UNITEDSTATES
        SECURITIESAND
        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 March 31, 2006




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)
                375-1202The
                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 May 17, 2006Common
                stock, $0.001 par value
            14,722,686The
                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
                Conditionand
                Results of Operations
            
            
            9Item
                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










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





**Item
      1.**   **Financial
      Statements**




**IsoRay,
        Inc. and Subsidiary**
 **Consolidated
        Balance Sheets**




**(Unaudited)****March
                    31,****2006**
              
              **June
                  30, 2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,472,218
              
              $
              1,653,144Accounts
                  receivable, net
              
              
              593,310
              
              
              49,969Inventory
              
              
              311,340
              
              
              81,926Prepaid
                  expenses
              
              
              174,999
              
              
              181,266Total
                  current assets
              
              
              3,551,867
              
              
              1,966,305Fixed
                  assets, net of accumulated depreciation and amortization
              
              
              1,575,040
              
              
              842,323Other
                  assets, net of accumulated amortization
              
              
              960,936
              
              
              793,756Total
                  assets
              
              $
              6,087,843
              
              $
              3,602,384**LIABILITIES
                  AND SHAREHOLDERS' EQUITY (DEFICIT)**Current
                  liabilities:Accounts
                  payable
              
              $
              392,383
              
              $
              695,588Accrued
                  payroll and related taxes
              
              
              286,692
              
              
              157,924Accrued
                  interest payable
              
              
              -
              
              
              41,325Notes
                  payable, due within one year
              
              
              44,992
              
              
              43,116Capital
                  lease obligations, due within one year
              
              
              181,185
              
              
              9,604Total
                  current liabilities
              
              
              905,252
              
              
              947,557Notes
                  payable, due after one year
              
              
              275,333
              
              
              562,224Capital
                  lease obligations, due after one year
              
              
              240,257
              
              
              19,584Convertible
                  debentures payable, due after one year
              
              
              455,000
              
              
              3,587,875Total
                  liabilities
              
              
              1,875,842
              
              
              5,117,240Shareholders'
                  equity (deficit):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; 181,248 and 1,588,589 shares
                  issuedand
                  outstanding
              
              
              181
              
              
              1,589Common
                  stock, $.001 par value; 194,000,000 shares authorized;
                  14,716,653and
                  7,317,073 shares issued and outstanding
              
              
              14,716
              
              
              7,317Subscriptions
                  receivable
              
              
              (6,227,067
              )
              
              -Additional
                  paid-in capital
              
              
              21,351,085
              
              
              3,804,369Accumulated
                  deficit
              
              
              (10,926,914
              )
              
              (5,328,131
              )Total
                  shareholders' equity (deficit)
              
              
              4,212,001
              
              
              (1,514,856
              )Total
                  liabilities and shareholders' equity (deficit)
              
              $
              6,087,843
              
              $
              3,602,384




1


**IsoRay,
      Inc. and Subsidiary**


**Consolidated
      Statements of Operations**


**Three
      and Nine Months Ended March 31, 2006 and 2005
      (Unaudited)**


**For
                the three months ended**
            
            **For
                the nine months ended****March
                31,**
            
            **March
                31,**
            
            **March
                31,**
            
            **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Product
                sales
            
            $
            479,225
            
            $
            50,565
            
            $
            1,176,387
            
            $
            74,735Cost
                of product sales
            
            
            791,457
            
            
            571,872
            
            
            2,427,897
            
            
            958,923Gross
                profit (loss)
            
            
            (312,232
            )
            
            (521,307
            )
            
            (1,251,510
            )
            
            (884,188
            )Operating
                expenses:Research
                and development
            
            
            86,194
            
            
            30,030
            
            
            208,813
            
            
            58,061Sales
                and marketing expenses
            
            
            325,858
            
            
            25,220
            
            
            981,429
            
            
            420,762General
                and administrative expenses
            
            
            738,494
            
            
            41,924
            
            
            2,374,887
            
            
            806,042Total
                operating expenses
            
            
            1,150,546
            
            
            97,174
            
            
            3,565,129
            
            
            1,284,865Operating
                loss
            
            
            (1,462,778
            )
            
            (618,481
            )
            
            (4,816,639
            )
            
