UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-Q




**þ**
            **QUARTERLY****REPORT PURSUANT TO SECTION 13 OR 15(****d****)
                OF THE SECURITIES EXCHANGE ACT OF
                1934**


For
      the
      quarterly period ended September 30, 2008





or





**o**
            **TRANSITION
                REPORT****PURSUANT
                TO SECTION 13 OR 15(****d****)
                OF THE SECURITIES EXCHANGE ACT OF
                1934**


For
      the
      transition period from __________ to ____________




Commission
      File No. 001-33407




**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)





Registrant's
      telephone number, including area code: (509)
      375-1202




Indicate
      by check mark whether the registrant has (1) filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period the registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes x No  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.


Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filer ̈


Smaller
                reporting companyx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act): Yes  ̈ No x





Number
      of
      shares outstanding of each of the issuer's classes of common equity as of the
      latest practicable date:





Class
            Outstanding
                as of November 3, 2008Common
                stock, $0.001 par value
            22,942,088









**ISORAY,
      INC.**




**Table
      of Contents**




PART
                I
            FINANCIAL
                INFORMATIONItem
                1
            Consolidated
                Unaudited Financial Statements
            1Consolidated
                Balance Sheets
            1Consolidated
                Statements of Operations
            2Consolidated
                Statements of Cash Flows
            3Notes
                to Consolidated Financial Statements
            4Item
                2
            Management’s
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            10Item
                3
            Quantitative
                and Qualitative Disclosures About Market Risk
            16Item
                4T
            Controls
                and Procedures
            16PART
                II
            OTHER
                INFORMATIONItem
                1A
            Risk
                Factors
            17Item
                6
            Exhibits
            17Signatures
            
            18







**PART
      I - FINANCIAL INFORMATION**


**IsoRay,
      Inc. and Subsidiaries**


**Consolidated
      Balance Sheets**





**September 30,****2008**
            
            **June
                30,****(Unaudited)**
            
            **2008****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,775,691
            
            $
            4,820,033Short-term
                investments
            
            
            3,566,800
            
            
            3,726,000Accounts
                receivable, net of allowance for doubtful accounts of $54,588 and
                $33,031,
                respectively
            
            
            911,275
            
            
            1,016,495Inventory
            
            
            851,051
            
            
            899,964Prepaid
                expenses and other current assets
            
            
            256,783
            
            
            267,001Total
                current assets
            
            
            9,361,600
            
            
            10,729,493Fixed
                assets, net of accumulated depreciation and amortization
            
            
            5,754,259
            
            
            6,040,641Deferred
                financing costs, net of accumulated amortization
            
            
            57,595
            
            
            65,221Licenses,
                net of accumulated amortization
            
            
            443,728
            
            
            455,646Restricted
                cash
            
            
            176,539
            
            
            175,852Other
                assets, net of accumulated amortization
            
            
            350,549
            
            
            345,040Total
                assets
            
            $
            16,144,270
            
            $
            17,811,893**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            791,746
            
            $
            751,402Accrued
                payroll and related taxes
            
            
            340,132
            
            
            344,612Notes
                payable, due within one year
            
            
            66,201
            
            
            64,486Capital
                lease obligations, due within one year
            
            
            14,951
            
            
            25,560Total
                current liabilities
            
            
            1,213,030
            
            
            1,186,060Notes
                payable, due after one year
            
            
            328,452
            
            
            344,898Asset
                retirement obligation
            
            
            517,475
            
            
            506,005Total
                liabilities
            
            
            2,058,957
            
            
            2,036,963Shareholders'
                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; 59,065 shares issued and outstanding
            
            
            59
            
            
            59Common
                stock, $.001 par value; 194,000,000 shares authorized;22,942,088
                shares issued and outstanding
            
            
            22,942
            
            
            22,942Treasury
                stock, at cost, 13,200 and 5,000 shares
            
            
            (8,390
            )
            
            (3,655
            )Additional
                paid-in capital
            
            
            47,573,221
            
            
            47,464,507Accumulated
                deficit
            
            
            (33,502,519
            )
            
            (31,708,923
            )Total
                shareholders' equity
            
            
            14,085,313
            
            
            15,774,930Total
                liabilities and shareholders' equity
            
            $
            16,144,270
            
            $
            17,811,893





The
      accompanying notes are an integral part of these financial
      statements.




1




**IsoRay,
                Inc. and Subsidiaries****Consolidated
                Statements of Operations****(Unaudited)**





**Three months ended September 30,****2008**
            
            **2007**Product
                sales
            
            $
            1,519,582
            
            $
            1,855,719Cost
                of product sales
            
            
            1,448,436
            
            
            2,005,502Gross
                margin (loss)
            
            
            71,146
            
            
            (149,783
            )Operating
                expenses:Research
                and development expenses
            
            
            218,550
            
            
            256,370Sales
                and marketing expenses
            
            
            730,774
            
            
            1,059,816General
                and administrative expenses
            
            
            780,157
            
            
            902,025Total
                operating expenses
            
            
            1,729,481
            
            
            2,218,211Operating
                loss
            
            
            (1,658,335
            )
            
            (2,367,994
            )Non-operating
                income (expense):Interest
                income
            
            
            44,786
            
            
            238,696Loss
                on impairment of short-term investments
            
            
            (159,200
            )
            
            -Financing
                and interest expense
            
            
            (20,847
            )
            
            (30,103
            )Non-operating
                (expense) income, net
            
            
            (135,261
            )
            
            208,593Net
                loss
            
            $
            (1,793,596
            )
            $
            (2,159,401
            )Basic
                and diluted loss per share
            
            $
            (0.08
            )
            $
            (0.09
            )Weighted
                average shares used in computing net loss per share:Basic
                and diluted
            
            
            22,942,088
            
            
            23,001,041





The
      accompanying notes are an integral part of these financial
      statements.




