**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





xQUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





**For
      the quarterly period ended January 31, 2007**





or





oTRANSITION
      REPORT PURSUANT TO SECTION 13
      OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


Commission
      File Number 0-26670







**NORTH
      AMERICAN SCIENTIFIC, INC.**


(Exact
      name of registrant as specified in its charter)








Delaware
            
            51-0366422(State
                or other jurisdiction
                of
            
            (I.R.S.
                Employerincorporation
                or
                organization)
            
            Identification
                No.)




20200
      Sunburst Street, Chatsworth, CA 91311


(Address
      of principal executive offices)





(818)
      734-8600


(Registrant's
      telephone number, including area code)







Indicate
      by check mark whether the registrant (1) has 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 that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days. x Yes o No




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Securities
      Exchange Act of 1934. Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x





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





The
      number of shares of Registrant's Common Stock, $.01 par value, outstanding
      as of
      February 28, 2007 was 29,366,216 shares.


---

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          1
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**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Index**




**Part
      I - Financial Information**





**Item
              1.**
            **Financial
              Statements**
            **Page**Consolidated
                Balance Sheets as of January 31, 2007 and October 31, 2006
            3Consolidated
                Statements of Operations for the three months endedJanuary
                31, 2007 and 2006
            4Consolidated
                Statements of Cash Flows for the three months endedJanuary
                31, 2007 and 2006
            5Condensed
                Notes to the Consolidated Financial Statements
            6**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition
                and****Results
                of Operations**
            24**Item
                3.**
            **Quantitative
                and Qualitative Disclosures about Market Risk**
            33**Item
                4.**
            **Controls
                and Procedures**
            33





**Part
      II - Other Information**




**Item
                1A.**
            **Risk
                Factors**
            34**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds**
            52**Item
                6.**
            **Exhibits**
            53**Signatures**
            54


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            2
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**PART
      II - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Balance Sheets**


**January
                  31, **2007****
              
              
              **October
                  31,****2006****Assets**
              
              
              (Unaudited)Current
                  assetsCash
                  and cash equivalents
              
              $
              1,307,000
              
              $
              903,000Marketable
                  securities, held to maturity
              
              
              2,997,000
              
              
              8,420,000Accounts
                  receivable, net of reserves
              
              
              6,278,000
              
              
              4,711,000Inventories,
                  net of reserves
              
              
              4,363,000
              
              
              4,202,000Prepaid
                  expenses and other current assets
              
              
              1,431,000
              
              
              1,085,000Total
                  current assets
              
              
              16,376,000
              
              
              19,321,000Equipment
                  and leasehold improvements, net
              
              
              2,229,000
              
              
              2,400,000Goodwill
              
              
              2,564,000
              
              
              2,564,000Intangible
                  assets, net
              
              
              2,375,000
              
              
              2,532,000Other
                  assets
              
              
              302,000
              
              
              381,000Total
                  assets
              
              $
              23,846,000
              
              $
              27,198,000**Liabilities
                  and Stockholders’ Equity**Current
                  liabilitiesAccounts
                  payable
              
              $
              1,936,000
              
              $
              2,406,000Accrued
                  expenses
              
              
              3,504,000
              
              
              3,940,000Deferred
                  revenue
              
              
              4,179,000
              
              
              3,664,000Total
                  current liabilities
              
              
              9,619,000
              
              
              10,010,000Commitments
                  and contingenciesStockholders’
                  EquityPreferred
                  stock, $0.01 par value, 2,000,000 shares authorized; no
                  sharesIssued
              
              
              —
              
              
              —Common
                  stock, $0.01 par value, 40,000,000 shares authorized, 29,504,037and
                  29,447,270 shares issued; 29,366,216 and 29,336,144 shares outstanding
                  as
                  of January 31, 2007 and October 31, 2006, respectively
              
              
              298,000
              
              
              298,000Additional
                  paid-in capital
              
              
              144,803,000
              
              
              144,543,000Treasury
                  stock, at cost – 137,821 and 111,126 common shares as of January 31, 2007
                  and October 31, 2006, respectively
              
              
              (160,000
              )
              
              (133,000
              )Accumulated
                  deficit
              
              
              (130,715,000
              )
              
              (127,520,000
              )Other
                  comprehensive income
              
              
              1,000
              
              
              —Total
                  stockholders’ equity
              
              
              14,227,000
              
              
              17,188,000Total
                  liabilities and stockholders’ equity
              
              $
              23,846,000
              
              $
              27,198,000





See
      condensed notes to the consolidated financial statements.


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          3
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**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Operations**


**(Unaudited)**




**Three
                  Months Ended**
                **January
                  31,****2007**
              
              
              **2006**RevenueProduct
              
              $
              5,496,000
              
              $
              5,169,000Service
              
              
              2,064,000
              
              
              2,358,000Total
                  revenue
              
              
              7,560,000
              
              
              7,527,000Cost
                  of revenueProduct
              
              
              3,527,000
              
              
              3,856,000Service
              
              
              733,000
              
              
              820,000Total
                  cost of revenue
              
              
              4,260,000
              
              
              4,676,000Gross
                  profit
              
              
              3,300,000
              
              
              2,851,000Operating
                  expensesSelling
                  expenses
              
              
              2,091,000
              
              
              1,854,000General
                  and administrative expenses
              
              
              3,033,000
              
              
              2,194,000Research
                  and development
              
              
              1,227,000
              
              
              1,324,000Amortization
                  of intangible assets
              
              
              157,000
              
              
              157,000Total
                  operating expenses
              
              
              6,508,000
              
              
              5,529,000Loss
                  from operations
              
              
              (3,208,000
              )
              
              (2,678,000
              )Interest
                  and other income
              
              
              13,000
              
              
              3,000Loss
                  before provision for income taxes
              
              
              (3,195,000
              )
              
              (2,675,000
              )Provision
                  for income taxes
              
              
              —
              
              
              —Net
                  loss
              
              $
              (3,195,000
              )
              $
              (2,675,000
              )Basic
                  and diluted loss per share:
              
              $
              (0.11
              )
              $
              (0.16
              )Weighted
                  average number of shares outstanding
              
              
              29,329,016
              
              
              16,854,315




See
      condensed notes to the consolidated financial statements.


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          4
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**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Cash Flows**


**(Unaudited)**


**Three
                  Months Ended**
                **January
                  31,****2007**
              
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (3,195,000
              )
              $
              (2.675,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              377,000
              
              
              405,000Amortization
                  of warrants
              
              
              79,000
              
              
              —Provision
                  for doubtful accounts
              
              
              258,000
              
              
              570,000Provision
                  for inventory reserves
              
              
              (21,000
              )
              
              —Share-based
                  compensation expense
              
              
              205,000
              
              
              258,000Changes
                  in assets and liabilities, net of discontinued operation:Accounts
                  receivable
              
              
              (1,825,000
              )
              
              (1,149,000
              )Inventories
              
              
              (140,000
              )
              
              (220,000
              )Prepaid
                  and other current assets
              
              
              (345,000
              )
              
              408,000Accounts
                  payable
              
              
              (472,000
              )
              
              151,000Accrued
                  expenses
              
              
              (434,000
              )
              
              (1,179,000
              )Deferred
                  revenue
              
              
              515,000
              
              
              798,000Net
                  cash used in operating activities
              
              
              (4,998,000
              )
              
              (2,633,000
              )Cash
                  flows from investing activities:Proceeds
                  from maturity of marketable securities
              
              
              5,423,000
              
              
              993,000Capital
                  expenditures
              
              
              (50,000
              )
              
              (55,000
              )Net
                  cash provided by investing activities
              
              
              5,373,000
              
              
              938,000Cash
                  flow from financing activities:Proceeds
                  from line of credit
              
              
              —
              
              
              1,000,000Proceeds
                  from exercise of stock options and stock purchase plan
              
              
              56,000
              
              
              70,000Purchases
                  of treasury stock
              
              
              (27,000
              )
              
              —Net
                  cash provided by finance activities
              
              
              29,000
              
              
              1,070,000Net
                  increase (decrease) in cash and cash equivalents
              
              
              404,000
              
              
              (625,000
              )Cash
                  and cash equivalents at beginning of period
              
              
              903,000
              
              
              2,630,000Cash
                  and cash equivalents at end of period
              
              $
              1,307,000
              
              $
              2,005,000





Supplemental
      disclosure:


In
      the
      three months ended January 31, 2006, the Company issued a warrant with an
      estimated fair value of $50,000 to a bank as consideration for entering into
      an
      Amendment to a Loan Agreement. See Note 9 to the Financial
      Statements.





In
      the
      three months ended January 31, 2007 and 2006, there were no cash flows from
      discontinued operation.





See
      condensed notes to the consolidated financial statements.


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          5
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**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Condensed
      Notes to Consolidated Financial Statements**


**(Unaudited)**





**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Basis
      of Presentation*





The
      accompanying consolidated financial statements of the Company are unaudited,
      other than the consolidated balance sheet at October 31, 2006, and reflect
      all
      material adjustments, consisting only of normal recurring adjustments, which
      management considers necessary for a fair statement of the Company’s financial
      position, results of operations and cash flows for the interim periods. The
      results of operations for the current interim periods are not necessarily
      indicative of the results to be expected for the entire fiscal
      year.





These
      consolidated financial statements have been prepared in accordance with the
      rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
      information and footnotes normally included in financial statements prepared
      in
      accordance with generally accepted accounting principles in the United States
      of
      America have been condensed or omitted pursuant to these rules and regulations.
      These consolidated financial statements should be read in conjunction with
      the
      consolidated financial statements and the notes thereto included in the
      Company’s Form 10-K, as filed with the SEC for the fiscal year ended October 31,
      2006.





Certain
      reclassifications have been made to prior period balances in order to conform
      to
      the current period presentation.





*Management’s
      Plans*





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business.  We have incurred net losses of $3.2 million
      in the three months ended January 31, 2007, and $17.1 million, $55.5 million
      and
      $36.3 million for the years ended October 31, 2006, 2005 and 2004, respectively.
      We have used cash in operations of $5.0 million in the three months ended
      January 31, 2007, and $15.9 million, $11.9 million and $23.1 million for the
      years ended October 31, 2006, 2005 and 2004, respectively.  As of January
      31, 2007, we had an accumulated deficit of $130.7 million; cash, cash
      equivalents and marketable securities of $4.3 million, and no long-term
      debt.





Based
      on
      the Company’s current operating plans, management believes existing cash
      resources and cash forecasted by management to be generated by operations,
      sales
      of common stock and /or securities convertible to debt, as well as the Company’s
      anticipated and available lines of credit, will be sufficient to meet working
      capital and capital requirements through at least the next twelve months. Also,
      management’s plans to attain profitability and generate additional cash flows
      include increasing revenues from existing and new products and services and
      a
      focus on cost control.  However, there is no assurance that management will
      be successful with these plans.  If events and circumstances occur such
      that the Company does not meet its current operating plans as expected, and
      the
      Company is unable to raise additional debt or equity financing, the Company
      may
      be required to further reduce expenses or take other steps which could have
      a
      material adverse effect on our future performance, including but not limited
      to,
      the premature sale of some or all of our assets or product lines on undesirable
      terms, merger with or acquisition by another company on unsatisfactory terms,
      or
      the cessation of operations.


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          6
          -


*Use
      of Estimates*





In
      the
      normal course of preparing the financial statements in conformity with generally
      accepted accounting principles in the United States of America, management
      is
      required 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 reported amounts of revenue and
      expenses during the reporting period.  Actual results could differ from
      those amounts.





*Marketable
      Securities*





The
      Company invests excess cash in marketable securities consisting primarily of
      commercial paper, corporate notes and bonds, U.S. Government securities and
      money market funds. Investments with maturities of less than one year are
      considered to be short term and are classified as current assets.





Debt
      securities that the Company has the positive intent and ability to hold to
      maturity are classified as "held-to-maturity" and reported at amortized cost.
      Debt securities not classified as held-to-maturity and marketable equity
      securities are classified as either "trading" or "available-for-sale," and
      are
      recorded at fair value with unrealized gains and losses included in earnings
      or
      stockholders' equity, respectively. All other equity securities are accounted
      for using either the cost method or the equity method.





The
      Company continually reviews its investments to determine whether a decline
      in
      fair value below the cost basis is other than temporary. If the decline in
      fair
      value is judged to be other than temporary, the cost basis of the security
      is
      written down to fair value and the amount of the write-down is included in
      the
      Consolidated Statements of Operations.