            (2,169,053
            )Non-operating
                income (expense):Interest
                income
            
            
            25,472
            
            
            234
            
            
            35,624
            
            
            529Financing
                expense
            
            
            (81,149
            )
            
            (37,496
            )
            
            (432,257
            )
            
            (58,285
            )Loss
                on disposal of fixed assets
            
            
            -
            
            
            (68,571
            )
            
            -
            
            
            (120,890
            )Debt
                conversion expense
            
            
            (141,414
            )
            
            -
            
            
            (385,511
            )
            
            -Non-operating
                income (expense), net
            
            
            (197,091
            )
            
            (105,833
            )
            
            (782,144
            )
            
            (178,646
            )Net
                loss
            
            $
            (1,659,869
            )
            $
            (724,314
            )
            $
            (5,598,783
            )
            $
            (2,347,699
            )Basic
                net loss per weighted-average share of common stock
            
            $
            (0.11
            )
            $
            (0.10
            )
            $
            (0.49
            )
            $
            (0.36
            )Basic
                weighted average shares outstanding
            
            
            14,567,672
            
            
            7,193,735
            
            
            11,502,400
            
            
            6,509,762




2


**IsoRay,
      Inc. and Subsidiary**


**Consolidated
      Statements of Cash Flows**  **Nine
      Months Ended March 31, 2006 and 2005 (Unaudited)**


**For
                  the nine months ended****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  loss
              
              $
              (5,598,783
              )
              $
              (2,347,699
              )Adjustments
                  to reconcile net loss to net cash used by operating
                  activities:activities:Depreciation
                  and amortization of fixed assets
              
              
              174,751
              
              
              98,824Amortization
                  of deferred financing costs and other assets
              
              
              185,634
              
              
              -Loss
                  on disposal of fixed assets
              
              
              -
              
              
              120,890Compensation
                  recorded in connection with issuance of common stock
              
              
              355,000
              
              
              -Rent
                  expense paid by issuance of common stock
              
              
              60,018
              
              
              -Repair
                  and maintenance expense paid by issuance of common stock
              
              
              14,752
              
              
              -Debt
                  conversion expense
              
              
              385,511
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (543,341
              )
              
              (21,238
              )Inventory
              
              
              (229,414
              )
              
              19,451Prepaid
                  expenses
              
              
              66,285
              
              
              (436,282
              )Accounts
                  payable
              
              
              (324,560
              )
              
              450,751Accrued
                  payroll and related taxes
              
              
              128,768
              
              
              114,553Accrued
                  interest payable
              
              
              (41,325
              )
              
              -Net
                  cash used by operating activities
              
              
              (5,366,704
              )
              
              (2,000,750
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchases
                  of fixed assets
              
              
              (376,549
              )
              
              (112,127
              )Additions
                  to other assets
              
              
              (352,815
              )
              
              (100,072
              )Net
                  cash used by investing activities
              
              
              (729,364
              )
              
              (212,199
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Borrowings
                  on bank line of credit
              
              
              -
              
              
              200,000Borrowings
                  under notes payable
              
              
              450,000
              
              
              280,000Proceeds
                  from sales of convertible debentures payable
              
              
              550,000
              
              
              495,000Principal
                  payments on notes payable
              
              
              (689,331
              )
              
              (6,946
              )Principal
                  payments on capital lease obligations
              
              
              (113,417
              )
              
              (122
              )Proceeds
                  for sales of shares for cash pursuant to private
                  placements,net
                  of offering costs
              
              
              6,518,773
              
              
              1,399,964Payments
                  to common and preferred shareholders in lieu of issuingfractional
                  shares
              
              
              (734
              )
              
              (100
              )Proceeds
                  from cash sales of common stock, pursuant to exercise of
                  warrants
              
              
              56,936
              
              
              -Proceeds
                  from cash sales of common stock, pursuant to exercise of
                  options
              
              
              110,058
              
              
              -Net
                  cash provided by financing activities
              
              
              6,882,285
              
              
              2,367,796Net
                  increase (decrease) in cash and cash equivalents
              
              
              786,217
              
              
              154,847Cash
                  and cash equivalents, beginning of period
              
              
              1,686,001
              
              
              100**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              2,472,218
              
              $
              154,947Supplemental
                  disclosures of cash flow information:Cash
                  paid for interest
              