2




**IsoRay,
                Inc. and Subsidiaries****Consolidated
                Statements of Cash Flows****(Unaudited)**





**Three months ended September 30,****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (1,793,596
            )
            $
            (2,159,401
            )Adjustments
                to reconcile net loss to net cash used by operating activities:Depreciation
                and amortization of fixed assets
            
            
            303,489
            
            
            206,937Amortization
                of deferred financing costs and other assets
            
            
            21,493
            
            
            68,733Amortization
                of discount on short-term investments
            
            
            -
            
            
            (67,593
            )Loss
                on impairment of short-term investments
            
            
            159,200
            
            
            -Accretion
                of asset retirement obligation
            
            
            11,470
            
            
            2,973Share-based
                compensation
            
            
            108,714
            
            
            187,607Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            105,220
            
            
            84,909Inventory
            
            
            48,913
            
            
            (32,842
            )Prepaid
                expenses and other current assets
            
            
            10,218
            
            
            (172,093
            )Accounts
                payable and accrued liabilities
            
            
            40,344
            
            
            (592,673
            )Accrued
                payroll and related taxes
            
            
            (4,480
            )
            
            168,460Deferred
                revenue
            
            
            -
            
            
            (23,874
            )Net
                cash used by operating activities
            
            
            (989,015
            )
            
            (2,328,857
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchases
                of fixed assets
            
            
            (17,107
            )
            
            (2,484,363
            )Additions
                to licenses and other assets
            
            
            (7,458
            )
            
            (51,707
            )Change
                in restricted cash
            
            
            (687
            )
            
            -Purchases
                of short-term investments
            
            
            -
            
            
            (5,947,407
            )Proceeds
                from the sale or maturity of short-term investments
            
            
            -
            
            
            6,985,410Net
                cash used by investing activities
            
            
            (25,252
            )
            
            (1,498,067
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Principal
                payments on notes payable
            
            
            (14,731
            )
            
            (13,588
            )Principal
                payments on capital lease obligations
            
            
            (10,609
            )
            
            (50,160
            )Proceeds
                from cash sales of common stock, pursuant to exercise of warrants
            
            
            -
            
            
            971,100Proceeds
                from cash sales of common stock, pursuant to exercise of options
            
            
            -
            
            
            11,900Repurchase
                of Company common stock
            
            
            (4,735
            )
            
            -Net
                cash (used) provided by financing activities
            
            
            (30,075
            )
            
            919,252Net
                decrease in cash and cash equivalents
            
            
            (1,044,342
            )
            
            (2,907,672
            )Cash
                and cash equivalents, beginning of period
            
            
            4,820,033
            
            
            9,355,730**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            $
            3,775,691
            
            $
            6,448,058Non-cash
                investing and financing activities:Increase
                in fixed assets related to asset retirement obligation
            
            $
            -
            
            $
            473,096





The
      accompanying notes are an integral part of these financial
      statements.




3




**IsoRay,
      Inc.**


**Notes
      to the Unaudited Consolidated Financial Statements**


**For
      the three-month periods ended September 30, 2008 and 2007**





**1.** **Basis
          of Presentation**





The
      accompanying consolidated financial statements are those of IsoRay, Inc., and
      its wholly-owned subsidiaries (IsoRay or the Company). All significant
      intercompany accounts and transactions have been eliminated in
      consolidation.





The
      accompanying interim consolidated financial statements have been prepared in
      conformity with U.S. generally accepted accounting principles, consistent in
      all
      material respects with those applied in the Company’s Annual Report on Form 10-K
      for the fiscal year ended June 30, 2008. The financial information is unaudited
      but reflects all adjustments, consisting only of normal recurring accruals,
      which are, in the opinion of the Company’s management, necessary for a fair
      statement of the results for the interim periods presented. Interim results
      are
      not necessarily indicative of results for a full year. The information included
      in this Form 10-Q should be read in conjunction with the Company’s Annual Report
      on Form 10-K for the fiscal year ended June 30, 2008.





Certain
      amounts in the prior-year financial statements have been reclassified to conform
      to the current year presentation.





**2.**  **Changes
      in Accounting Policies**





SFAS
      157





Effective
      July 1, 2008, the Company implemented Statement of Financial Accounting
      Standards (SFAS) No. 157, *Fair
      Value Measurements* .
      SFAS 157 defines fair value, establishes a framework for measuring fair
      value in accordance with accounting principles generally accepted in the United
      States, and expands disclosures about fair value measurements. The Company
      elected to implement this Statement with the one-year deferral permitted by
      FASB
      Staff Position (FSP) 157-2 for nonfinancial assets and nonfinancial liabilities
      measured at fair value, except those that are recognized or disclosed on a
      recurring basis. This deferral applies to fixed assets and intangible asset
      impairment testing and initial recognition of asset retirement obligations
      for
      which fair value is used. The Company does not expect any significant impact
      to
      our consolidated financial statements when we implement SFAS 157 for these
      assets and liabilities.





SFAS
      157
      requires disclosures that categorize assets and liabilities measured at fair
      value into one of three different levels depending on the observability of
      the
      inputs employed in the measurement. Level 1 inputs are quoted prices in active
      markets for identical assets or liabilities. Level 2 inputs are observable
      inputs other than quoted prices included within Level 1 for the asset or
      liability, either directly or indirectly through market-corroborated inputs.
      Level 3 inputs are unobservable inputs for the asset or liability reflecting
      significant modifications to observable related market data or our assumptions
      about pricing by market participants.





Due
      to
      the uncertainties in the credit markets, the monthly auctions for the Company’s
      short-term securities (auction rate securities or ARS) have failed since
      February 2008 and no longer have an active market. These short term securities
      are valued by our broker using various assumptions including current interest
      rates, credit ratings, the issuer’s financial health, etc. These are classified
      as Level 2.