*Accounts
      Receivable and Allowance for Doubtful Accounts*




Accounts
      receivable are recorded at the invoiced amount and do not bear interest. The
      allowance for doubtful accounts is the Company’s best estimate of the amount of
      probable credit losses in our existing accounts receivable. The Company
      determines the allowance based on historical write-off experience and customer
      economic data. We review our allowance for doubtful accounts monthly. Past
      due
      balances over 60 days and over a specified amount are reviewed individually
      for
      collectibility. Account balances are charged off against the allowance when
      the
      Company believes that it is probable the receivable will not be recovered.
      The
      Company does not have any off-balance-sheet credit exposure related to our
      customers.





*Equipment
      and Leasehold Improvements*





Equipment
      and leasehold improvements are stated at cost. Maintenance and repair costs
      are
      expensed as incurred, while improvements are capitalized. Gains or losses
      resulting from the disposition of assets are included in income. Depreciation
      and amortization are computed using the straight-line method over the estimated
      useful lives as follows:





Furniture,
                fixtures and equipment
            3-7
                yearsLeasehold
                improvements
            Lesser
                of the useful life or term of lease





*Goodwill*





Goodwill
      represents the excess of cost over the value of net assets of businesses
      acquired pursuant to Statement of Financial Accounting Standards ("SFAS")
      No. 141, "Business Combinations" and is carried at cost unless write-downs
      for impairment are required. The Company evaluates the carrying value of
      goodwill on an annual basis and whenever events and changes in circumstances
      indicate that the carrying amount may not be recoverable.


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          7
          -


*Intangible
      Assets*





License
      agreements are amortized on a straight-line basis over periods ranging up to
      fifteen years. The amortization periods of patents are based on the lives of
      the
      license agreements to which they are associated or the approximate remaining
      lives of the patents, whichever is shorter. Purchased intangible assets with
      finite lives are carried at cost less accumulated amortization and are amortized
      on a straight-line basis over periods ranging from three to twelve
      years.





The
      Company reviews for impairment whenever events and changes in circumstances
      indicate that such assets might be impaired. If the estimated future cash flows
      (undiscounted and without interest charges) from the use of an asset are less
      than the carrying value, a write-down is recorded to reduce the related asset
      to
      its estimated fair value.





*Revenue
      Recognition*





The
      Company sells products for radiation therapy treatment, including brachytherapy
      seeds used in the treatment of cancer, IMRT and IGRT products and
      services.  Product revenue consists of brachytherapy, non-therapeutic
      sources, and certain IMRT hardware devices, including our MiMIC and Crane
      products. Software revenues consist of IMRT treatment planning software Corvus,
      Peacock, and nomosSTAT, and our IGRT products. Service revenue consists of
      warranty revenue and maintenance service agreements.





Product
      revenue




The
      Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104,
“Revenue Recognition” for the sale of non-software products.  SAB No. 104,
      which supercedes 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.  In general, the Company recognizes revenue related
      to product sales when (i) persuasive evidence of an arrangement exists, (ii)
      delivery has occurred, (iii) the fee is fixed or determinable, and (iv)
      collectibility is reasonably assured.





Software
      revenue




The
      Company’s software revenue is generated from the sale of advanced medical
      equipment products.  The software element of the Company’s products is
      deemed an essential element of the functionality of the product. 
Maintenance and support are provided with the initial product sale for a twelve
      month period.  The maintenance and support is renewable annually or longer,
      at the customer’s discretion.




The
      Company recognizes revenue in accordance with the provisions of Statement of
      Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain
      Transactions”.  Under the provisions of SOP 97-2, the Company recognizes
      software revenue upon delivery and acceptance, provided all significant
      obligations have been met, persuasive evidence of an arrangement exists, fees
      are fixed or determinable, collection is probable, and the Company is not
      involved in providing services that are essential to the functionality of the
      product.


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            8
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 The
      Company’s software sales are generally multiple element arrangements, which
      could include the product, first year annual maintenance and support, and
      training and installation.  Revenues from the multiple element arrangements
      are allocated to each element based on the relative fair value of the
      elements.  If the fair value of the element exists, the determination is
      based on vendor specific objective evidence.  If such evidence of fair
      value for each element of the arrangement does not exist, all revenue from
      the
      arrangement is deferred until such time that evidence of fair value of each
      element does exist or until all elements of the arrangement are delivered. 
If in a multiple element arrangement, fair value does not exist for one or
      more
      of the undelivered elements, the residual method of accounting is applied. 
Under the residual method, the fair value of the undelivered elements is
      deferred, and the remaining portion of the arrangement fee is recognized as
      revenue.




Service
      revenue





Services
      revenues are derived mainly from maintenance and support contracts and are
      recognized on a straight-line basis over the term of the contract. Payments
      for
      maintenance revenues are normally received in advance and are nonrefundable.





*Stock-based
      Compensation*





Effective
      November 1, 2005, the Company adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 123(R), *Share-Based
      Payment* (“SFAS
      123(R)”), which requires the measurement and recognition of compensation expense
      for all share-based payment awards made to employees and directors, including
      stock options and employee stock purchases related to the Company’s Employee
      Stock Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair
      values. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”), which the Company previously followed in accounting for stock-based
      awards. In March 2005, the SEC issued *Staff
      Accounting Bulletin No. 107* (“SAB
      107”) to provide guidance on SFAS 123(R). The Company has applied SAB 107 in its
      adoption of SFAS 123(R).





The
      Company adopted SFAS 123(R) using the modified prospective transition method
      as
      of and for the three months ended January 31, 2007 and 2006. In accordance
      with
      the modified prospective transition method, the Company’s financial statements
      for prior periods have not been restated to reflect, and do not include, the
      impact of SFAS 123(R). Share-based compensation expense recognized is based
      on
      the value of the portion of share-based payment awards that is ultimately
      expected to vest. Share-based compensation expense recognized in the Company’s
      Condensed Consolidated Statement of Operations during the three months ended
      January 31, 2007 and 2006 includes compensation expense for share-based payment
      awards granted prior to, but not yet vested as of, October 31, 2005 based on
      the
      grant date fair value estimated in accordance with the pro forma provisions
      of
      SFAS 123 and new stock option grants made during the fiscal year ended October
      31, 2006. A total of 1,303,000 stock option grants were awarded to employees
      on
      March 16, 2006 and a total of 150,000 stock option grants were awarded to
      directors on May 3, 2006 and June 14, 2006.





In
      conjunction with the adoption of SFAS 123(R), the Company elected to attribute
      the value of share-based compensation to expense using the straight-line method,
      which was previously used for its pro forma information required under SFAS
      123
      and SFAS 148. Share-based compensation expense related to stock options and
      employee stock purchases was $205,000 and $258,000 for the three months ended
      January 31, 2007 and 2006, and was recorded in the financial statements as
      a
      component of general and administrative expense. Note that the stock option
      grants on March 16, 2006 included a total of 650,500 stock options that contain
      certain market condition requirements (“2007 Premium Price Awards”) The 2007
      Premium Price Awards are, to the extent provided by law, incentive stock options
      that have an exercise price of $3.35 per share, which is equal to 159% of the
      fair market value of the Company’s common stock on the grant date. The 2007
      Premium Price Awards also include a market condition that provides that such
      stock options will only vest if the closing price of the Company's common stock
      is equal to or greater than $3.35 on each day over any consecutive four month
      period beginning on any date after the date of grant and ending no later than
      the third anniversary of the date of grant. If the market condition is not
      satisfied by the third anniversary of the date of grant, the 2007 Premium Price
      Awards will not vest. Subject to the attainment of the market condition by
      the
      Company’s common stock, the 2007 Premium Price Awards will vest, if at all, in
      equal annual installments over a four year period beginning on the second
      anniversary of the grant date of March 16, 2006. The 2007 Premium Price Awards
      have a term of 8 years from the date of grant.


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          9
          -


The
      Company uses the Black-Scholes option-pricing model for estimating the fair
      value of options granted. The Black-Scholes option-pricing model was developed
      for use in estimating the fair value of traded options that 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. The Company uses projected volatility rates, which are based
      upon historical volatility rates, trended into future years. Because the
      Company’s employee stock options have characteristics significantly different
      from those of traded options, and because changes in the subjective input
      assumptions can materially affect the fair value estimate, in management’s
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of the Company’s options. For purposes of financial
      statement presentation and pro forma disclosures, the estimated fair values
      of
      the options are amortized over the options’ vesting periods.





*Net
      Loss per Share*





Basic
      loss per share is computed by dividing the loss by the weighted average number
      of shares outstanding for the period.





Diluted
      earnings (loss) per share is computed by dividing the net income (loss) by
      the
      sum of the weighted average number of common shares outstanding for the period
      plus the assumed exercise of all dilutive securities by applying the treasury
      stock method. Stock options for which the exercise price exceeds the average
      market price over the period have an anti-dilutive effect on earnings per share
      and, accordingly, are excluded from the calculation. The following table sets
      forth the computation of basic and diluted loss per share:


**Three
                  months ended January 31,****2007**
              
              
              **2006**Net
                  loss
              
              $
              (3,195,000
              )
              $
              (2,675,000
              )Weighted
                  average shares outstanding - basic
              
              
              29,329,016
              
              
              16,854,315Dilutive
                  effect of stock options
              
              
              —
              
              
              —Weighted
                  average shares outstanding -diluted
              
              
              29,329,016
              
              
              16,854,315Basic
                  loss per share
              
              $
              (0.11
              )
              $
              (0.16
              )Diluted
                  loss per share
              
              $
              (0.11
              )
              $
              (0.16
              )








Stock
      options and warrants to purchase 3,169,562 and 2,376,711  common
      shares for the three months ended January 31, 2007 and 2006, respectively,
      were not included in the computation of diluted loss per share for those years
      because their effect would have been anti-dilutive.


-
          10
          -


*Significant
      Concentrations*





As
      of
      January 31, 2007, there was one customer that made up more than 10% of revenues
      and 4% of accounts receivable, and one supplier that made up more than 10%
      of
      purchases and 16% of accounts payable.





*Recent
      Accounting Pronouncements*





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation
      of FASB Statement No. 109, (FIN 48).  FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with FASB Statement No. 109, Accounting
      for Income Taxes. FIN 48 also prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return that results in
      a
      tax benefit. Additionally, FIN 48 provides guidance on de-recognition,
      income statement classification of interest and penalties, accounting in interim
      periods, disclosure, and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company does
      not
      believe that FIN 48 will have a material impact on the Company’s financial
      position, results of operations or cash flows.





In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which
      amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
      Activities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS
      140).  SFAS 155 amends SFAS 133 to narrow the scope exception for
      interest-only and principal-only strips on debt instruments to include only
      such
      strips representing rights to receive a specified portion of the contractual
      interest or principle cash flows.  SFAS 155 also amends SFAS 140 to allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument.  SFAS No. 155 is effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. The
      Company does not believe that SFAS No. 155 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to
      obtain hedge-like (offset) accounting. This Statement amends FASB Statement
      No.
      140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities”, with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. The Statement (1)
      requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract in certain situations; (2) requires that a separately
      recognized servicing asset or servicing liability be initially measured at
      fair
      value, if practicable; (3) permits an entity to choose either the amortization
      method or the fair value method for subsequent measurement for each class of
      separately recognized servicing assets or servicing liabilities; (4) permits
      at
      initial adoption a one-time reclassification of available-for-sale securities
      to
      trading securities by an entity with recognized servicing rights, provided
      the
      securities reclassified offset the entity’s exposure to changes in the fair
      value of the servicing assets or liabilities; and (5) requires separate
      presentation of servicing assets and servicing liabilities subsequently measured
      at fair value in the balance sheet and additional disclosures for all separately
      recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
      for all separately recognized servicing assets and liabilities as of the
      beginning of an entity’s fiscal year that begins after September 15, 2006, with
      earlier adoption permitted in certain circumstances. The Statement also
      describes the manner in which it should be initially applied. The Company does
      not believe that SFAS No. 156 will have a material impact on its financial
      position, results of operations or cash flows.