              $
              318,173
              
              $
              33,312Non-cash
                  investing and financing activities:Exchange
                  of convertible debentures payable for shares of common
                  stock
              
              $
              3,682,875
              
              $
              -Fixed
                  assets acquired by capital lease obligations
              
              $
              505,671
              
              $
              25,559Issuance
                  of common shares as compensation for guarantee of debt
              
              $
              -
              
              $
              348,381Issuance
                  of common shares as partial payment for production
                  equipment
              
              $
              25,248
              
              $
              50,000Issuance
                  of common shares as partial payment of notes payable
              
              $
              45,684
              
              $
              -Prepaid
                  rent paid by issuance of common stock
              
              $
              120,036
              
              $
              -




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, as amended,
        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 131Cs brachytherapy seed, in October 2004 for the treatment of prostate
        cancer. Sales of the 131Cs brachytherapy seed comprise all operating revenues
        of
        the combined companies. Three customers individually comprised more than
        10% of
        product sales for the three month period ended March 31, 2006: Community
        Hospital of Los Gatos, CA, Eisenhower Medical Center, Rancho Mirage, CA,
        and
        Mills Peninsula Health Services, San Mateo, CA .
 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.
 
 *Basis
          of consolidation* - The accompanying unaudited consolidated financial
          statements reflect the balance sheets of IsoRay, Inc. and its subsidiary
          as of
          March 31, 2006, and the results of operation and statements of cash flows
          for
          the three and nine 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 March 31, 2006, uninsured cash balances totaled approximately
          $2,400,000.
 
 *Inventory
          -* Inventory is reported at the lower of cost, determined using the
          weighted
          average method, or net realizable value.
  *Revenue
          recognition* - The Company applies the provisions of SEC Staff Accounting
          Bulletin (“SAB”) No. 104, “Revenue Recognition.” SAB No. 104, which
          supersedes SAB No. 101, “Revenue Recognition in Financial Statements”,
          provides guidance on the recognition, presentation and disclosure of revenue
          in
          financial statements. SAB No. 104 outlines the basic criteria that must be
          met to recognize revenue and provides guidance for the disclosure of revenue
          recognition policies. The Company recognizes revenue related to product
          sales
          when (i) persuasive evidence of an arrangement exists, (ii) shipment
          has occurred, (iii) the fee is fixed or determinable, and
          (iv) collectibility is reasonably assured.
 4
  Revenue
        for the three and nine months ended March 31, 2006 was derived solely from
        sales
        of the 131 Cs
        brachytherapy seed, which is used in the treatment of cancer. The Company
        recognizes revenue once an order has been received and shipped to the customer.
        Prepayments, if any, received from customers prior to the time that products
        are
        shipped are recorded as deferred revenue. In these cases, when the related
        products are shipped, the amount recorded as deferred revenue is recognized
        as
        revenue. The Company accrues for sales returns and other allowances 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 March 31, 2006, there were 3,050,983 options to
        purchase common stock issued and approximately 749,000 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 March 31,
        2006,
        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 nine months ended****March
                    31,**
                
                **March
                    31,**
                
                **March
                    31,**
                
                **March
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Net
                    loss, as reported
                
                $
                (1,659,869
                )
                $
                (724,314
                )
                $
                (5,598,783
                )
                $
                (2,347,699
                )Less:
                    Stock-based compensation expense determinedunder
                    fair value method for all stock options, net ofrelated
                    tax benefit
                
                
                (180,000
                )
                
                -
                
                
                (336,000
                )
                
                -Profoma
                    net loss
                
                $
                (1,839,869
                )
                $
                (724,314
                )
                $
                (5,934,783
                )
                $
                (2,347,699
                )Basic
                    net loss per common share:As
                    reported
                
                $
                (0.11
                )
                $
                (0.10
                )
                $
                (0.49
                )
                $
                (0.36
                )Proforma
                