4




The
      fair
      value hierarchy for our financial assets accounted for at fair value on a
      recurring basis at September 30, 2008 was:





Level
                1
            
            Level
                2
            
            Level
                3Short-term
                investments
            
            $
            –
            
            $
            3,566,800
            
            $
            –





SFAS
      159





Effective
      July 1, 2008, the Company adopted SFAS 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities Including
      an
      Amendment of FASB Statement No. 115* .
      The
      statement allows entities to value many financial instruments and certain other
      items at fair value. SFAS 159 provides guidance over the election of the fair
      value option, including the timing of the election and specific items eligible
      for the fair value accounting. If the fair value option is elected then
      unrealized gains and losses are reported in earnings at each subsequent
      reporting date. The Company elected not to measure any additional financial
      instruments or other items at fair value as of July 1, 2008 in accordance with
      SFAS 159. Accordingly, the adoption of SFAS 159 did not impact our consolidated
      financial statements.





**3.**  **Loss
      per Share**





The
      Company accounts for its income (loss) per common share according to SFAS No.
      128, *Earnings
      Per Share* .
      Under
      the provisions of SFAS 128, primary and fully diluted earnings per share are
      replaced with basic and diluted earnings per share. Basic earnings per share
      is
      calculated by dividing net income (loss) available to common shareholders by
      the
      weighted average number of common shares outstanding, and does not include
      the
      impact of any potentially dilutive common stock equivalents. Common stock
      equivalents, including warrants and options to purchase the Company's common
      stock, are excluded from the calculations when their effect is antidilutive.
      At
      September 30, 2008 and 2007, the calculation of diluted weighted average shares
      did not include preferred stock, common stock warrants, or options that are
      potentially convertible into common stock as those would be antidilutive due
      to
      the Company’s net loss position.





Securities
      not considered in the calculation of diluted weighted average shares, but that
      could be dilutive in the future as of September 30, 2008 and 2007 were as
      follows:





September
                30,2008
            
            2007Preferred
                stock
            
            
            59,065
            
            
            59,065Common
                stock warrants
            
            
            3,245,082
            
            
            3,350,150Common
                stock options
            
            
            2,469,376
            
            
            3,320,906Total
                potential dilutive securities
            
            
            5,773,523
            
            
            6,730,121





**4.**  **Short-Term
      Investments**





The
      Company’s short-term investments are classified as available-for-sale and
      recorded at fair market value. The Company’s short-term investments consisted
      entirely of auction rate securities (ARS) of various student loan portfolios
      as
      of September 30, 2008 and June 30, 2008.





Beginning
      in February 2008, the uncertainties in the credit markets have prevented the
      Company from liquidating these investments. The securities continue to pay
      interest according to their stated terms and are all AAA/Aaa rated investments.
      The Company has recognized the decline in the fair value of these securities
      (which has been caused by the market uncertainties) as other than temporary
      and
      has recorded the impairment loss in the statement of operations.




5




In
      August
      2008, the Company’s broker for its ARS entered into a settlement with various
      government entities (including the New York Attorney General and the Securities
      and Exchange Commission) relating to the sale and marketing of ARS. Due to
      this
      settlement the Company will receive rights that will become effective in January
      2009 which entitle the Company to sell its ARS to the Company’s broker at par
      value. The Company intends to exercise its rights during the third quarter
      of
      fiscal year 2009 which should allow the Company to liquidate these securities.
      However, the ability to exercise these rights is dependent on the broker’s
      financial resources and condition during this exercise period. Due to these
      uncertainties, the Company has continued to recognize the declines in the fair
      value of its ARS as other than temporary.





**5.**  **Inventory**





Inventory
      consisted of the following at September 30, 2008 and June 30, 2008:





September
                30,
            
            June
                30,2008
            
            2008Raw
                materials
            
            $
            687,147
            
            $
            696,958Work
                in process
            
            
            150,869
            
            
            191,684Finished
                goods
            
            
            13,035
            
            
            11,322$
            851,051
            
            $
            899,964





**6.**  **Share-Based
      Compensation**





The
      following table presents the share-based compensation expense recognized during
      the three months ended September 30, 2008 and 2007:




Three****months****ended****September****30,2008
            
            2007Cost
                of product sales
            
            $
            9,130
            
            $
            37,003Research
                and development
            
            
            9,921
            
            
            11,550Sales
                and marketing expenses
            
            
            58,692
            
            
            59,557General
                and administrative expenses
            
            
            30,971
            
            
            79,497Total
                share-based compensation
            
            $
            108,714
            
            $
            187,607





As
      of
      September 30, 2008, total unrecognized compensation expense related to
      stock-based options was $403,209 and the related weighted-average period over
      which it is expected to be recognized is approximately 0.70 years.





The
      Company currently provides stock-based compensation under three equity incentive
      plans approved by the Board of Directors. Options granted under each of the
      plans have a ten year maximum term, an exercise price equal to at least the
      fair
      market value of the Company’s common stock on the date of the grant, and varying
      vesting periods as determined by the Board. For stock options with graded
      vesting terms, the Company recognizes compensation cost on a straight-line
      basis
      over the requisite service period for the entire award.




6




A
      summary
      of stock options within the Company’s share-based compensation plans as of
      September 30, 2008 were as follows:





WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateNumber
                of
            
            Exercise
            
            Contractual
            
            IntrinsicOptions
            
            Price
            
            Term
            
            ValueOutstanding
                at September 30, 2008
            
            
            2,469,376
            
            $
            2.69
            
            
            7.5
            
            $
            0.00Vested
                and expected to vest atSeptember
                30, 2008
            
            
            2,447,722
            
            $
            2.68
            
            
            7.5
            
            $
            0.00Vested
                and exercisable atSeptember
                30, 2008
            
            
            2,141,002
            
            $
            2.55
            
            
            7.4
            
            $
            0.00





The
      aggregate intrinsic value of options exercised during the three months ended
      September 30, 2008 and 2007 was $0 and $25,300, respectively. The Company’s
      current policy is to issue new shares to satisfy option exercises.





