December 7, 2005, the Company entered into a SICAV ONE Securities Purchase
      Agreement and a SICAV TWO Securities Purchase Agreement (collectively, the
      “Purchase Agreements”) with Mercatus & Partners, Limited, a United Kingdom
      private limited company (“Mercatus”). Pursuant to the Purchase Agreements,
      Mercatus has agreed, subject to receipt of sufficient funding, to purchase
      1,778,146 shares of the Company’s common stock at a purchase price of $3.502 per
      share. As of the date of this Report, no funding had been received by the
      Company.





Pursuant
      to the Purchase Agreements, Mercatus, a foreign entity, was issued 1,778,146
      shares of the Company’s common stock in exchange for a future cash payment of
      $6,227,067.29. If the future payment is not made then the shares will be
      returned. This sale was effected pursuant to the exemption from registration
      provided by Regulation D promulgated under the Securities Act, and Section
      4(2)
      of the Securities Act.




15




**ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K**




(a)
              Exhibits:31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of Principal Executive
                  Officer31.2
              Rule
                  13a-14(a)/15d-14(a) Certification of Principal Financial
                  Officer32.1
              Section
                  1350 Certifications(b)
              Reports
                on Form 8-K:




On
      November 3, 2005, the Company filed a Current Report on Form 8-K providing
      audited financial statements for IsoRay Medical, Inc. for the years ended June
      30, 2005 and 2004.




On
      November 3, 2005, the Company filed a Current Report on Form 8-K announcing
      the
      commencement of quotations of its common stock on the OTC Bulletin Board under
      the symbol "ISRY.OB" and IsoRay Medical, Inc.'s nomination for a FLC Award
      for
      Excellence in Technology Transfer.




On
      December 12, 2005, the Company filed a Current Report on Form 8-K announcing
      its
      entry into two securities purchase agreements with Mercatus & Partners,
      Limited.




On
      December 14, 2005, the Company filed a Current Report on Form 8-K announcing
      the
      engagement of DeCoria, Maichel &Teague, P.S. as its new independent
      auditor.




On
      December 20, 2005, the Company filed a Current Report on Form 8-K announcing
      its
      entry into an Economic Development Agreement with the Pocatello Development
      Authority.




On
      December 29, 2005, the Company filed a Current Report on Form 8-K announcing
      the
      sale of 598,000 shares of its common stock (with accompanying warrants) under
      its October 17, 2005 Private Placement Memorandum.




16




SIGNATURES





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Dated:
                February 17, 2006ISORAY,
              INC., a
              Minnesota corporationBy:
            /s/ Roger
              E.
              GirardRoger
              E. Girard, Chief Executive OfficerBy:
            /s/ Michael K. DunlopMichael
              K. Dunlop, Chief Financial
              Officer




17