                $
                (0.13
                )
                $
                (0.10
                )
                $
                (0.52
                )
                $
                (0.36
                )
   *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 March 31, 2006 and 2005, 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 March 31, 2006, the Company had 181,248 shares of
        preferred stock which are exchangeable, on a one-to-one basis, with common
        stock; debentures which could be converted into 109,638 shares of common
        stock;
        options and warrants to purchase 5,981,519 shares of common stock; and warrants
        to purchase 34,836 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 6,263,711 shares
        of
        common stock that are issuable upon conversion, exercise or exchange of the
        debentures, options, warrants, and preferred stock would have been included
        in a
        separate calculation for diluted EPS.
  5
  ***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. Fees for legal services of approximately
        $126,300 and $363,200 have been included in expense for the three and nine
        months ended March 31, 2006, respectively.
  ***NOTE
        3 - INCOME TAX:***
 
 As
        of
        March 31, 2006, 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 $2,465,703 at March 31, 2006, coupled with its cash expenditure
        rate of approximately $630,000 per month, excluding capital items that have
        recently been approximately $50,000 per month. Management continues to seek
        opportunities to obtain additional cash for the Company, and past attempts
        have
        been successful. However, although management believes the Company has enough
        cash on hand to continue operations until the end of the fiscal year, there
        is
        no assurance future plans will be successful in providing the Company with
        the
        cash it needs on a timely basis to support operations until it reaches
        profitability. The accompanying financial statements do not include any
        adjustments that might be necessary should the Company be unable to continue
        as
        a going concern.
  6
  ***NOTE
        5 - 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
        6 - 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 March 31, 2006, holders of $3,682,875
        of debentures had converted to common stock of the Company responding to
        the
        inducement of the second exercise method described above. As of March 31,
        2006,
        the Company had issued 911,276 shares of common stock (including approximately
        23,840 incremental shares not previously available to holders of debentures
        under the original terms), and 659,469 warrants to purchase shares of common,
        exercisable at $6.00 per share. As of March 31, 2006, the Company recognized
        $ 385,511 in
        non-cash short-term inducement expense, in accordance with FASB Statement
        of
        Financial Accounting Standards No. 84.
 
 ***NOTE
        7 -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"). The Purchase Agreements permitted Mercatus
        to purchase 1,778,146 shares of the Registrant's common stock at a purchase
        price of $3.502 per share subject to receipt of funding. On May 18, 2006,
        the
        Company requested immediate return of the certificates representing all shares
        of common stock to which Mercatus had previously subscribed in accordance
        with
        the terms of the Purchase Agreements. The Agreements call for return of
        certificates within ten days if funding is not received within two days of
        receipt of the notice.
 
 ***NOTE
        8 - EQUITY OFFERINGS:***
 
 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, 2006.
 
 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 consisted 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. The Units
        were
        being sold for $22,500 per Unit. The Company closed this offering on February
        24, 2006. As of March 31, 2006, approximately $1.2 million had been raised
        under
        the New Offering.
  7
  ***NOTE
        9 - SUBSEQUENT EVENTS:***
  On
        April
        4, 2006, the Board of Directors granted 50,000 options to purchase common
        stock
        to each of its newly added independent Directors: Albert Smith and Dwight
        Babcock. The requisite Form 4 has been filed with the SEC for each
        grantee.
  On
        April
        14, 2006, the Company retired notes payable of $71,001 with a cash payment.
 
 On
        April
        18, 2006, IsoRay Medical, Inc. hired Jonathan Hunt as corporate controller.
        Filling this staff position is a partial fulfillment of our commitment to
        remediate one of the material weaknesses in our internal financial controls
        (See
        Item 3).
 
 On
        April
        27, 2006, with a cash payment of $30,645, which included interest accrued
        through that date, the Company retired the balance outstanding on the $50,000
        Columbia River Bank equipment loan.
 
 On
        May
        18, 2006, the Company requested immediate return of the certificates
        representing all shares of common stock to which Mercatus previously subscribed
        in accordance with the Purchase Agreements. In future periods, this will
        have
        the effect of reducing the number of common shares issued and outstanding
        by
        approximately 1,778,150 shares, and on subsequent balance sheets, reduce
        the
        Subscriptions Receivable contra-equity account by $6,227,067, reduce the
        Common
        stock account by 1,778, and reduce the Additional paid-in capital account
        by
        $6,225,289.
  8
  **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 initial 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.
        In the
        brachytherapy procedure places radioactive seeds are placed directly in or
        near
        the cancerous tumor (the word “brachytherapy” means close therapy). The seeds
        deliver therapeutic radiation thereby killing the tumor cells and cells in
        the
        immediate vicinity of the tumor while minimizing exposure to adjacent healthy
        tissue. This allows doctors to administer a higher dose of radiation to the
        tumor than with other therapies.. Approximately 85 to 135 seeds are permanently
        implanted in the prostate during a 45-minute outpatient procedure. The
        radioisotope is sealed within a welded titanium capsule. 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 nine month periods ended March 31, 2006 and 2005.**
 