-
          11
          -


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value ** Measurements”,
      (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles (GAAP), and
      expands disclosures about fair value measurements. This Statement applies under
      other accounting pronouncements that require or permit fair value measurements,
      and does not require any new fair value measurements. The application of SFAS
      No. 157, however, may change current practice within an organization. SFAS
      No.
      157 is effective for all fiscal years beginning after November 15, 2007, with
      earlier application encouraged. The
      Company does not believe that SFAS No. 157 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for
      Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
      Statements No. 87, 88, 106 and 132(R)”(“SFAS 158”). SFAS 158 requires us to
      (a) recognize a plan’s funded status in the statement of financial
      position, (b) measure a plan’s assets and its obligations that determine
      its funded status as of the end of the employer’s fiscal year and
      (c) recognize changes in the funded status of a defined postretirement plan
      in the year in which the changes occur through other comprehensive income.
      SFAS
      No. 158 is effective for fiscal years ending after December 15, 2006. The
      Company does not believe that SFAS No. 158 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”), to address diversity in practice in quantifying financial statement
      misstatements. SAB 108 requires the quantification of misstatements based on
      their impact on both the balance sheet and the income statement to determine
      materiality. The guidance provides for a one-time cumulative effect adjustment
      to correct for misstatements that were not deemed material under a company’s
      prior approach but are material under the SAB 108 approach. SAB 108 is effective
      for fiscal years ending after November 15, 2006. The Company is assessing the
      potential impact that SAB 108 may have on our consolidated financial position,
      results of operations or cash flows.





In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities.”* SFAS
      159
      provides companies with an option to report selected financial assets and
      liabilities at fair value. The standard’s objective is to reduce both complexity
      in accounting for financial instruments and the volatility in earnings caused
      by
      measuring related assets and liabilities differently. The standard requires
      companies to provide additional information that will help investors and other
      users of financial statements to more easily understand the effect of the
      company’s choice to use fair value on its earnings. It also requires companies
      to display the fair value of those assets and liabilities for which the company
      has chosen to use fair value on the face of the balance sheet. The new standard
      does not eliminate disclosure requirements included in other accounting
      standards, including requirements for disclosures about fair value measurements
      included in SFAS 157, *“Fair
      Value Measurements,”* and
      SFAS
      107, *“Disclosures
      about Fair Value of Financial Instruments.”* SFAS
      159
      is effective as of the start of fiscal years beginning after November 15,
      2007. Early adoption is permitted. We are in the process of evaluating this
      standard and therefore have not yet determined the impact that the adoption
      of
      SFAS 159 will have on our financial position, results of operations or cash
      flows.


-
          12
          -


**NOTE
      2 - SEGMENT INFORMATION**




The
      Company’s operations are divided into segments based upon a combination of
      factors including: product produced, manufacturing process and management
      oversight.  The Company’s two segments are: IMRT/IGRT and Radiation
      Sources. IMRT/IGRT develops and markets products used during external beam
      radiation therapy for the treatment of cancer.  Radiation Sources develops
      and markets radioisotopic products including brachytherapy seeds and accessories
      used in the treatment of cancer and non-therapeutic products used in medical,
      environmental, research and industrial applications.





The
      Company evaluates performance and allocates resources based on operating results
      and development milestones.  The accounting polices of the reportable
      segments are the same as those described in Note 1 in the summary of significant
      accounting policies.  There are no inter-company sales or
      profits.




The
      Company’s segments are business units that either offer different products or
      are managed separately because they operate with distinct manufacturing and
      development processes.


**Three
                  months ended**
                **January
                  31,****2007**
              
              
              **2006****Revenues**IMRT/IGRT
              
              $
              3,646,000
              
              $
              4,675,000Radiation
                  Sources
              
              
              3,914,000
              
              
              2,852,000$
              7,560,000
              
              $
              7,527,000**Loss
                  from Operations**IMRT/IGRT
              
              $
              (1,772,000
              )
              $
              (1,451,000
              )Radiation
                  Sources
              
              
              (1,436,000
              )
              
              (1,227,000
              )$
              (3,208,000
              )
              $
              (2,678,000
              )**Depreciation
                  and amortization**IMRT/IGRT
              
              $
              229,000
              
              $
              229,000Radiation
                  Sources
              
              
              148,000
              
              
              176,000$
              377,000
              
              $
              405,000
 **January
                  31,**
              
              
              **October
                  31,****2007**
              
              
              **2006****Goodwill**IMRT/IGRT
              
              $
              2,564,000
              
              $
              2,564,000$
              2,564,000
              
              $
              2,564,000**Total
                  assets**IMRT/IGRT
              
              $
              14,265,000
              
              $
              15,789,000Radiation
                  Sources
              
              
              9,581,000
              
              
              11,409,000$
              23,846,000
              
              $
              27,198,000


-
          13
          -


**NOTE
      3 - DISCONTINUED OPERATION**





In
      September 2004, the Company discontinued its Theseus Operation which had been
      engaged in the research and development of a proprietary radiopharmaceutical
      agent (referred to as “Hynic-Annexin V”) since its acquisition in October 2000.
      The Company believed that successful completion of development and receipt
      of
      regulatory approvals allowing the marketing of Hynic-Annexin V would not occur
      earlier than 2007 and the additional costs would be substantial. During the
      third quarter of fiscal 2004, the Company determined that it needed to review
      the carrying value of Theseus assets for possible impairment due to ongoing
      discussions with various third parties concerning strategic alternatives for
      the
      Hynic-Annexin V product development program. The Company determined that the
      carrying value of the Theseus assets at July 31, 2004 exceeded their fair value,
      as determined by estimated future cash flows, and therefore, recorded a $4.7
      million charge for the impairment of goodwill and long-lived assets. Discussions
      with the various potential financial and strategic partners ceased in August
      2004, which resulted in the Company’s decision to shut-down the Theseus
      operation in September 2004. The Company recorded additional costs of $0.7
      million for severance, license termination fees and facility shut down costs,
      offset by $0.2 in proceeds from the sale of long-lived assets and research
      materials during the quarter ended October 31, 2004. As of October 31, 2005,
      the
      Company revised downward its estimate of the costs of the shut-down of its
      Theseus operation, resulting in a gain of $0.4 million related to that
      discontinued operation in the year ended October 31, 2005. As of October 31,
      2006, the Company wrote off the remaining accounts of the Theseus operation,
      resulting in a gain of $0.3 million related to that discontinued operation
      in
      the year ended October 31, 2006.





As
      a
      result of the shut-down in September 2004, the Company has presented the Theseus
      operation as a discontinued operation in the accompanying financial statements.





The
      Company had no revenues or expenses from the discontinued operation during
      the
      three months ended January 31, 2007 and 2006, and no assets or liabilities
      are
      recorded on the Company’s balance sheet as of January 31, 2007 or October 31,
      2006.





**NOTE
      4—MARKETABLE SECURITIES**





Marketable
      securities consist of the following:


**January
                  31, 2007**
              
              
              **October
                  31, 2006**Securities
                  held to maturity:Corporate
                  and government bonds
              
              $
              2,997,000
              
              $
              4,886,000Commercial
                  paper
              
              
              —
              
              
              2,947,000Certificate
                  of deposits and other
              
              
              —
              
              
              587,0002,997,000
              
              
              8,420,000Less:
                  current portion
              
              
              (2,997,000
              )
              
              (8,420,000
              )Non‐current
                  portion
              
              $
              —
              
              $
              —





The
      amortized cost of all held to maturity securities approximates fair value.
      At
      January 31, 2007, the entire balance of investments in debt securities matures
      within one year.





**NOTE
      5—ACCOUNTS RECEIVABLE**





Accounts
      receivable are recorded at the invoiced amount and do not bear interest. The
      allowance for doubtful accounts is the Company’s best estimate of the amount of
      probable credit losses in our existing accounts receivable. The Company
      determines the allowance based on historical write-off experience and customer
      economic data. We review our allowance for doubtful accounts monthly. Past
      due
      balances over 60 days and over a specified amount are reviewed individually
      for
      collectibility. Account balances are charged off against the allowance when
      the
      Company believes that it is probable the receivable will not be recovered.
      The
      Company does not have any off-balance-sheet credit exposure related to our
      customers.


-
          14
          -


Accounts
      receivable consist of the following:


**January
                  31, 2007**
              
              
              **October
                  31, 2006**Accounts
                  receivable - trade
              
              $
              7,640,000
              
              $
              5,815,000Less:
                  allowance for doubtful accounts
              
              
              (1,362,000
              )
              
              (1,104,000
              )$
              6,278,000
              
              $
              4,711,000





The
      provision for doubtful accounts was $0.3 million, and $0.6 million for the
      three
      months ended January 31, 2007 and 2006, respectively.





**NOTE
      6—INVENTORIES**


Inventories
                  consist of the following:**January
                  31, 2007**
              
              
              **October
                  31, 2006**Raw
                  materials
              
              $
              4,846,000
              
              $
              4,691,000Work
                  in process
              
              
              183,000
              
              
              174,000Finished
                  goods
              
              
              1,935,000
              
              
              1,959,000Reserve
                  for excess inventory
              
              
              (2,601,000
              )
              
              (2,622,000
              )$
              4,363,000
              
              $
              4,202,000





**NOTE
      7—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**





Equipment
      and leasehold improvements consist of the following:


**January
                  31, 2007**
              
              
              **October
                  31, 2006**Furniture,
                  fixtures and equipment
              
              $
              6,442,000
              
              $
              6,528,000Leasehold
                  improvements
              
              
              2,447,000
              
              
              2,312,0008,889,000
              
              
              8,840,000Less:
                  accumulated depreciation
              
              
              (6,660,000
              )
              
              (6,440,000
              )$
              2,229,000
              
              $
              2,400,000




Depreciation
      expense was $0.2 million and $0.2 million for the three months ended
      January 31, 2007 and 2006, respectively.





**NOTE
      8—INTANGIBLE ASSETS**


**January
                    31, 2007**
                
                
                **October
                    31, 2006**Amortizable
                    intangible assetsPurchased
                    technology
                
                $
                3,129,000
                
                $
                3,129,000Existing
                    customer relationships
                
                
                1,770,000
                
                
                1,770,000Trademark
                
                
                1,666,000
                
                
                1,666,000Patents
                    and licenses
                
                
                98,000
                
                
                98,0006,663,000
                
                
                6,663,000Less:
                    accumulated amortization
                
                
                (4,288,000
                )
                
                (4,131,000
                )))$
                2,375,000
                
                $
                2,532,000
 -
              15
              -


Amortization
      expense was $157,000 and $157,000, for the three months ended January 31,
      2007 and 2006, respectively.





The
      estimate of aggregate amortization expense for the subsequent years is as
      follows:


**For
                the Years Ended January 31,**2007
            
            $
            627,0002008
            
            
            627,0002009
            
            
            627,0002010
            
            
            494,000$
            2,375,000





**NOTE
      9 - BORROWINGS**





*Line
      of Credit*





On
      October 5, 2005, the Company entered into a Loan and Security Agreement (the
      “Loan Agreement”) **** with
      Silicon Valley Bank (the “Bank”), for a secured, revolving line of credit of up
      to $5,000,000. The line of credit had a term of one year and includes a letter
      of credit sub-facility. Borrowings under the line of credit are subject to
      a
      borrowing base formula. The Company will pay interest on the borrowings under
      the line of credit at the Bank’s prime rate, which was 8.25% on January 31,
      2007, or, if certain financial tests are not satisfied, at the Bank’s prime rate
      plus 1.5%. The line of credit is secured by all of the assets of the Company
      and
      is subject to customary financial and other covenants, including reporting
      requirements.





On
      January 12, 2006, the Company, entered into a First Amendment to Loan and
      Security Agreement (the “Amendment”) with the Bank.  The Amendment revised
      certain terms of the Loan Agreement to provide an adjustment to the borrowing
      base formula and to permit liens in favor of a holder of subordinated debt
      that
      are subordinated to the liens of the Bank.  In addition, the Amendment
      decreased the minimum tangible net worth that must be maintained by the Company
      under the Asset Based Terms of the Loan Agreement from $5 million to $1.5
      million and granted the Bank a warrant to purchase 39,683 shares of the
      Company’s common stock at an exercise price of $1.89 per share.  The
      warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $51,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $1.89Dividend
                yield
            
            0%Expected
                volatility
            
            63%Risk-free
                interest rate
            
            4.9%Expected
                life
            
            5
                years





The
      value
      of the warrant is being amortized over the term of the line of credit at $5,100
      per month, and is included in Interest and Other Expense on the Income
      Statement.