The
      weighted average fair value of stock option awards granted and the key
      assumptions used in the Black-Scholes valuation model to calculate the fair
      value are as follows:





Three****months****ended****September****30,2008(a)
            
            2007
                (b)Weighted
                average fair value of options granted
            
            $
            0.51
            
            $
            –Key
                assumptions used in determining fair value:Weighted
                average risk-free interest rate
            
            
            3.34
            %
            
            –
            %Weighted
                average life of the option (in years)
            
            
            5.33
            
            
            –Weighted
                average historical stock price volatility
            
            
            122.28
            %
            
            –
            %Expected
                dividend yield
            
            
            0.00
            %
            
            –
            %





(a)  During
      the quarter ended September 30, 2008, the Company granted 45,000 stock
      options.


(b)  During
      the quarter ended September 30, 2007, the Company did not grant any stock
      options.





The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions, including the expected stock price volatility. Although
      the Company is using the Black-Scholes option valuation model, management
      believes that because changes in the subjective input assumptions can materially
      affect the fair value estimate, this valuation model does not necessarily
      provide a reliable single measure of the fair value of its stock options. The
      risk-free interest rate is based on the U.S. treasury security rate in effect
      as
      of the date of grant. The expected option lives, volatility, and forfeiture
      assumptions are based on historical data of the Company.





**7.**  **Extension
      of Warrants**





On
      August
      20, 2008, the Board of Directors extended the expiration dates of warrants
      issued pursuant to the Company’s private placement memorandums dated October 17,
      2005 and February 1, 2006 for an additional one-year period. These warrants
      originally began expiring in October 2007 but were retroactively extended for
      a
      one-year term on January 8, 2008 and extended again on August 20, 2008. Based
      on
      this additional extension, the warrants will now expire between October 2009
      and
      February 2010. No other terms or conditions of the warrants were changed. The
      change in expiration dates affected outstanding warrants to purchase 2,102,142
      shares of common stock. Of these outstanding warrants there were warrants to
      purchase 12,500 shares held by the Chairman and Interim CEO of the
      Company.




7




The
      change in expiration date was a modification of the original warrant based
      on
      market conditions and was accounted for as a financing transaction similar
      to an
      extension of time in the offering of shares in a stock sale. Therefore there
      was
      no effect on the statement of operations as the Company had previously
      determined that under SFAS 133 and EITF 00-19 these warrants were equity
      instruments rather than derivatives.





**8.**  **Commitments
      and Contingencies**





Patent
      and Know-How Royalty License Agreement





The
      Company is the holder of an exclusive license to use certain “know-how”
developed by one of the founders of a predecessor to the Company and licensed
      to
      the Company by the Lawrence Family Trust, a Company shareholder. The terms
      of
      this license agreement require the payment of a royalty based on the Net Factory
      Sales Price, as defined in the agreement, of licensed product sales. Because
      the
      licensor’s patent application was ultimately abandoned, only a 1% “know-how”
royalty based on Net Factory Sales Price, as defined in the agreement, remains
      applicable. To date, management believes that there have been no product sales
      incorporating the “know-how” and therefore no royalty is due pursuant to the
      terms of the agreement. Management believes that ultimately no royalties should
      be paid under this agreement as there is no intent to use this “know-how” in the
      future.





The
      licensor of the “know-how” has disputed management’s contention that it is not
      using this “know-how”. On September 25, 2007 and again on October 31, 2007, the
      Company participated in nonbinding mediation regarding this matter; however,
      no
      settlement was reached with the Lawrence Family Trust. After additional
      settlement discussions, which ended in April 2008, the parties failed to reach
      a
      settlement. The parties may demand binding arbitration at any time.





License
      Agreement with IBt





In
      February 2006, the Company signed a license agreement with International
      Brachytherapy SA (IBt), a Belgian company, covering North America and providing
      the Company with access to IBt’s Ink Jet production process and its proprietary
      polymer seed technology for use in brachytherapy procedures using Cs-131. Under
      the original agreement royalty payments were to be paid on net sales revenue
      incorporating the technology.





On
      October 12, 2007, the Company entered into Amendment No. 1 (the Amendment)
      to
      its License Agreement dated February 2, 2006 with IBt. The Company paid license
      fees of $275,000 (under the original agreement) and $225,000 (under the
      Amendment) during fiscal years 2006 and 2008, respectively. The Amendment
      eliminates the previously required royalty payments based on net sales revenue,
      and the parties intend to negotiate terms for future payments by the Company
      for
      polymer seed components to be purchased at IBt's cost plus a to-be-determined
      profit percentage. No agreement has been reached on these terms and there is
      no
      assurance that the parties will consummate an agreement pursuant to such
      terms.




8




**9.**  **New
      Accounting Pronouncements**





In
      December 2007, FASB issued SFAS No. 141(R), *Business
      Combinations* (SFAS 141R), which replaces SFAS No. 141, *Business
      Combinations* (SFAS 141).
      SFAS 141R applies to all transactions and other events in which one entity
      obtains control over one or more other businesses. The standard requires the
      fair value of the purchase price, including the issuance of equity securities,
      to be determined on the acquisition date. SFAS 141R requires an acquirer to
      recognize the assets acquired, the liabilities assumed, and any noncontrolling
      interests in the acquiree at the acquisition date, measured at their fair values
      as of that date, with limited exceptions specified in the statement.
      SFAS 141R requires acquisition costs to be expensed as incurred and
      restructuring costs to be expensed in periods after the acquisition date.
      Earn-outs and other forms of contingent consideration are to be recorded at
      fair
      value on the acquisition date. Changes in accounting for deferred tax asset
      valuation allowances and acquired income tax uncertainties after the measurement
      period will be recognized in earnings rather than as an adjustment to the cost
      of the acquisition. SFAS 141R generally applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008 with
      early adoption prohibited.