 **Revenues.** During
        the three month period ended March 31, 2006, the Company generated $479,225
        in
        sales of its 131 Cs
        seed.
        This represents an increase of $428,660 over sales in the three months ended
        March 31, 2005 (the “Prior Quarter”) of $50,565. Sales for the nine month period
        ended March 31, 2006 were $1,176,387. This represents an increase of $1,101,652
        over sales in the nine month period ended March 31, 2005. IsoRay Medical
        began
        sales of its 131 Cs
        seed
        on October 26, 2004 with one medical center customer. By March 31, 2006 the
        number of medical center customers who have ordered the 131 Cs
        seed
        had grown to 21. Although sales in the three month period ended March 31,
        2006
        were largely unchanged from sales levels in the previous quarter, sales in
        the
        most recent quarter included no sales to Chicago Prostate Cancer Center
        (“CPCC”), whose orders comprised a significant portion of total sales in the
        three month period ended December 31, 2005. However, the expansion of our
        customer base during the most recent quarter provided additional new customers
        whose orders essentially maintained the sales levels of the previous quarter.
   9
  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 working to bring these functions in house. On March 28,
        2006,
        following commencement of operations of the Company’s pre-load department, which
        performs third party assay, preloading and sterilization of the 131 Cs
        seeds,
        CPCC resumed ordering from us. Initial shipments of 131 Cs
        seeds,
        custom-loaded to this customer’s specifications, met the quality control
        guidelines established by CPCC. Although the temporary three month’s suspension
        of seed orders by CPCC has had a negative impact on revenue in the past quarter,
        the Company’s management believes any long-term impact will be nominal. With the
        resumption of orders by CPCC, added to the increasing customer base, management
        believes sales for the following quarters will increase.
  **Gross
        loss.** Gross
        loss was $312,232 for the three month period ended March 31, 2006.  This
        represents an improvement of $209,075, or 40% over the Prior Quarter’s gross
        loss of $521,307.  Gross loss was $1,251,510 for the nine month period
        ended March 31, 2006. This represents an increased loss of $367,322 over
        the
        gross loss of $884,188 for the nine month period ended March 31, 2005. Cost
        of
        products sold was $791,457 for the three month period ended March 31,
        2006.  Components of this cost include charges from Pacific Northwest
        National Laboratories of approximately $200,000 for ancillary manufacturing
        services, which terminated in January 2006, waste disposal, testing and sample
        analysis and assay and technical services; approximately $256,000 in wages,
        benefits and related taxes, approximately $208,000 in direct and indirect
        materials, and the balance of approximately $127,000 in overhead expenses.
        This
        was an increase in cost of products sold of $219,585 or 38% more than the
        Prior
        Quarter. Cost of products sold for the nine month period ended March 31,
        2006
        was $2,427,897. This was an increase in cost of products sold of $1,468,974
        over
        the nine month period ended March 31, 2005. Increased costs in the three
        and
        nine month periods are generally attributable to the Company’s increased selling
        activity during the nine month period ended March 31, 2006.
 
 **Research
        and development.** Research
        and development expenses for the three month period ended March 31, 2006
        were
        $86,194. This represents an increased expenditure of $56,164, or a 187% increase
        over the Prior Quarter’s expense of $30,030. Research and development expenses
        for the nine month period ended March 31, 2006 were $208,813 or an increase
        of
        $150,752 over the nine month period ended March 31, 2005. Of this amount,
        $86,700 was paid in conjunction with an ongoing protocol study on the results
        of
        100 patients who have recently been implanted, or will be implanted in the
        near
        future, with the Company’s 131 Cs
        brachytherapy seed.
 