-
          16
          -


On
      October 31, 2006, the Company entered into a Second Amendment to Loan and
      Security Agreement (the “Second Amendment”) with the Bank.  The Second
      Amendment extended the term of the line of credit to October 3, 2007 and revised
      certain terms of the Loan Agreement. Specifically, the Second Amendment
      decreased the amount available under the line of credit from $5 million to
      $4
      million, and increased the minimum tangible net worth that must be maintained
      by
      the Company from $1.5 million to $5 million. Borrowings under the line of credit
      continue to be subject to a borrowing base formula. Borrowings now bear interest
      at the prime rate until such time as the Company’s quick ratio, which is defined
      as the ratio of unrestricted cash plus the Company’s net accounts receivable to
      the Company’s current liabilities, falls below 1.00 to 1.00. At such time as the
      Company’s quick ratio falls below 1.00 to 1.00, borrowings will bear interest at
      the prime rate plus 1.50%, and the Company will pay a fee of 0.50% per annum
      on
      the unused portion of the line of credit, and a collateral handling fee in
      an
      amount equal to $2,000 per month. No
      borrowings were outstanding against the Line of Credit as of January 31,
      2007.





*Subordinated
      Debt*





On
      March
      28, 2006, the Company entered into a Loan and Security Agreement (the “Loan
      Agreement”) **** with
      Partners for Growth, LLC (the “Debt Provider”), for a secured, revolving line of
      credit of up to $4,000,000, which will supplement an existing line of credit
      provided by Silicon Valley Bank. The line of credit has a term of eighteen
      months. Borrowings under the line of credit are subject to a borrowing base
      formula. The Company has paid interest on the borrowings under the line of
      credit at prime rate as quoted in the *Wall
      Street Journal,* which on
      January 31, 2007 was 8.25%. Amounts owing under the line of credit are secured
      by all of the assets of the Company and are subordinated to amounts owing under
      the line of credit with Silicon Valley Bank. The line of credit does not contain
      financial covenants; however the Company is subject to other customary
      covenants, including reporting requirements, and events of default. In
      connection with the Loan Agreement, the Company also granted the Debt Provider
      a
      warrant to purchase 395,000 shares of the Company’s common stock at an exercise
      price of $1.89 per share. As a result of the private placement of the Company’s
      common stock completed on June 7, 2006 (see Note 13), and pursuant to the
      anti-dilution terms of the warrant issued to the Debt Provider, the warrant
      was
      amended to increase the number of shares of the Company’s common stock that the
      Debt Provider can purchase from 395,000 shares to 555,039 shares, and the
      exercise price was decreased from $1.89 per share to $1.35 per share. The
      warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $475,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $2.05Dividend
                yield
            
            0%Expected
                volatility
            
            63%Risk-free
                interest rate
            
            4.9%Expected
                life
            
            5
                years





The
      issuance of the warrant has been accounted for as a loan origination fee. As
      such, the value of the warrant has been deferred and is being amortized over
      the
      life of the loan at $26,500 per month and is included in Interest and Other
      Expense on the Income Statement. No
      borrowings were outstanding against the Loan Agreement as of January 31,
      2007.





**NOTE
      10—STOCKHOLDERS' EQUITY**





*Preferred
      Stock*





The
      Company has authorized the issuance of 2,000,000 shares of preferred stock;
      however, no shares have been issued. The designations, rights and preferences
      of
      any preferred stock that may be issued will be established by the Board of
      Directors at or before the time of such issuance.


-
          17
          -


*Sale
      of Common Stock and Warrants*





On
      June
      7, 2006, we completed a private placement of 12,291,934
      shares of the Company’s common stock at a purchase price of $1.95 per share as
      well as warrants to purchase an additional 6,145,967 shares of the Company’s
      common stock at an exercise price of $2.08 per share for an aggregate
      consideration of approximately $24.0 million (before cash commissions and
      expenses of approximately $2.0 million). The warrants are exercisable beginning
      180 days after the date of closing until 7 years after the date of closing.
      The
      values of the warrants and common stock in excess of par value have been
      classified as stockholders’ equity in additional paid-in capital in our
      consolidated balance sheet as of January 31, 2007 and October 31, 2006. The
      warrants were evaluated under SFAS 133 and EITF 00-19, and the Company
      determined that the warrants have been correctly classified as
      equity.





The
      shares of common stock sold to the investors and the shares of common stock
      issuable upon the exercise of the warrants are subject to certain registration
      rights as set forth in the Securities Purchase Agreements. Under the Securities
      Purchase Agreements, we agreed to file a registration statement with the
      Securities and Exchange Commission within 45 days after the closing of the
      transaction to register the resale of the shares of common stock and the shares
      of common stock issuable upon the exercise of the warrants. If we failed to
      file
      a registration statement within such time period or such registration statement
      was not declared effective within 90 days after the closing of the transaction,
      we would have been liable for certain specified liquidated damages as set forth
      in the Securities Purchase Agreements, except that the parties have agreed
      that
      the Company will not be liable for liquidated damages with respect to the
      warrants or the warrant shares. We have agreed to maintain the effectiveness
      of
      this registration statement until the earlier of such time as the passage of
      two
      years from the closing date or all of the securities registered under the
      registration statement may be sold under Rule 144(k) of the Securities Act
      of
      1933 or all of the securities registered under the registration statement have
      been sold. We will pay all expenses incurred in connection with the
      registration, except for underwriting discounts and commissions. Pursuant to
      the
      terms of the Securities Purchase Agreement, we filed a registration statement
      on
      Form S-3 with the Securities and Exchange Commission on July 21, 2006 to
      register the shares of common stock sold to the investors and the shares of
      common stock issuable upon the exercise of the warrants. The registration
      statement was declared effective by the Securities and Exchange Commission
      on
      August 4, 2006.





The
      Securities Purchase Agreements contain certain customary closing conditions,
      as
      well as the requirement that we increase the number of members of the Board
      of
      Directors of the Company (the “Board”) from seven members to nine members. Under
      the Securities Purchase Agreements, Three Arch Partners, one of the investors,
      has the right to designate two members to the Board so long as Three Arch
      Partners beneficially owns greater than 3,500,000 shares of common stock
      (including shares of common stock issuable upon exercise of the warrants, and
      as
      appropriately adjusted for stock splits, stock dividends and recapitalizations)
      and the right to designate one member to the Board so long as Three Arch
      Partners beneficially owns greater than 2,000,000 shares of common stock
      (including shares of common stock issuable upon exercise of the warrants, and
      as
      appropriately adjusted for stock splits, stock dividends and recapitalizations).
      In accordance with the terms of the Securities Purchase Agreements, we increased
      the number of members of our Board from seven members to nine members and Three
      Arch Partners designated Wilfred E. Jaeger, M.D. and Roderick A. Young to fill
      the two vacancies. Our Board elected Dr. Jaeger and Mr. Young to serve as
      members of the Board on June 13, 2006.





In
      connection with the issuance of the warrants and upon closing of the
      transaction, we entered into a Warrant Agreement with our transfer agent
      relating to the warrant of Three Arch Partners and a different Warrant Agreement
      with our transfer agent relating to the warrants of the investors other than
      Three Arch Partners. The material differences between the two Warrant Agreements
      are described below.


-
          18
          -


The
      Three
      Arch Partners Warrant Agreement includes a non-waivable provision that provides
      that the number of shares issuable upon exercise of the warrants that may be
      acquired by Three Arch Partners will be limited to the extent necessary to
      assure that, following such exercise, the total number of shares of common
      stock
      then beneficially owned by Three Arch Partners and its affiliates does not
      exceed 19.9% of the total number of issued and outstanding shares of common
      stock as of the date of such exercise (including for such purpose the shares
      of
      common stock issuable upon such exercise of warrants), unless approved by our
      stockholders prior to such exercise. The Warrant Agreement relating to the
      warrants of the other investors does not include such a provision.





The
      Warrant Agreement relating to the investors other than Three Arch Partners
      includes a waivable provision that provides that the number of shares issuable
      upon exercise of the warrants that may be acquired by a registered holder of
      warrants upon an exercise of warrants will be limited to the extent necessary
      to
      assure that, following such exercise, the total number of shares of common
      stock
      then beneficially owned by its holder and its affiliates does not exceed 4.99%
      of the total number of issued and outstanding shares of common stock (including
      for such purpose the shares of common stock issuable upon such exercise of
      warrants). This provision may be waived by a registered holder of warrants
      upon,
      at the election of such holder, upon not less than 61 days prior notice to
      us.
      This Warrant Agreement also contains a non-waivable provision that provides
      that
      the number of shares issuable upon exercise of the warrants that may be acquired
      by a registered holder of warrants upon an exercise of warrants will be limited
      to the extent necessary to assure that, following such exercise, the total
      number of shares of common stock then beneficially owned by such holder and
      its
      affiliates does not exceed 9.99% of the total number of issued and outstanding
      shares of common stock (including for such purpose the shares of common stock
      issuable upon such exercise of warrants). The Warrant Agreement relating to
      the
      warrants of Three Arch Partners does not include such provisions.





*Stock
      Options*





The
      Company's 1996 Stock Option Plan ("1996 Plan"), as amended April 6, 2001,
      provided for the issuance of incentive stock options to employees of the Company
      and non-qualified options to employees, directors and consultants of the Company
      with exercise prices equal to the fair market value of the Company's stock
      on
      the date of grant. Certain options are immediately exercisable while other
      options vest over periods up to four years. The options expire ten years from
      the date of grant. The 1996 Plan provided for the automatic increase on
      January 1 of each year, beginning with calendar year 2002 and continuing
      through calendar year 2004, by a number of shares equal to 3.5% of the total
      number of shares of the Company's Common Stock outstanding on the last trading
      day in the immediately preceding calendar year. In May 2004, the Company’s
      shareholders approved proposals to amend the 1996 Plan to make an additional
      600,000 shares available for issuance under the plan and to permit the issuance
      of 1,362,589 replacement options in connection with the acquisition of NOMOS.
      From November 1, 2005 through March 31, 2006, stock options for 1,303,000 shares
      were granted to employees under the 1996 Plan. The 1996 Plan expired on April
      1,
      2006.





On
      May 3,
      2006, the Company’s shareholders approved the North American Scientific, Inc.
      2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
      1,700,000 shares, plus any shares from the 1996 Plan that are subsequently
      terminated, expire unexercised or forfeited, to employees of the Company through
      incentive stock options, non-qualified options, stock appreciation rights,
      restricted stock and restricted stock units. The exercise price of an option
      is
      equal to the fair market value of the Company’s stock on the date of the grant.
      At January 31, 2007, no equity awards have been granted under the 2006
      Plan.





In
      March 2003, the Company's shareholders approved the 2003 Non-Employee
      Directors' Equity Compensation Plan ("Directors' Plan"). The Directors' Plan
      supersedes prior provisions for grants of stock options to non-employee
      directors contained in the 1996 Plan. Under the Directors' Plan, the Company
      may
      issue up to 500,000 shares to non-employee directors of the Company through
      non-qualified options or restricted stock. The exercise price of an option
      is
      equal to the fair market value of the Company's stock on the date of grant.
      Options and restricted stock vest equally over a three-year period. The options
      expire ten years from the date of grant. In the three months ended January
      31,
      2007, no stock options shares were granted to non-employee directors under
      the
      Directors’ Plan. At January 31, 2007, there were 85,000 shares available for
      grant under the Directors’ Plan.


-
          19
          -


At
      January 31, 2007, a total of 5,434,354 shares of the Company’s common stock were
      reserved for issuance. The following table summarizes stock option activity
      for
      both plans:


**Options
                Outstanding****Options**
              **Available**
              **for
                Grant**
            
            **Number**
              **Outstanding**
            
            **Exercise
                Price**Balance
                at October 31, 2004
            
            
            1,579,742
            
            
            3,253,821
            
            $
            0.03
                - $24.54Granted
            
            
            (275,000
            )
            
            275,000
            
            $
            2.25
                - $3.66Forfeited
                and expired
            
            
            427,699
            
            
            (427,699
            )
            $
            1.11
                - $16.75Exercised
            
            
            —
            
            
            (687,013
            )
            $
            1.11
                - $1.96Balance
                at October 31, 2005
            
            
            1,732,441
            
            
            2,414,109
            
            $
            0.03
                - $24.54Granted
            
            
            (1,453,000
            )
            
            1,453,000
            
            $
            1.92
                - $3.35Forfeited
                and expired
            
            
            (194,441
            )
            
            (426,618
            )
            $
            1.11
                - $16.75Exercised
            
            
            —
            
            
            (2,186
            )
            $
            1.11
                - $1.12Additional
                shares reserved
            
            
            1,700,000
            
            
            —Balance
                at October 31, 2006
            
            
            1,785,000
            
            
            3,438,305
            
            $
            0.03
                - $24.54Granted
            
            
            —
            
            
            —
            
            
            —Forfeited
                and expired
            
            
            492,150
            
            
            (281,101
            )
            $
            0.07
                - $8.80Exercised
            
            
            —
            
            
            —
            
            
            —Balance
                at January 31, 2007
            
            
            2,277,150
            
            
            3,157,204
            
            $
            0.03
                - $24.54





There
      were 1,700,562, 1,878,663 and 1,873,220 options exercisable with weighted
      average exercise prices of $9.34, $8.57 and $8.79 at January 31, 2007, October
      31, 2006 and 2005, respectively.