In
      December 2007, the FASB issued statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements - an amendment of ARB No.
      51* .
      The
      statement requires noncontrolling interests or minority interests to be treated
      as a separate component of equity, not as a liability or other item outside
      of
      permanent equity. Upon a loss of control, the interest sold, as well as any
      interest retained, is required to be measured at fair value, with any gain
      or
      loss recognized in earnings. Based on SFAS 160, assets and liabilities will
      not
      change for subsequent purchase of sales transactions with noncontrolling
      interests as long as control is maintained. Differences between the fair value
      of consideration paid or received and the carrying value of noncontrolling
      interests are to be recognized as an adjustment to the parent interest’s equity.
      SFAS 160 is effective for fiscal years beginning on or after December 15, 2008
      and earlier adoption is prohibited. The Company is currently evaluating the
      impact that the implementation of SFAS 160 will have with respect to the
      Company’s interest in UralDial, LLC.





In
      March 2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      No. 133* .
      SFAS
      161 requires disclosures of the fair value of derivative instruments and their
      gains and losses in a tabular format, provides for enhanced disclosure of an
      entity’s liquidity by requiring disclosure of derivative features that are
      credit-risk related, and requires cross-referencing within footnotes to enable
      financial statement users to locate information about derivative instruments.
      This statement is effective for fiscal years and interim periods beginning
      after
      November 15, 2008. The Company does not believe the adoption of SFAS 161 will
      have a material effect on its consolidated financial statements.




9




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





***Caution
      Regarding Forward-Looking Information***





*In
      addition to historical information, this Form 10-Q contains certain
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995 (“PSLRA”). This statement is included for the
      express purpose of availing IsoRay, Inc. of the protections of the safe harbor
      provisions of the PSLRA.*





*All
      statements contained in this Form 10-Q, other than statements of historical
      facts, that address future activities, events or developments are
      forward-looking statements, including, but not limited to, statements containing
      the words "believe," "expect," "anticipate," "intends," "estimate," "forecast,"
      "project," and similar expressions . 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. These statements are based
      on
      certain assumptions and analyses made by us in light of our experience and
      our
      assessment of historical trends, current conditions and expected future
      developments as well as other factors we believe are appropriate under the
      circumstances. However, whether actual results will conform to the expectations
      and predictions of management is subject to a number of risks and uncertainties
      described under “Risk Factors” beginning on page 17 below and in the “Risk
      Factors” section of our Form 10-K for the fiscal year ended June 30, 2008 that
      may cause actual results to differ materially.*





*Consequently,
      all of the forward-looking statements made in this Form 10-Q are qualified
      by
      these cautionary statements and there can be no assurance that the actual
      results anticipated by management will be realized or, even if substantially
      realized, that they will have the expected consequences to or effects on our
      business operations. 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.*





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of the Company’s financial condition and results of
      operations are based upon its consolidated financial statements, which have
      been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      management to make estimates and judgments that affect the reported amounts
      of
      assets, liabilities, revenues and expenses, and related disclosure of contingent
      liabilities. On an on-going basis, management evaluates past judgments and
      estimates, including those related to bad debts, inventories, accrued
      liabilities, and contingencies. Management bases its estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions. The accounting policies
      and
      related risks described in the Company’s annual report on Form 10-K as filed
      with the Securities and Exchange Commission on September 29, 2008 are those
      that
      depend most heavily on these judgments and estimates. As of September 30,
      2008, there have been no material changes to any of the critical accounting
      policies contained therein, except for the adoption of SFAS 157 and 159 as
      noted
      below.




10




**Fair
      Value Measurements**





Effective
      July 1, 2008, the Company adopted statement No. 157, *Fair
      Value Measurements* (SFAS 157), which was issued by the FASB in September 2006. SFAS 157
      defines fair value, establishes a framework for measuring fair value in
      accordance with accounting principles generally accepted in the United States,
      and expands disclosures about fair value measurements. Any amounts recognized
      upon adoption as a cumulative effect adjustment will be recorded to the opening
      balance of retained earnings in the year of adoption.





**Fair
      Value Option for Financial Assets and Financial
      Liabilities**





Effective
      July 1, 2008, the Company adopted statement No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities Including
      an
      Amendment of FASB Statement No. 115* (SFAS
      159), which was issued by the FASB in February 2007. The statement allows
      entities to value financial instruments and certain other items at fair value.
      The statement provides guidance over the election of the fair value option,
      including the timing of the election and specific items eligible for the fair
      value accounting. Changes in fair values would be recorded in earnings. The
      Company elected not to measure any additional financial instruments or other
      items at fair value as of July 1, 2008 in accordance with SFAS 159. Accordingly,
      the adoption of SFAS 159 did not impact our consolidated financial
      statements.





**Results
      of Operations**




**Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007**





**Revenues.** The
      Company generated revenue of $1,519,582 during the three months ended September
      30, 2008 compared to sales of $1,855,719 during the three months ended September
      30, 2007. The decrease of $336,137 or 18% is due to decreased sales of the
      Company’s Proxcelan Cs-131 brachytherapy seed. During the three months ended
      September 30, 2008, the Company sold its Proxcelan seeds to 47 different medical
      centers as compared to 49 medical centers during the corresponding period of
      2007. The Company noted that the doctors at its major accounts took more
      vacations during the three months ended September 30, 2008 than during the
      three
      months ended September 30, 2007 which resulted in decreased orders. Also, the
      Company’s sales force had significant turnover during the three months ended
      September 30, 2008. The Company did hire replacements for the sales force but
      the replacements did not start until the end of August and then participated
      in
      training which reduced their time in the field during the three months ended
      September 30, 2008.  Also, the Company has noted increased competition from
      differing treatment modalities including IMRT which it believes has negatively
      affected revenues.