 **Sales
        and marketing expenses.** Sales
        and
        marketing expenses were $325,858 for the three-month period ended March 31,
        2006. This represents an increase of $300,638 compared to the Prior Quarter’s
        expenditure of $25,220 for sales and marketing. Of the $325,858, approximately
        $237,883 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. The balance was spent on advertising, market research, and trade shows
        and conferences. Sales and marketing expense for the nine month period ended
        March 31, 2006 was $981,429. This represents an increase of 560,667 or 133%
        compared to the nine month period ended March 31, 2005 expenditures of $420,762.
        These increases have occurred as the Company has hired more sales staff and
        incurred more marketing expenditures since October 2004 when we began selling
        our product.
  10
  **General
        and administrative expenses.** General
        and administrative expenses for the three month period ended March 31, 2006
        amounted to $738,494. This represents an increase of $696,570 in comparison
        to
        the Prior Quarter’s expense of $41,924. General and administrative expenses for
        the nine month period ended March 31, 2006 were $2,374,887. This is an increase
        of $1,568,845 over the nine month period ended March 31, 2005, during which
        general and administrative expense was $806,042. The increases over the prior
        periods are due to supporting the Company’s increased manufacturing and sales
        activities. These activities have increased as the Company has only been
        manufacturing and selling its product since October 2004.
 
 **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 March 31, 2006,
        the
        Company had an operating loss of $1,462,778. This represents an increased
        loss
        of $844,297 or 137%, in comparison with the Prior Quarter’s operating loss of
        $618,481. Operating loss for the nine month period ended March 31, 2006 was
        $4,816,639. Operating loss for the nine month period ended March 31, 2005
        was
        $2,169,053.
  **Non-operating
        income (expense).** Total
        non-operating income (expense) was $(197,091) for the three month period
        ended
        March 31, 2006. This represents an increase in net expense of $91,258 or
        86%
        over the Prior Quarter’s non-operating income (expense) of $(105,833). This
        decrease in non-operating income (expense) was largely due to a debt conversion
        expense of $141,414 (see Note 6) The Company earned $25,472 of interest income
        on funds held in certain near-liquid accounts. This was $25,238 more than
        the
        Prior Quarter’s interest income of $234. During this period, financing expense
        was $81,149, or an increased expense of $43,653 or 116% over the Prior Quarter’s
        financing expense of $37,496. Of this amount, $29,376 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 nine
        month period ended March 31, 2006 was $(782,144) which represents an increase
        of
        $603,498 or 338% over the nine month period ended March 31, 2005. This increase
        is mainly due to the one-time recognition of expense associated with a
        short-term inducement to convert debentures (see Note 6) and an increase
        in
        financing expenses as noted above.
  **Liquidity
        and capital resources** .
        At
        March 31, 2006, cash and cash equivalents amounted to $2,472,218. During
        the
        three months ended March 31, 2006, the Company issued 1,123,384 shares of
        common
        stock and granted an equal number of warrants to purchase shares of common
        stock
        pursuant to the October 17, 2005 and February 1, 2006 Offerings. This issuance
        of common stock provided the Company approximately $4,200,000, in cash, net
        of
        legal costs and commissions paid pursuant to the Offerings. Additionally,
        the
        Company issued 32,000 shares of common stock pursuant to the exercise of
        options
        to purchase common stock. This exercise of options provided the Company with
        $37,130.
  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
        $1.2 million under that offering as of March 31, 2006.
  The
        Company had approximately $1.2 million cash on hand as of May 17,
        2006 **.** As of
        that date the Company's monthly required cash operating expenditures were
        approximately $630,000, and capital expenditures were approximately $50,000.
        As
        of May 17, 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 end of the fiscal year, June 30,
        2006.
  Our
        growth plan for 2006 includes expanding sales to existing customers, continuing
        a trend that has improved starting in the second quarter of FY 2006; continuing
        to reduce the level of services provided by Pacific Northwest National
        Laboratory as equivalent company resources become available, 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.
  11
  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 fluid 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 required a cash outlay of
        approximately $225,000 in March 2006, which was paid. A second payment of
        $225,000 will be due in August 2006.
  At
        March
        31, 2006 IsoRay Medical had 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 March
        31,
        2006, the principal balance owed was $208,511. 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 revolving line of credit from Columbia
        River Bank, which provides credit in the amount of $375,000. 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 March 31,
        2006,
        there were no advances outstanding under 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 March 31, 2006, the principal
        balance owed was approximately $30,813. This loan was retired subsequent
        to
        March 31, 2006 (See Note 9).
  IsoRay
        Medical also had $455,000 in principal amount of convertible debentures
        outstanding as of March 31, 2006, which were issued between February and
        July
        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 $71,001 in principal amount of notes payable outstanding
        as of
        March 31, 2006, 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. Subsequent to March 31, 20065 the Company
        retired these note payable obligations with part of the proceeds received
        from
        the New Offering of February 1, 2006 (See Note 9).
  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.
  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, and we may decide
        to
        lower the exercise price of previously issued warrants.
  12
  We
        have
        no material commitments for capital expenditures and no off-balance sheet
        arrangements.
  **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, as amended.*
  *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 until
                we
                reach profitability.  ·
            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.  ·
            We
                are subject to the risk that certain third parties may mishandle
                our
                product.  ·
            Our
                quarterly operating results will be subject to significant
                fluctuations.   13
  ·
            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.  ·
            Our
                industry is intensely competitive.  ·
            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 March 31, 2006. 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 procedure is designed to provide a reasonable level
        of
        assurance that the objectives of the system will be met.
  (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.
   14
  The
        size
        of the Company has previously 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.
  *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. As of May 1, 2006 we hired an experienced controller, but we believe
        additional staff is still needed, and we will continue in our attempt to
        add
        staff to allow for fuller segregation of duties, although there is no certainty
        additional staff can be successfully hired. 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 up coming 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 March 31, 2006, the Company sold 268,889 shares
        of
        common stock pursuant to the February 1, 2006 Offering, in exchange for cash
        payments of $1,210,000 (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 $6.50 per share with a two-year term. These sales were
        made
        between February 1 and February 21, 2006, 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 sold 1,500,000 shares of common stock pursuant to the October
        17, 2005 Offering, in exchange for cash payments of $6,000,000 (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, 2005 and January
        31,
        2006 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.
 