The
      following table summarizes options outstanding at January 31, 2007 and the
      related weighted average exercise price and remaining contractual life
      information:




**Employee
                Options Outstanding**
            
            
            **Employee
                Options Exercisable****Range
                of**
              **Exercise
                Prices**
            
            
            **Shares**
            
            
            **Weighted
                Avg.**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**
            
            
            **Shares**
            
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**$0.03
                - $2.23
            
            
            789,253
            
            
            6.49
            
            $
            2.04
            
            
            100,608
            
            $
            1.04$2.24
                - $3.35
            
            
            764,500
            
            
            7.54
            
            
            3.30
            
            
            68,752
            
            
            3.18$3.36
                - $7.60
            
            
            700,041
            
            
            5.00
            
            
            7.01
            
            
            674,791
            
            
            7.00$7.61
                - $12.89
            
            
            675,900
            
            
            4.93
            
            
            9.94
            
            
            628,901
            
            
            10.00$12.90
                - $24.54
            
            
            227,510
            
            
            2.53
            
            
            20.01
            
            
            227,510
            
            
            20.013,157,204
            
            
            5.79
            
            $
            6.43
            
            
            1,700,562
            
            $
            9.34





There
      were no options granted during the three months ended January 31, 2007. The
      average fair value for accounting purposes of options granted was $1.09 and
      $2.47 for the years ended October 31, 2006 and 2005,
      respectively.


-
          20
          -


The
      following table summarizes the weighted average price, weighted average
      remaining contractual life and intrinsic value for granted and exercisable
      options outstanding as of January 31, 2007 and October 31, 2006:




**Number
                of Shares**
            
            
            **Weighted
                Average Exercise Price**
            
            
            **Weighted
                Avg.**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            
            **Intrinsic
                Value**
              **as
                of October 31, 2006***As
                of October 31, 2006:*Employee
                Options Outstanding
            
            
            3,438,305
            
            $
            6.06
            
            
            5.81
            
            $
            56,500Employee
                Options Expected to Vest
            
            
            1,559,642
            
            $
            2.68
            
            
            7.14
            
            $
            —Employee
                Options Exercisable
            
            
            1,878,663
            
            $
            8.57
            
            
            4.52
            
            $
            56,500*As
                of January 31, 2007*Employee
                Options Outstanding
            
            
            3,157,204
            
            $
            6.41
            
            
            5.79
            
            $
            7,070Employee
                Options Expected to Vest
            
            
            1,456,642
            
            $
            2.32
            
            
            5.86
            
            $
            —Employee
                Options Exercisable
            
            
            1,700,562
            
            $
            9.34
            
            
            4.66
            
            $
            7,070


*Fair
      Value Disclosures*





The
      Company did not grant any options during the three-month period ended January
      31, 2007, and no assumptions have been developed. For prior periods, the Company
      calculated the fair value of each option grant on the respective date of grant
      using the Black-Scholes option-pricing model as prescribed by SFAS 123(R)
      using the following assumptions:





**Year
                Ended****October
                31****2006**
            
            **2005**Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            63
            %
            
            82
            %Risk-free
                interest rate
            
            
            4.9
            %
            
            3.9
            %Expected
                life
            
            
            5
                years
            
            
            5
                years





*Stockholders'
      Rights Plan*





In
      October 1998, the Board of Directors of the Company implemented a rights
      agreement to protect stockholders' rights in the event of a proposed takeover
      of
      the Company. In the case of a triggering event, each right entitles the
      Company's stockholders to buy, for $80, $160 worth of common stock for each
      share of common stock held. The rights will become exercisable only if a person
      or group acquires, or commences a tender offer to acquire, 15% or more of the
      Company's common stock. The rights, which expire in October 2008, are
      redeemable at the Company's option for $0.001 per right. The Company also has
      the ability to amend the rights, subject to certain limitations.





*Employee
      Stock Purchase Plan*





In
      March
      2000, the Board of Directors authorized an Employee Stock Purchase Plan ("the
      ESPP") under which 300,000 shares of the Company's common stock are reserved
      for
      issuance. Eligible employees may authorize payroll deductions of up to 15%
      of
      their salary to purchase shares of the Company's common stock at a discount
      of
      up to 15% of the market value at certain plan-defined dates. In the three months
      ended January 31, 2007 and the years ended October 31, 2006 and 2005, the shares
      issued under the ESPP were 56,767, 96,489 and 59,742 shares, respectively.
      At
      January 31, 2007 and October 31, 2006, 17,072 and 73,839 shares were
      available for issuance under the ESPP, respectively.


-
          21
          -


*Common
      Stock Repurchase Program*





In
      October 2001, the Board of Directors authorized a stock repurchase program
      to acquire up to $10 million of the Company's common stock in the open
      market at any time. The number of shares of common stock actually acquired
      by
      the Company will depend on subsequent developments and corporate needs, and
      the
      repurchase of shares may be interrupted or discontinued at any time. As of
      January 31, 2007 and October 31, 2006, a cumulative total of 48,795 and
      22,100 shares had been repurchased by the Company at a cost of $160,000 and
      $133,000, respectively and are reflected as Treasury Stock on the Balance Sheet
      at the respective dates.





**NOTE
      11—COMMITMENTS AND CONTINGENCIES**





*Contract
      Commitments*





The
      Company has entered into purchase commitments of $0.1 million to suppliers
      under
      blanket purchase orders. The blanket purchase orders expire when the designated
      quantities have been purchased.




*Lease
      Commitments*





The
      Company leases facilities and equipment under non-cancelable operating lease
      agreements. Future minimum lease payments are subject to annual adjustment
      for
      increases in the Consumer Price Index. Total rent expense for the three months
      ended January 31, 2007 and the years ended October 31, 2006, and 2005 was
      $224,000, $881,000 and $872,000, respectively.





Future
      minimum annual lease payments under all operating leases are as
      follows:





**For
                the Years Ended January 31,**2008
            
            $
            790,0002009
            
            
            538,0002010
            
            
            538,0002011
            
            
            538,0002012
            
            
            527,000Thereafter
            
            
            533,000$
            3,464,000





*Third
      Party License Agreements*




We
      license from third parties some of the technologies used in our core products.
      The following are the minimum annual royalty amounts under each of the
      agreements:




Lawrence
                  Livermore National Laboratory
              
              $
              25,000Wisconsin
                  Alumni Research Foundation
              
              
              15,000University
                  of Texas
              
              
              50,000National
                  Research Council of Canada
              
              
              30,000IdeaMatrix,
                  Inc.
              
              
              125,000$
              245,000




-
          22
          -


*Employment
      Agreements*





The
      Company maintains employment agreements with certain key management. The
      agreements provide for minimum base salaries, eligibility for stock options
      and
      performance bonuses and severance payments.





*Litigation*





In
      November, 2005, the Company was served with a complaint filed in U.S. District
      Court in Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s
      six count complaint alleges breach of a confidentiality agreement, fraud, patent
      infringement, wrongful interference with contractual relations, violation of
      the
      Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
      Practices Act. WWMT alleges that the Company fraudulently obtained WWMT’s
      confidential information during negotiations to purchase WWMT in 2004 and that
      once the Company acquired that information, it purportedly learned that Richard
      Terwilliger, (our former Vice President of New Product Development) owned
      certain patent rights and that we began trying to inappropriately gain property
      rights by hiring him away from WWMT. The Company was served with this matter
      at
      approximately the same time Mr. Terwilliger was served with a lawsuit in
      state court and with an application seeking a preliminary
      injunction declaring plaintiffs to be the sole owners of the intellectual
      property at issue and preventing Mr. Terwilliger from effectively serving
      as Vice President of New Product Development at the Company. The Company has
      agreed to defend Mr. Terwilliger. We have removed the state court claim against
      Mr. Terwilliger to federal court and the cases have been consolidated. The
      defendants have answered both complaints and discovery has commenced
      in each matter. In April 2006, WWMT had its hearing for a preliminary injunction
      against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned
      that portion of their application for preliminary injunction that was based
      on
      an alleged misappropriation of trade secrets shortly before the hearing. On
      August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering
      that what remained of plaintiffs' motion be denied.  Specifically, the
      Magistrate Judge found that plaintiffs do not have a reasonable likelihood
      of
      success on the merits of their claim for declaratory judgment that some or
      all
      of plaintiffs are the sole owners of the intellectual property at issues, and
      she further found that there do not exist sufficiently serious questions
      going to the merits of that claim to make them a fair ground for
      litigation.  The Company denies liability and intends to vigorously
      defend itself in this litigation as it progresses. No trial date has
      yet been set.





On
      April
      20, 2006, a lawsuit captioned *J.P.
      Morgan Trust Company, N.A. v. John Alan Friede, et al.* was
      filed in the U.S. District Court for the Southern District of New York against
      John A. Friede, a current director and stockholder of the Company, Mr. Friede’s
      wife, and NOMOS Corporation, a subsidiary of the Company. The plaintiff, J.P.
      Morgan Trust Company, filed the lawsuit in its capacity as personal
      representative of the Estate of Evelyn A.J. Hall, Mr. Friede’s deceased mother.
      The complaint, as amended on August 8, 2006, asserts claims for reimbursement
      and contribution, constructive fraud, breach of contract and other related
      claims arising out of loans made by Mrs. Hall to, or for the benefit of, Mr.
      and
      Mrs. Friede and/or NOMOS, or acting as an accommodation party in additional
      loans made to Mr. and Mrs. Friede by financial institutions that were not
      subsequently repaid. During the time periods alleged in the complaint, Mr.
      Friede was the Chairman, Chief Executive Officer and the largest stockholder
      of
      NOMOS. With respect to NOMOS, the complaint seeks at least approximately
      $5,250,000 principal amount of loans allegedly made to and still outstanding
      and
      owed by NOMOS, and other related equitable remedies plus interest, costs and
      expenses.


-
          23
          -


On
      the
      basis of copies of documents that have been made available to us, we believe
      that the claims made against NOMOS in the lawsuit appear to be without merit
      and
      we intend to vigorously defend against them. However, in accordance with the
      indemnification provisions of the merger agreement under which we acquired
      NOMOS
      on May 4, 2004, and the related indemnity escrow agreement, we have made a
      claim
      for indemnification against the escrow to preserve our right of indemnity.
      Under
      these provisions, an indemnifying party will not have any indemnification
      obligations until such time as the aggregate indemnified losses for which we
      are
      entitled to indemnification equals or exceeds $400,000, at which point, the
      indemnifying party will be liable for the full amount of all such indemnified
      losses without regard to the $400,000 basket. As of the date hereof, the
      indemnity escrow account holds approximately $1,225,000 of cash and 526,810
      shares of our common stock. We also intend to review various other legal
      remedies that may be available to us.




The
      Company is also subject to other legal proceedings, claims and litigation
      arising in the ordinary course of business. While the outcome of these matters
      is currently not determinable, management does not expect that the ultimate
      costs to resolve these matters will have a material adverse effect on the
      Company's consolidated financial position, results of operations, or cash
      flows.