**Cost
      of product sales.** Cost of
      product sales was $1,448,436 for the three months ended September 30, 2008
      compared to cost of product sales of $2,005,502 during the three months ended
      September 30, 2007. The decrease of $557,066 or 28% was mainly due to more
      efficient production operations as the Company has worked to streamline its
      manufacturing process during the past six months. The major components of the
      decrease were materials, wages, benefits and related taxes, preload expenses,
      and small tools expense. Material costs decreased approximately $275,000 due
      to
      the decreased sales volume, more efficient use of isotope, and a decrease in
      the
      overall cost of isotope. Part of the materials cost decrease is also due to
      an
      additional $38,000 of isotope that was ordered in September 2007 to ensure
      that
      no orders were missed during the transition from the Company’s old production
      facility to the new facility. Wages, benefits, and related taxes decreased
      approximately $167,000 and are directly attributable to a reduced headcount
      as
      the Company has worked to more efficiently manage its manufacturing staff.
      Preload expenses decreased approximately $107,000 due to decreased sales volumes
      and more in-house loading. Small tools expense decreased approximately $69,000
      as the prior year quarter contained items that were expensed as part of
      equipping the new facility that became operational in September 2007. These
      increases were partially offset by an increase in depreciation of approximately
      $87,000 as a result of moving operations into a new production facility and
      purchasing new equipment.




11




**Gross
      margin (loss).** Gross
      margin was $71,146 for the three month period ended September 30, 2008 compared
      to a gross loss of $149,783 for the three month period ended September 30,
      2007.
      The increase of $220,929 or 147% was due to reductions in production costs
      and a
      more efficient use of manufacturing resources despite the decrease in
      revenues.





**Research
      and development.** Research
      and development expenses for the three month period ended September 30, 2008
      were $218,550 which represents a decrease of $37,820 or 15% over the research
      and development expenses of $256,370 for the corresponding period of 2007.
      The
      decrease is mainly due to a decrease in consulting and payroll, benefits and
      related taxes. Consulting decreased approximately $40,000 as the Company’s
      project to increase the efficiency of isotope production had lower spending
      as
      the consultant prepared for a demonstration. Payroll, benefits and related
      taxes
      decreased approximately $41,000 due to a lower headcount. These decreases were
      partially offset by an increase in protocol expenses of approximately $51,000
      related to the Company’s dual therapy protocol and data collection for other
      protocols.





**Sales
      and marketing expenses.** Sales
      and
      marketing expenses were $730,774 for the three months ended September 30, 2008.
      This represents a decrease of $329,042 or 31% compared to expenditures in the
      three months ended September 30, 2007 of $1,059,816 for sales and marketing.
      The
      decrease is mainly due to wages, benefits and related taxes and marketing and
      advertising. Wages, benefits and related taxes decreased approximately $241,000
      due to a lower headcount and lower base salaries for sales people due to a
      new
      compensation plan that was originally introduced in April 2008 and subsequently
      changed in October 2008. Marketing and advertising expenses decreased
      approximately $99,000 as during the prior year the Company updated its marketing
      literature to incorporate new data published from the protocols, developed
      additional websites for patients and doctors, and updated its sales
      booth.





**General
      and administrative expenses.** General
      and administrative expenses for the three months ended September 30, 2008 were
      $780,157 compared to general and administrative expenses of $902,025 for the
      corresponding period of 2007. The decrease of $121,868 or 14% is primarily
      due
      to decreases in wages, benefits and related taxes, public company expenses,
      and
      share-based compensation partially offset by an increase in consulting expenses.
      Wages, benefits and related taxes decreased approximately $66,000 mainly due
      to
      the resignation of the Company’s CEO in February 2008. Public company expenses
      decreased approximately $54,000 due to reduced investor relations activities
      partially offset by higher board compensation. Share-based compensation
      decreased approximately $49,000 due to reduced option awards and due to the
      forfeiture of unvested options by the Company’s former CEO. Consulting expenses
      increased approximately $47,000 due to the Company’s ISO 13458 audit that was
      conducted in July 2008 and compensation paid to the Company’s interim
      CEO.





**Operating
      loss.** The
      Company continues to focus its resources on sales and retaining the
      administrative infrastructure to increase the level of demand for the Company’s
      product. These objectives and resulting costs have resulted in the Company
      not
      being profitable and generating operating losses since its inception. In the
      three months ended September 30, 2008, the Company had an operating loss of
      $1,658,335 which is a decrease of $709,659 or 30% over the operating loss of
      $2,367,994 for the three months ended September 30, 2007. The three months
      ended
      September 30, 2008 were negatively impacted by vacations taken by some of the
      Company’s larger accounts and by turnover in our sales force as discussed
      above.





12




**Interest
      income.** Interest
      income was $44,786 for the three months ended September 30, 2008. This
      represents a decrease of $193,910 or 81% compared to interest income of $238,696
      for the three months ended September 30, 2007. The decrease is due to the
      Company’s lower short-term investment balances and lower interest rates during
      the quarter ended September 30, 2008 as compared to the quarter ended September
      30, 2007. Interest income is mainly derived from excess funds held in money
      market accounts and invested in short-term investments.





**Loss
      on short-term investments.** The loss
      of $159,200 for the quarter ended September 30, 2008 is due to uncertainties
      in
      the credit markets that have affected the liquidity of the Company’s auction
      rate securities. The loss represents the amount to write-down these securities
      to their estimated fair market value. The Company’s broker has entered into a
      settlement agreement that will grant the Company rights to redeem its auction
      rate securities at par value beginning in January 2009 and the Company intends
      to exercise these rights once they become effective. However, it cannot be
      certain that the broker’s financial resources and condition will allow it to
      honor these rights. Therefore, the Company has recognized these losses as other
      than temporary and recorded them in the statement of operations rather than
      in
      other comprehensive income.