 During
        the three month period ended March 31, 2006 the Company also issued 5,000
        shares
        of common stock in exchange for consulting services by Rockberry LLC pursuant
        to
        the exemption from registration provided by Section 4(2) of the Securities
        Act.
        In conjunction with this issuance, the company recognized $25,000 in
        compensation expense, which is included in statements of operations for the
        quarter.
  15
  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”). The Purchase Agreements permitted Mercatus
        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, subject to receipt
        of funding. 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. On May 18, 2006, the Company requested that the
        certificates representing these shares be returned immediately. The agreement
        calls for a return within 10 days of request if funding is not received within
        two days of receipt of the notice.
 
  **ITEM
        6. EXHIBITS AND REPORTS ON FORM 8-K**
  (a)  Exhibits:
  31.1  Rule
        13a-14(a)/15d-14(a) Certification of Principal Executive Officer
  31.2  Rule
        13a-14(a)/15d-14(a) Certification of Principal Financial Officer
  32  Section
        1350 Certifications
  (b)  Reports
        on Form 8-K:
  On
        March
        24, 2006, the Company filed a Current Report on Form 8-K announcing a licensing
        agreement with IBt, SA, a Belgium company ("IBt"), to use IBt’s proprietary "Ink
        Jet" production process for the formulation of a jetable fluid containing
        a
        radioisotope and its proprietary polymer based seed encapsulation technology
        for
        a fifteen year term.
  On
        April
        6, 2006, the Company filed a Current Report on Form 8-K announcing the expansion
        of the Board of Directors to seven members and appointing Albert Smith and
        Dwight Babcock as directors.
  On
        May 2,
        2006, the Company filed a Current Report on Form 8-K/A amending its March
        26,
        2006 Form 8-K filing.
  On
        May 9,
        2006, the Company filed a Current Report on Form 8-K providing notice that
        certain previously filed consolidated financial statements were to be
        restated.


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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:
              May 19,
              2006ISORAY,
              INC., a
              Minnesota corporationBy
            /s/ Roger
              E.
              GirardRoger
              E. Girard, Chief Executive Officer By
            /s/ Michael
              K. DunlopMichael
              K. Dunlop, Chief Financial Officer




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