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





*The
      following discussion and analysis provides information, which our management
      believes is relevant to an assessment and understanding of our financial
      condition and results of operations. The discussion should be read in
      conjunction with the Consolidated Financial Statements contained herein and
      the
      notes thereto. Certain statements contained in this Form 10-Q, including,
      without limitation, statements containing the words “believes”, “anticipates”,
“estimates”, “expects”, “projections”, and words of similar import are forward
      looking as that term is defined by: (i) the Private Securities Litigation
      Reform Act of 1995 (the "1995 Act") and (ii) releases issued by the
      Securities and Exchange Commission (“SEC”). These statements are being made
      pursuant to the provisions of the 1995 Act and with the intention of obtaining
      the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution that
      any forward looking statements made herein are not guarantees of future
      performance and that actual results may differ materially from those in such
      forward looking statements as a result of various factors, including, but not
      limited to, any risks detailed herein or detailed from time to time in our
      other
      filings with the SEC including our most recent report on Form 10-K. We are
      not undertaking any obligation to update publicly any forward-looking
      statements. Readers should not place undue reliance on these forward-looking
      statements.*




**Overview**





We
      manufacture, market and sell products for the radiation oncology community,
      including intensity modulated and image guided radiation therapy products and
      services, as well as brachytherapy seeds used in the treatment of prostate
      cancer. Our business is organized into two operating segments: IMRT/IGRT and
      Radiation Sources.





IMRT/IGRT
      develops and markets intensity modulated radiation therapy (“IMRT”) and image
      guided radiation therapy (“IGRT”) products used in external beam radiation
      therapy for the treatment of disease. Radiation Sources develops and markets
      radioisotopic products including brachytherapy seeds, accessories and
      calibration sources used in the treatment of disease and used in medical,
      environmental, research and industrial applications.


-
          24
          -


On
      November 7, 2006, we announced the introduction of ClearPathTM, our unique
      multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation (APBI), at the American Society for Therapeutic Radiology and
      Oncology (ASTRO) Annual Meeting in Philadelphia. The ClearPath systems are
      placed through a single incision and are designed to conform to the resection
      cavity, allowing for more conformal therapeutic radiation dose distribution
      following lumpectomy compared to other methods of APBI. ClearPath is designed
      to
      accommodate either high-dose, ClearPath-HDRTM, or low-dose rate, ClearPath-CRTM,
      treatment methods. The Company received 510k approval from the United States
      Food and Drug Administration for a low-dose rate, or continuous release
      treatment utilizing the Company’s Prospera® brachytherapy seeds in April 2006
      and approval for the high-dose rate treatment in November 2006. We expect to
      commercially launch our ClearPath product during fiscal year 2007, with an
      initial focus on ClearPath-HDR, to be followed by release of our ClearPath-CR.





Based
      on
      our current operating plans, we believe that the existing cash resources, cash
      forecasted by our plans to be generated by operations, the issuance of our
      common stock and/or securities convertible to debt as well as our anticipated
      and available lines of credit will be sufficient to meet working capital and
      capital requirements through at least the next twelve months.  Also, our
      plans to attain profitability and generate additional cash flows include
      increasing revenues from existing and new products and services and a focus
      on
      cost control.  There is no assurance that we will be successful with these
      plans.  However, if events and circumstances occur such that we do not meet
      our current operating plan as expected, and we are unable to raise additional
      debt or equity financing, we may be required to further reduce expenses or
      take
      other steps which could have a material adverse effect on our future
      performance, including but not limited to, the premature sale of some or all
      of
      our assets or product lines on undesirable terms, merger with or acquisition
      by
      another company on unsatisfactory terms, or the cessation of
      operations.





On
      January 11, 2007, we announced that we had engaged CIBC World Markets
      Corporation as a financial advisor to assist us in identifying strategic
      opportunities for our IMRT/IGRT business segment that could enhance shareholder
      value.





**Results
      of Operations**





**Three
      Months Ended January 31, 2007 Compared to Three Months Ended January 31,
      2006**




**Total
              Revenue**
            
            
            **Three
                Months Ended January 31,****2007**
            
            
            **2006**
            
            
            **%
                Change****($
                millions)**IMRT/IGRT
                Products
            
            $
            1.6
            
            $
            2.3
            
            
            (32)
            %IMRT/IGRT
                Services
            
            
            2.1
            
            
            2.4
            
            
            (12)
            %Total
                IMRT/IGRT
            
            $
            3.7
            
            $
            4.7
            
            
            (22)
            %Radiation
                Sources
            
            
            3.9
            
            
            2.8
            
            
            37
            %$
            7.6
            
            $
            7.5
            
            
            0.4
            %


-
          25
          -


Total
      revenue increased 0.4% to $7.6 million for the three months ended January 31,
      2007 from $7.5 million for the three months ended January 31, 2006. The increase
      in revenue is due to a $1.1 million, or 37%, increase of net sales in our
      Radiation Sources products, partially offset by a decline in product and service
      revenues from our IMRT/IGRT business. The increase in our Radiation Sources
      business reflects a 26% increase in sales of our brachytherapy seeds and
      accessories, with increased product sales partially offset by a decline in
      average selling prices, and a 70% increase in sales of our non-therapeutic
      products. The decrease in the IMRT/IGRT revenue results from a decline in both
      the number of products sold and in average selling prices due to competition.
      Our service revenue is related to our IMRT/IGRT business, and decreased $0.3
      million, or 12%, to $2.1 million for the three months ended January 31, 2007
      from $2.4 million for the three months ended January 31, 2006.




**Gross
      profit**


**Three
                Months Ended January 31,****2007**
            
            
            **2006**
            
            
            **%
                Change****($
                millions)**IMRT/IGRT
                Products
            
            $
            0.6
            
            $
            0.6
            
            
            2
            %IMRT/IGRT
                Services
            
            
            1.3
            
            
            1.5
            
            
            (13)
            %Total
                IMRT/IGRT
            
            $
            1.9
            
            $
            2.1
            
            
            (10)
            %Radiation
                Sources
            
            
            1.4
            
            
            0.8
            
            
            89
            %$
            3.3
            
            $
            2.9
            
            
            16
            %




**Three
                Months Ended January 31,****2007**
            
            
            **2006**
            
            
            **%
                Point Change****(%
                of Revenue)**IMRT/IGRT
                Products
            35
                %
            
            
            24
                %
            
            
            11
                %IMRT/IGRT
                Services
            64
                %
            
            
            65
                %
            
            
            (1)
                %Total
                IMRT/IGRT
            52
                %
            
            
            45
                %
            
            
            7
                %Radiation
                Sources
            36
                %
            
            
            26
                %
            
            
            10
                %44
                %
            
            
            38
                %
            
            
            6
                %





Gross
      profit increased $0.4 million, or 16%, to $3.3 million for the three months
      ended January 31, 2007 from $2.9 million for the three months ended
      January 31, 2006. The increase in our gross profit is primarily due to
      increased product sales and reduced cost of in-house stranding in our Radiation
      Sources business, partially offset by reduced revenues of our IMRT/IGRT
      business. Gross profit for the three months ended January 31, 2007 consisted
      of
      $1.9 million from our IMRT/IGRT business and $1.4 million from our Radiation
      Sources business. The gross profit on our service revenue, related to our
      IMRT/IGRT business, decreased $0.2 million, or 13%, to $1.3 million for the
      three months ended January 31, 2007 from $1.5 million for the three months
      ended January 31, 2006.





Gross
      profit as a percent of sales increased from 38% in the three months ended
      January 31, 2006 to 44% in three months ended January 31, 2007 primarily due
      to
      increased product sales and reduced cost of in-house stranding in our Radiation
      Sources business, and a shift in IMRT/IGRT revenues toward higher margin service
      revenues. Gross profit as a percent of sales by business segment for the three
      months ended January 31, 2007 consisted of 52% of sales from our IMRT/IGRT
      business and 36% of sales from our Radiation Sources business. We anticipate
      that gross profit margins of both businesses will improve over time with the
      anticipated increase in sales volumes as new products are
      introduced.


-
          26
          -


**Selling
      and marketing expenses**


**Three
                Months Ended January 31,****($
                millions)**
            
            
            **2007**
            
            
            **2006**
            
            
            **%
                Change**Selling
                and marketing expenses
            
            $
            2.1
            
            $
            1.9
            
            
            13
            %As
                a percent of total revenue
            
            
            28
            %
            
            25
            %





Selling
      and marketing expenses comprised primarily of salaries, commissions, and
      marketing costs, increased $0.2 million, or 13%, to $2.1 million for the three
      months ended January 31, 2007, from $1.9 million for the three months ended
      January 31, 2006. The increase in selling and marketing expenses is primarily
      attributed to sales commissions related to the increased sales of Radiation
      Sources products, marketing expenses related to the ClearPath product and trade
      show expenses.





**General
      and administrative expenses ("G&A")**


**Three
                Months Ended January 31,****2007**
            
            
            **2006**
            
            
            **%
                Change****($
                millions)**General
                and administrative expenses
            
            $
            3.0
            
            $
            2.2
            
            
            38
            %As
                a percent of total revenue
            
            
            40
            %
            
            29
            %





G&A
      increased $0.8 million, or 38%, to $3.0 million for the three months ended
      January 31, 2007, from $2.2 million for the three months ended
      January 31, 2006. The increase in G&A is primarily attributed to $0.5
      million increase in professional fees, and $0.2 million increase in the
      allowance for bad debts.





**Research
      and development (“R&D”)**


**Three
                Months Ended January 31,****2007**
            
            
            **2006**
            
            
            **%
                Change****($
                millions)**


Research
                and development expenses
            
            $
            1.2
            
            $
            1.3
            
            
            (7)
            %As
                a percent of total revenue
            
            
            16
            %
            
            18
            %





R&D
      decreased $0.1 million or 7%, to $1.2 million for the three months ended
      January 31, 2007, from $1.3 million for the three months ended
      January 31, 2006. The decrease in R&D spending is primarily due to
      reduced project spending in IMRT/IGRT business, partially offset by increased
      spending on product development in our Radiation Sources business relating
      to
      in-house stranding and breast brachytherapy. resources in new product
      development, as well as continue to enhance existing products.





**Amortization
      of intangible assets.** Amortization of intangible assets was $0.2 million in the three months ended
      January 31, 2007 and 2006.





**Interest
      and other income, net.** Interest
      income increased by $10,000 to $13,000 due to an increase in the portfolio
      of
      marketable securities.  -
            27
            -


**Liquidity
      and Capital Resources**





To
      date,
      our short-term liquidity needs have generally consisted of working capital
      to
      fund our ongoing operations and to finance growth in inventories, trade accounts
      receivable, new product research and development, capital expenditures,
      acquisitions and strategic investments in related businesses.  We have
      satisfied these needs primarily through a combination of cash generated by
      operations, public offerings and from private placements of our common
      stock.  We expect that we will be able to satisfy our longer term
      liquidity needs for research and development, capital expenditures, and
      acquisitions through a combination of cash generated by operations, sales of
      our
      common stock and /or securities convertible to debt, and our anticipated and
      available lines of credit.





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business. However, the Company has continued to incur
      substantial net losses and used substantial amounts of cash. As of January
      31,
      2007, the Company has an accumulated deficit of $130.7 million; cash, cash
      equivalents and marketable securities of $4.3 million and no long-term
      debt.





Based
      on
      our current operating plans, we believe that the existing cash resources, cash
      forecasted by our plans to be generated by operations, the sale of our common
      stock and/or securities convertible to debt as well as our anticipated and
      available lines of credit will be sufficient to meet working capital and capital
      requirements through at least the next twelve months.  Also, our plans to
      attain profitability and generate additional cash flows include increasing
      revenues from existing and new products and services and a focus on cost
      control. However, there is no assurance that we will be successful with
      these plans.  If events and circumstances occur such that we do not meet
      our current operating plan as expected, and we are unable to raise additional
      debt or equity financing, we may be required to further reduce expenses or
      take
      other steps which could have a material adverse effect on our future
      performance, including but not limited to, the premature sale of some or all
      of
      our assets or product lines on undesirable terms, merger with or acquisition
      by
      another company on unsatisfactory terms, or the cessation of
      operations.





At
      January 31, 2007, we had cash, and cash equivalents, and investments in
      marketable securities aggregating approximately $4.3 million, a decrease of
      approximately $5.0 million from $9.3 million at October 31, 2006. The decrease
      was primarily attributed to $5.0 million used in continuing operations and
      $0.1
      million used for capital expenditures, partially offset by $0.1 million in
      cash
      received from the exercise of stock options and the employee stock purchase
      plan.