**Financing
      and interest expense.** Financing and interest expense for the three months ended September 30, 2008
      was
      $20,847 or a decrease of $9,256 or 31% from financing and interest expense
      of
      $30,103 for the corresponding period in 2007. Interest expense was approximately
      $13,000 and $22,000 for the three months ended September 30, 2008 and 2007,
      respectively. The remaining balance of financing and interest expense represents
      the amortization of deferred financing costs.





**Liquidity
      and capital resources** .
      The
      Company has historically financed its operations through cash investments from
      shareholders. During the quarter ended September 30, 2008, the Company primarily
      used existing cash reserves to fund its operations and capital
      expenditures.





*Cash
      flows from operating activities*





Cash
      used
      in operating activities was approximately $1.0 million for the three months
      ended September 30, 2008 compared to approximately $2.3 million for the three
      months ended September 30, 2007. Cash used by operating activities is net loss
      adjusted for non-cash items and changes in operating assets and
      liabilities.





*Cash
      flows from investing activities*





Cash
      used
      in investing activities was approximately $25,000 and $1.5 million for the
      three
      months ended September 30, 2008 and 2007, respectively. Cash expenditures for
      fixed assets were approximately $17,000 and $2.5 million during the three months
      ended September 30, 2008 and 2007, respectively. The expenditures for fixed
      assets during the three months ended September 30, 2007 were related to the
      construction of the Company’s new production facility.




13




*Cash
      flows from financing activities*





Cash
      used
      in financing activities was approximately $30,000 for the quarter ended
      September 30, 2008 and was used mainly for payments of debt and capital leases.





*Projected
      2008 Liquidity and Capital Resources*





At
      September 30, 2008, cash and cash equivalents amounted to $3,775,691 and
      short-term investments amounted to $3,566,800 compared to $4,820,033 of cash
      and
      cash equivalents and $3,726,000 of short-term investments at June 30,
      2008.





The
      Company had approximately $3.4 million of cash and cash equivalents and $3.6
      million of short-term investments as of November 7, 2008. As of that date
      management believed that the Company’s monthly required cash operating
      expenditures were approximately $400,000 excluding capital expenditure
      requirements.





Assuming
      operating costs expand proportionately with revenue increases, other
      applications are pursued for seed usage outside the prostate market, protocols
      are expanded supporting the integrity of the Company’s product and sales and
      marketing expenses continue to increase, management believes the Company will
      reach breakeven with revenues of approximately $1.5 million per month.
      Management’s plans to attain breakeven and generate additional cash flows
      include increasing revenues from both new and existing customers and maintaining
      cost control. However, there can be no assurance that the Company will attain
      profitability or that the Company will be able to attain its aggressive revenue
      targets. If the Company does not experience the necessary increases in sales
      or
      if it experiences unforeseen manufacturing constraints, the Company may need
      to
      obtain additional funding.





The
      Company had revised its sales force compensation in April 2008 with a minor
      revision again in July 2008. The April and July 2008 revisions were done to
      deemphasize base salaries and increase commissions in the hope of reinvigorating
      the sales force and increasing sales. In October 2008, the Company further
      revised its sales force compensation by increasing base salaries up to a level
      commensurate with others in the industry. Management has proactively discussed
      these changes with its sales force to ensure that its base salary is now viewed
      as competitive but that its commission structure continues to provide the
      incentives necessary to reward good performance. Based on these discussions,
      the
      sales force appears motivated by this new compensation plan and management
      anticipates having lower turnover while preserving motivation in the sales
      team.  The Company had a moderate increase in sales from September 2008 to
      October 2008 and management will continue to monitor the sales force to further
      implement the new compensation structure.





The
      Company expects to finance its future cash needs through the sale of equity
      securities and possibly strategic collaborations or debt financing or through
      other sources that may be dilutive to existing shareholders. If the Company
      needs to raise additional money to fund its operations, funding may not be
      available to it on acceptable terms, or at all. If the Company is unable to
      raise additional funds when needed, it may not be able to market its products
      as
      planned or continue development and regulatory approval of its future products.
      If the Company raises additional funds through equity sales, these sales may
      be
      dilutive to existing investors.





*Long-Term
      Debt and Capital Lease Agreements*





IsoRay
      has two loan facilities in place as of September 30, 2008. The first loan is
      from the Benton-Franklin Economic Development District (BFEDD) 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
      September 30, 2008, the principal balance owed was $140,413. This loan is
      secured by certain equipment, materials and inventory of the Company, and also
      required personal guarantees, for which the guarantors were issued approximately
      70,455 shares of common stock. The second loan is from the Hanford Area Economic
      Investment Fund Committee (HAEIFC) and was originated in June 2006. The loan
      originally had a total facility of $1,400,000 which was reduced in September
      2007 to the amount of the Company’s initial draw of $418,670. The loan bears
      interest at nine percent and the principal balance owed as of September 30,
      2008
      was $254,240. This loan is secured by receivables, equipment, materials and
      inventory, and certain life insurance policies and also required personal
      guarantees.




14




The
      Company has a capital lease for production equipment that expires in April
      2009.
      The lease currently calls for total monthly payments of $2,286. The total of
      all
      capital lease obligations at September 30, 2008 was $14,951.





*Other
      Commitments and Contingencies*





In
      February 2006, the Company signed a license agreement with International
      Brachytherapy SA (IBt), a Belgian company, covering North America and providing
      the Company with access to IBt’s Ink Jet production process and its proprietary
      polymer seed technology for use in brachytherapy procedures using Cs-131. Under
      the original agreement royalty payments were to be paid on net sales revenue
      incorporating the technology.