Cash
      flows used in operating activities increased $2.4 million, or 90%, to $5.0
      million for the three months ended January 31, 2007 from $2.6 million for the
      three months ended January 31, 2006, primarily due to reduced collections of
      accounts receivable ($0.7 million) increased payments to suppliers ($0.6
      million), reduced deferred revenue ($0.3 million) and an increase in the net
      cash used in prepaid and other current assets ($0.8 million). We expect that
      cash used in operating activities may fluctuate in future periods as a result
      of
      a number of factors, including fluctuations in our operating results, accounts
      receivable collections, inventory management, research and development expenses,
      and the timing of payments.





Cash
      flows provided by investing activities increased $4.5 million to $5.4 million
      for the three months ended January 31, 2007, from $0.9 million for the three
      months ended January 31, 2006. The increase reflects the additional draw down
      of
      our balance of marketable securities to fund operations.





Cash
      provided by financing activities decreased $1.0 million to $0.1 million for
      the
      three months ended January 31, 2007, from $1.1 million for the three months
      ended January 31, 2006. The decrease is due to a drawdown on the line of credit
      ($1.0 million) in 2006 and no drawdown in 2007.


-
          28
          -


We
      have
      $3.5 million in operating lease obligations for facilities and equipment under
      non-cancelable operating lease agreements. We have also entered into purchase
      commitments to suppliers under blanket purchase orders in the amount of $0.1
      million.





**Critical
      Accounting Policies**





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make judgments, assumptions and estimates that affect
      the
      amounts reported in the Consolidated Financial Statements included in the
      Company’s Form 10-K for the year ended October 31, 2006, and accompanying notes.
      Note 1 to the Consolidated Financial Statements describes the significant
      accounting policies and methods used in the preparation of the Consolidated
      Financial Statements. Estimates are used for, but not limited to, the accounting
      for revenue recognition, allowance for doubtful accounts, goodwill and
      long-lived asset impairments, loss contingencies, and taxes. Estimates and
      assumptions about future events and their effects cannot be determined with
      certainty. We base our estimates on historical experience and on various other
      assumptions believed to be applicable and reasonable under the circumstances.
      These estimates may change as new events occur, as additional information is
      obtained and as our operating environment changes. These changes have
      historically been minor and have been included in the consolidated financial
      statements as soon as they became known. The following critical accounting
      policies are impacted significantly by judgments, assumptions and estimates
      used
      in the preparation of the Consolidated Financial Statements and actual results
      could differ materially from the amounts reported based on these
      policies.





*Revenue
      Recognition*





We
      sell
      products and services for radiation therapy treatment of cancer, including
      intensity modulated radiation therapy (“IMRT”), image guided radiation therapy
      (“IGRT”), as well as brachytherapy. Product revenue consists of brachytherapy
      seeds and accessories, non-therapeutic sources, and certain IMRT hardware
      devices, including our MiMIC and Crane products. Software revenues consist
      of
      IMRT treatment planning software, including Corvus, Peacock, and nomosSTAT,
      and
      our IGRT products. Service revenue consists of warranty revenue and maintenance
      service agreements.





Product
      revenue





We
      apply
      the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
      Recognition” for the sale of non-software products. 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. In
      general, the Company recognizes revenue related to product sales when (i)
      persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii)
      the fee is fixed or determinable, and (iv) collectibility is reasonably
      assured.





Software
      revenue





Our
      software revenue is generated from the sale of advanced medical equipment
      products. The software element of our products is deemed an essential element
      of
      the functionality of the product. Maintenance and support are provided with
      the
      initial product sale for a twelve month period. The maintenance and support
      is
      renewable annually or longer, at the customer’s discretion.


-
          29
          -


We
      recognize software revenue in accordance with the provisions of Statement of
      Position 97-2 (“SOP 97-2”), “Software Revenue Recognition”, as amended by
      Statement of Position 98-9 (“SOP 98-9”), “Modification of SOP 97-2, Software
      Revenue Recognition, with respect to Certain Transactions”. Under the provisions
      of SOP 97-2, we recognize software revenue upon delivery and acceptance,
      provided all significant obligations have been met, persuasive evidence of
      an
      arrangement exists, fees are fixed or determinable, collection is probable,
      and
      we are not involved in providing services that are essential to the
      functionality of the product.





Our
      software sales are generally multiple element arrangements, which could include
      the product, first year annual maintenance and support, and training and
      installation. Revenues from the multiple elements arrangements are allocated
      to
      each element based on the relative fair value of the elements. If the fair
      value
      of the element exists, the determination is based on vendor specific objective
      evidence. If such evidence of fair value for each element of the arrangement
      does not exist, all revenue from the arrangement is deferred until such time
      that evidence of fair value of each element does exist or until all elements
      of
      the arrangement are delivered. If in a multiple element arrangement, fair value
      does not exist for one or more of the undelivered elements, the residual method
      of accounting is applied. Under the residual method, the fair value of the
      undelivered elements is deferred, and the remaining portion of the arrangement
      fee is recognized as revenue.





Service
      revenue





Services
      revenues are derived mainly from maintenance and support contracts and are
      recognized on a straight-line basis over the term of the contract. Payments
      for
      maintenance revenues are normally received in advance and are nonrefundable.




*Allowance
      for Doubtful Accounts and Sales Returns*





The
      allowance for doubtful accounts is based on our assessment of the collectibility
      of specific customer accounts and the aging of the accounts receivable. We
      regularly review the allowance by considering factors such as historical
      experience, age of the accounts receivable balances and current economic
      conditions that may affect a customer's ability to pay. If there was a
      deterioration of a major customer's credit worthiness or actual defaults are
      higher than our historical experience, our estimates of the recoverability
      of
      amounts due us could be overstated which could have an adverse impact on our
      financial results.





A
      reserve
      for sales returns is established based on historical trends in product return
      rates and is recorded as a reduction of our accounts receivable. If the actual
      future returns were to deviate from the historical data on which the reserve
      had
      been established, our revenue could be adversely affected. To date, product
      returns have not been considered material to our results of
      operations.





*Inventory
      Reserves*





Inventories
      are valued at the lower of cost or market as determined under the first-in,
      first-out method. Costs include materials, labor and manufacturing
      overhead.





The
      Company's Radiation Sources products are subject to shelf-life expiration
      periods, which are carefully monitored by the Company. Provision is made for
      inventory items which may not be sold because of expiring dates. The Company
      routinely reviews other inventories for evidence of impairment of value and
      makes provision as such impairments are identified.


-
          30
          -


*Goodwill
      and Other Intangible Assets*





SFAS
      142,
      Goodwill and Other Intangible Assets, requires that goodwill be tested for
      impairment at the reporting unit level (operating segment or one level below
      an
      operating segment) on an annual basis (September 30) and between annual tests
      if
      an event occurs or circumstances change that would more likely than not reduce
      the fair value of a reporting unit below its carrying value. These events or
      circumstances could include a significant change in the business climate, legal
      factors, operating performance indicators, competition, sale or disposition
      of a
      significant portion of a reporting unit. Application of the goodwill impairment
      test requires judgment, including the identification of reporting units,
      assignment of assets and liabilities to reporting units, assignment of goodwill
      to reporting units, and determination of the fair value of each reporting unit.
      The fair value of each reporting unit is estimated using a discounted cash
      flow
      methodology. This requires significant judgments including estimation of future
      cash flows, which is dependent on internal forecasts, estimation of the
      long-term rate of growth for our business, the useful life over which cash
      flows
      will occur, and determination of our weighted average cost of capital. Changes
      in these estimates and assumptions could materially affect the determination
      of
      fair value and/or goodwill impairment for each reporting unit.







*Research
      and Development Costs*





We
      account for research and development costs in accordance with several accounting
      pronouncements, including SFAS 2, Accounting for Research and Development Costs,
      and SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased,
      or Otherwise Marketed. SFAS 86 specifies that costs incurred internally in
      researching and developing a computer software product should be charged to
      expense until technological feasibility has been established for the product.
      Once technological feasibility is established, all software costs should be
      capitalized until the product is available for general release to customers.
      Judgment is required in determining when technological feasibility of a product
      is established. We have determined that technological feasibility for our
      software products is reached shortly before the products are released to
      manufacturing. Costs incurred after technological feasibility is established
      are
      not material, and accordingly, we expense all research and development costs
      when incurred.





*Loss
      Contingencies*





We
      record
      liabilities related to pending litigation when an unfavorable outcome is
      probable and we can reasonably estimate the amount of the loss. We are subject
      to various legal proceedings and claims, either asserted or unasserted, that
      arise in the ordinary course of business. We evaluate, among other factors,
      the
      degree of probability of an unfavorable outcome and an estimate of the amount
      of
      the loss. Significant judgment is required in both the determination of the
      probability and as to whether an exposure can be reasonably estimated. When
      we
      determine that it is probable that a loss has been incurred, the effect is
      recorded promptly in the consolidated financial statements. Although the outcome
      of these claims cannot be predicted with certainty, we do not believe that
      any
      of our existing legal matters will have a material adverse effect on our
      financial condition or results of operations.





*Income
      Taxes*





We
      account for income taxes using the liability method. Deferred taxes are
      determined based on the differences between the financial statement and tax
      bases of assets and liabilities, using enacted tax rates in effect for the
      year
      in which the differences are expected to reverse. Valuation allowances are
      established when necessary to reduce deferred tax assets to the amounts expected
      to be realized. In addition, we are subject to examination of our income tax
      returns by the Internal Revenue Service and other tax authorities. We regularly
      assess the likelihood of adverse outcomes resulting from these
      examinations.


-
          31
          -


**Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation
      of FASB Statement No. 109, (FIN 48).  FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with FASB Statement No. 109, Accounting
      for Income Taxes. FIN 48 also prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return that results in
      a
      tax benefit. Additionally, FIN 48 provides guidance on de-recognition,
      income statement classification of interest and penalties, accounting in interim
      periods, disclosure, and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. The
      Company does not believe that FIN 48 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which
      amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
      Activities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS
      140).  SFAS 155 amends SFAS 133 to narrow the scope exception for
      interest-only and principal-only strips on debt instruments to include only
      such
      strips representing rights to receive a specified portion of the contractual
      interest or principle cash flows.  SFAS 155 also amends SFAS 140 to allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument.  SFAS No. 155 is effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. The
      Company does not believe that SFAS No. 155 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to
      obtain hedge-like (offset) accounting. This Statement amends FASB Statement
      No.
      140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities”, with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. The Statement (1)
      requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract in certain situations; (2) requires that a separately
      recognized servicing asset or servicing liability be initially measured at
      fair
      value, if practicable; (3) permits an entity to choose either the amortization
      method or the fair value method for subsequent measurement for each class of
      separately recognized servicing assets or servicing liabilities; (4) permits
      at
      initial adoption a one-time reclassification of available-for-sale securities
      to
      trading securities by an entity with recognized servicing rights, provided
      the
      securities reclassified offset the entity’s exposure to changes in the fair
      value of the servicing assets or liabilities; and (5) requires separate
      presentation of servicing assets and servicing liabilities subsequently measured
      at fair value in the balance sheet and additional disclosures for all separately
      recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
      for all separately recognized servicing assets and liabilities as of the
      beginning of an entity’s fiscal year that begins after September 15, 2006, with
      earlier adoption permitted in certain circumstances. The Statement also
      describes the manner in which it should be initially applied. The Company does
      not believe that SFAS No. 156 will have a material impact on its financial
      position, results of operations or cash flows.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value ** Measurements”,
      (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles (GAAP), and
      expands disclosures about fair value measurements. This Statement applies under
      other accounting pronouncements that require or permit fair value measurements,
      and does not require any new fair value measurements. The application of SFAS
      No. 157, however, may change current practice within an organization. SFAS
      No.
      157 is effective for all fiscal years beginning after November 15, 2007, with
      earlier application encouraged. The
      Company does not believe that SFAS No. 157 will have a material impact on the
      Company’s financial position, results of operations or cash
      flows.


-
          32
          -


In
      September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for
      Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
      Statements No. 87, 88, 106 and 132(R)”(“SFAS 158”). SFAS 158 requires us to
      (a) recognize a plan’s funded status in the statement of financial
      position, (b) measure a plan’s assets and its obligations that determine
      its funded status as of the end of the employer’s fiscal year and
      (c) recognize changes in the funded status of a defined postretirement plan
      in the year in which the changes occur through other comprehensive income.
      SFAS
      No. 158 is effective for fiscal years ending after December 15, 2006. The
      Company does not believe that SFAS No. 158 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”), to address diversity in practice in quantifying financial statement
      misstatements. SAB 108 requires the quantification of misstatements based on
      their impact on both the balance sheet and the income statement to determine
      materiality. The guidance provides for a one-time cumulative effect adjustment
      to correct for misstatements that were not deemed material under a company’s
      prior approach but are material under the SAB 108 approach. SAB 108 is effective
      for fiscal years ending after November 15, 2006. The Company is assessing the
      potential impact that SAB 108 may have on our consolidated financial position,
      results of operations or cash flows.