On
      October 12, 2007, the Company entered into Amendment No. 1 (the Amendment)
      to
      its License Agreement dated February 2, 2006 with IBt. The Company paid license
      fees of $275,000 (under the original agreement) and $225,000 (under the
      Amendment) during fiscal years 2006 and 2008, respectively. The Amendment
      eliminates the previously required royalty payments based on net sales revenue,
      and the parties intend to negotiate terms for future payments by the Company
      for
      polymer seed components to be purchased at IBt's cost plus a to-be-determined
      profit percentage. No agreement has been reached on these terms and there is
      no
      assurance that the parties will consummate an agreement pursuant to such
      terms.





In
      November 2008, a subsidiary of the Company entered into a written contract
      with
      a contractor based in the Ukraine to formalize a research and development
      project originally begun over two years ago to develop a proprietary separation
      process to manufacture enriched barium. There is no assurance that this process
      can be developed. The contract calls for an initial payment of $17,800 and
      a
      payment of $56,610 upon completion of a successful demonstration scheduled
      for
      January 2009. The Company’s demonstration was originally planned for October
      2008 but was postponed until January 2009 due to technical difficulties
      encountered by the contractor.





The
      Company is subject to various local, state, and federal environmental
      regulations and laws due to the isotopes used to produce the Company’s product.
      As part of normal operations, amounts are expended to ensure that the Company
      is
      in compliance with these laws and regulations. While there have been no
      reportable incidents or compliance issues, the Company believes that if it
      relocates its current production facilities then certain decommissioning
      expenses will be incurred. An asset retirement obligation was established in
      the
      first quarter of fiscal year 2008 for the Company’s obligations at its current
      production facility. This asset retirement obligation will be for obligations
      to
      remove any residual radioactive materials and to remove all leasehold
      improvements.





The
      industry that the Company operates in is subject to product liability
      litigation. Through its production and quality assurance procedures, the Company
      works to mitigate the risk of any lawsuits concerning its product. The Company
      also carries product liability insurance to help protect it from this
      risk.




15




The
      Company has no off-balance sheet arrangements.





**New
      Accounting Standards**





In
      December 2007, FASB issued SFAS No. 141(R), *Business
      Combinations* (“SFAS 141R”), which replaces SFAS No. 141, *Business
      Combinations* (“SFAS 141”).
      SFAS 141R applies to all transactions and other events in which one entity
      obtains control over one or more other businesses. The standard requires the
      fair value of the purchase price, including the issuance of equity securities,
      to be determined on the acquisition date. SFAS 141R requires an acquirer to
      recognize the assets acquired, the liabilities assumed, and any noncontrolling
      interests in the acquiree at the acquisition date, measured at their fair values
      as of that date, with limited exceptions specified in the statement.
      SFAS 141R requires acquisition costs to be expensed as incurred and
      restructuring costs to be expensed in periods after the acquisition date.
      Earn-outs and other forms of contingent consideration are to be recorded at
      fair
      value on the acquisition date. Changes in accounting for deferred tax asset
      valuation allowances and acquired income tax uncertainties after the measurement
      period will be recognized in earnings rather than as an adjustment to the cost
      of the acquisition. SFAS 141R generally applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008 with
      early adoption prohibited.





In
      December 2007, the FASB issued statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements - an amendment of ARB No.
      51* (SFAS
      160). The statement requires noncontrolling interests or minority interests
      to
      be treated as a separate component of equity, not as a liability or other item
      outside of permanent equity. Upon a loss of control, the interest sold, as
      well
      as any interest retained, is required to be measured at fair value, with any
      gain or loss recognized in earnings. Based on SFAS 160, assets and liabilities
      will not change for subsequent purchase of sales transactions with
      noncontrolling interests as long as control is maintained. Differences between
      the fair value of consideration paid or received and the carrying value of
      noncontrolling interests are to be recognized as an adjustment to the parent
      interest’s equity. SFAS 160 is effective for fiscal years beginning on or after
      December 15, 2008 and earlier adoption is prohibited. The Company is currently
      evaluating the impact that the implementation of SFAS 160 will have with respect
      to the Company’s interest in UralDial, LLC.





In
      March 2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      No. 133* .
      This
      Statement expands the annual and interim disclosure requirements of SFAS
      No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      for
      derivative instruments within the scope of that Statement. The Company does
      not
      believe the adoption of SFAS No. 161 will have a material effect on its
      consolidated financial statements.





**ITEM
      3 – QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





As
      a
      smaller reporting company, the Company is not required to provide Part I, Item
      3
      disclosure in this Quarterly Report.





**ITEM
      4T – CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





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 September 30, 2008. 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. However, management believes that our system of
      disclosure controls and procedures is designed to provide a reasonable level
      of
      assurance that the objectives of the system will be met.





16




**Changes
      in Internal Control over Financial Reporting**





There
      have not been any changes in our internal control over financial reporting
      (as
      such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
      during the most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**PART
      II - OTHER INFORMATION**





**ITEM
      1A - RISK FACTORS**





There
      have been no material changes for the risk factors disclosed in the “Risk
      Factors” section of our Annual Report on Form 10-K for the year ended June 30,
      2008 other than as follows:





*Liquidation
      of Auction Rate Securities.* Although
      the broker which sold the Company auction rate securities has granted the
      Company the right to liquidate them during the fiscal third quarter ending
      March
      31, 2009, this liquidation right is not secured by any assets of the broker.
      This liquidation right has been granted to many other companies which hold
      auction rate securities as well. There is no assurance funds will be available
      to pay the Company when liquidation occurs or the amount of proceeds which
      will
      ultimately be available.





**ITEM
      6. EXHIBITS**




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
            Section
                1350 Certifications




17




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:
                November 13, 2008




ISORAY,
                INC., a Minnesota corporationBy
            /s/ Dwight
                BabcockDwight
                Babcock, Interim Chief Executive
                Officer





By
            /s/ Jonathan
                R. HuntJonathan
                R. Hunt, Chief Financial Officer




18