In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities.”* SFAS
      159
      provides companies with an option to report selected financial assets and
      liabilities at fair value. The standard’s objective is to reduce both complexity
      in accounting for financial instruments and the volatility in earnings caused
      by
      measuring related assets and liabilities differently. The standard requires
      companies to provide additional information that will help investors and other
      users of financial statements to more easily understand the effect of the
      company’s choice to use fair value on its earnings. It also requires companies
      to display the fair value of those assets and liabilities for which the company
      has chosen to use fair value on the face of the balance sheet. The new standard
      does not eliminate disclosure requirements included in other accounting
      standards, including requirements for disclosures about fair value measurements
      included in SFAS 157, *“Fair
      Value Measurements,”* and
      SFAS
      107, *“Disclosures
      about Fair Value of Financial Instruments.”* SFAS
      159
      is effective as of the start of fiscal years beginning after November 15,
      2007. Early adoption is permitted. We are in the process of evaluating this
      standard and therefore have not yet determined the impact that the adoption
      of
      SFAS 159 will have on our financial position, results of operations or cash
      flows.





**Item
      3.**  **Quantitative
      and Qualitative Disclosures about Market Risk**




Information
      about market risks for the three months ended January 31, 2007, does not differ
      materially from that discussed under Item 7A of the registrant's Annual Report
      on Form 10-K for the fiscal year ended October 31, 2006.




**Item
      4.**  **Controls
      and Procedures**




(a)
      Evaluation of Disclosure Controls and Procedures





As
      required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”), we have carried out an evaluation, under the supervision and
      with the participation of our management, including our Chief Executive Officer
      (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the
      end of the fiscal quarter covered by this report, of the design and operation
      of
      our “disclosure controls and procedures” as defined in Rule 13a-15(e)
      promulgated by the SEC under the Exchange Act. Based upon that evaluation,
      our
      CEO and our CFO concluded that our disclosure controls and procedures, as of
      the
      end of such fiscal quarter, were adequate and effective to ensure that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the Commission’s rules and forms and that such
      information is accumulated and communicated to our management, including our
      CEO
      and CFO, as appropriate to all timely decisions regarding required disclosure.


-
          33
          -


(b)
      Changes in Internal Controls





There
      has
      been no change in our internal control over financial reporting during the
      quarter ended January 31, 2007, that has materially affected or is reasonably
      like to materially affect our internal control over financial reporting.








**PART
      II - OTHER INFORMATION**





The
      Company was not required to report the information pursuant to Items 1 through
      6
      of Part II of Form 10-Q except as follows:





*We
      operate in a rapidly changing environment that involves a number of risks,
      some
      of which are beyond our control. In addition to other information in this Form
      10-Q, you should carefully consider the risks described below before investing
      in our securities. This discussion highlights some of the risks that may affect
      future operating results. The risks described below are not the only ones facing
      us. Additional risks and uncertainties not presently known to us, which we
      currently deem immaterial or which are similar to those faced by other companies
      in our industry or business in general, may also impair our business operations.
      If any of the following risks or uncertainties actually occurs, our business,
      financial condition and operating results would likely suffer.*







**Item
      1A. Risk Factors**





**We
      have experienced significant losses and may continue to incur such losses in
      the
      future. As a result, the amount of our cash, cash equivalents, and investments
      in marketable securities has materially declined. If we continue to incur
      significant losses and are unable to access sufficient working capital from
      our
      operations or through external financings, we will be unable to fund future
      operations and operate as a going concern.**





We
      have
      incurred substantial net losses in each of the last six fiscal years. As
      reflected in our financial statements, we have experienced net losses of $3.2
      million in the three months ended January 31, 2007, and $17.1 million, $55.5
      million and $36.3 million in our fiscal years ended October 31, 2006, 2005
      and
      2004, respectively. As a result, the amount of our cash, cash equivalents,
      and
      investments in marketable securities has significantly declined from
      approximately  $15.0
      million at October 31, 2004 to $4.3 million at January 31, 2007. The decrease
      over the past two year period was primarily attributed to net cash payments
      of
      $32.2 million used in continuing operating activities, $0.7 million used in
      the
      discontinued Theseus operations, and $0.8 million used for capital expenditures,
      partially offset by $22.0 million net proceeds from the sale of common stock
      and
      warrants, and $1.1 million in cash received from the exercise of stock options
      and our employee stock purchase plan.


-
          34
          -




The
      negative cash flow we have sustained has materially reduced our working capital,
      which in turn, could materially and negatively impact our ability to fund future
      operations and continue to operate as a going concern. Management has and
      continues to take actions to improve our results. These actions include reducing
      cash operating expenses, developing new technologies and products, improving
      existing technologies and products, and expanding into new geographical
      markets. **** The
      availability of necessary working capital, however, is subject to many factors
      beyond our control, including, our ability to obtain favorable financing,
      economic cycles, market acceptance of our products, competitors’ responses to
      our products, the intensity of competition in our markets, and the level of
      demand for our products. In addition, our lines of credit with Silicon Valley
      Bank and Partners For Growth expire on October 3, 2007 and September 28, 2007,
      respectively, and there is no assurance that they will be renewed.





The
      amount of working capital that we will need in the future will also depend
      on
      our efforts and many factors, including:





•
            Our
                ability to successfully market and sell our products, including the
                successful launch of our new ClearPath device for treatment of breast
                cancer;


•
            Continued
                scientific progress in our discovery and research
                programs;


•
            Levels
                of sales and marketing that will be required to launch future products
                and
                achieve and maintain a competitive position in the marketplace for
                both
                existing and new products;


•
            Levels
                of inventory and accounts receivable that we
                maintain;


•
            Level
                of capital expenditures;


•
            Acquisition
                or development of other businesses, technologies or
                products;


•
            The
                time and costs involved in obtaining regulatory approvals;


•
            The
                costs involved in preparing, filing, prosecuting, maintaining, defending,
                and enforcing patent claims; and


•
            The
                potential need to develop, acquire or license new technologies and
                products.





If
      we are
      unsuccessful in these efforts or if any or some of these factors negatively
      impact us, we will need to raise additional capital, reduce operations or take
      other steps to achieve positive cash flow. Although we cannot assure you that
      we
      will be successful in these efforts or that any or some of these factors will
      not negatively impact us, we believe that we will have sufficient cash to
      sustain us at least through the fiscal year ending October 31, 2007.





**Future
      financing transactions may have a dilutive or other negative effect on our
      existing shareholders.**





In
      June
      2006, the Company completed a private placement of shares of its common stock
      that also includes a significant number of warrants. This financing resulted
      in
      significant dilution of the Company’s current shareholders. In the future, the
      Company may issue additional equity, debt or convertible securities to raise
      capital. If the Company does so, the percentage ownership of the Company held
      by
      existing shareholders would be further reduced, and existing shareholders may
      experience significant dilution. In addition, new investors in the Company
      may
      demand rights, preferences or privileges that differ from, or are senior to,
      those of our existing shareholders, such as warrants in addition to the
      securities purchased and other protections against future dilutive transactions.
      In addition, any debt securities that we may issue and sell in the future could
      result in increased debt on our balance sheet, additional interest and financing
      expense and/or decreased operating income.





**Success
      of our recently announced plans to introduce a breast brachytherapy product
      will
      be dependent upon a variety of factors.**





We
      recently announced the introduction of ClearPathTM, a new brachytherapy device
      for the treatment of breast cancer. We expect that this product may generate
      significant revenues in the future; however, successful technical development
      of
      our products does not guarantee successful commercialization. There are a number
      of factors which could adversely affect our ability to achieve this goal,
      including:


-
          35
          -




·
            Successful
                completion of the launch of this
                product;


·
            Our
                ability to protect our intellectual property through patents and
                licenses;


·
            Our
                ability to successfully manufacture production quantities of the
                product;


·
            The
                acceptance of the product by physicians and health professionals;
                and


·
            Our
                ability to hire and train a direct sales force to sell the
                product;





**We
      may encounter insurmountable obstacles or incur substantially greater costs
      and
      delays than anticipated in the development process.**





From
      time
      to time, we have experienced setbacks and delays in our research and development
      efforts and may encounter further obstacles in the course of the development
      of
      additional technologies, products and services. We may not be able to overcome
      these obstacles or may have to expend significant additional funds and time.
      Technical obstacles and challenges we encounter in our research and development
      process may result in delays in or abandonment of product commercialization,
      may
      substantially increase the costs of development, and may negatively affect
      our
      results of operations.




**We
      have experienced a significant deterioration of revenues in our IMRT/IGRT
      business. If we are unable to successfully develop and market new generations
      of
      IMRT/IGRT products, such as nomosSTAT, we may be unable to retain our existing
      customers or attract new customers.**




We
      have
      seen a significant deterioration of revenues in our IMRT/IGRT business, in
      part
      because of our inability to timely and successfully develop and market new
      products. Many of our products and product candidates are technologically
      innovative and require significant planning, design, development and testing.
      These activities require significant capital commitments and investment. If
      we
      are unable to raise needed capital on favorable terms or at all, we may be
      unable to obtain a competitive advantage in the marketplace.




New
      product developments in the healthcare industry are inherently risky and
      unpredictable. These risks include:




•
failure
      to prove feasibility;


•
time
      required from proof of feasibility to routine production;


•
timing
      and cost of regulatory approvals and clearances;


•
      competitors' response to new product developments;


•
      manufacturing, installation, warranty and maintenance cost overruns;


•
failure
      to obtain customer acceptance and payment;


•
      customer demands for retrofits of both old and new products; and


•
excess
      inventory caused by phase-in of new products and phase-out of old products.




The
      high
      cost of technological innovation is coupled with rapid and significant change
      in
      the regulations governing the products that compete in our market, by industry
      standards that could change on short notice, and by the introduction of new
      products and technologies that could render existing products and technologies
      uncompetitive. We cannot be sure that we will be able to successfully develop
      new products or enhancements to our existing products. Without successful new
      product introductions, our revenues likely will continue to suffer. Even if
      customers accept new or enhanced products, the costs associated with making
      these products available to customers, as well as our ability to obtain capital
      to finance such costs, could reduce or prevent us from increasing our operating
      margins. In July 2006 we received FDA 510(k) clearance for our nomosSTAT
      product, which represents the next generation of our previously marketed PEACOCK
      product. The successful marketing of nomosSTAT is critical to our ability to
      achieve our sales targets for fiscal 2007. Any lack of acceptance in the market
      for nomosSTAT may result in a materially adverse impact on our financial
      results.


-
            36
            -


**All
      of our product lines are subject to intense competition. Our most significant
      competitors have greater resources than we do. As a result, we cannot be certain
      that our competitors will not develop superior technologies or otherwise be
      able
      to compete against us more effectively. If we fail to maintain our competitive
      position in key product areas, we may lose significant sources of
      revenue.**




We
      expect
      that our serial tomotherapy, intensity-modulated radiation therapy, or IMRT,
      and
      image-guided radiation therapy, or IGRT, product lines, including CORVUS,
      nomosSTAT and BAT, will generate a significant part of our revenues, and we
      also
      believe that our ClearPath product will generate substantial revenues in the
      future. We will need to continue to develop enhancements to these products
      and
      improvements on our core technologies in order to compete effectively. Rapid
      change and technological innovation characterize the marketplace for medical
      products, and our competitors could develop technologies that are superior
      to
      our products or that render such products obsolete. We anticipate that
      expenditures for research and development will continue to be significant.
      The
      domestic and foreign markets for radiation therapy equipment are highly
      competitive. Many of our competitors and potential competitors have substantial
      installed bases of products and significantly greater financial, research and
      development, marketing and other resources than we do. Competition may increase
      as emerging and established companies enter the field. In addition, the
      marketplace could conclude that the tasks our products were designed to perform
      are no longer elements of a generally accepted treatment regimen. This could
      result in us having to reduce production volumes or discontinue production
      of
      one or more of our products.






Our
      single largest competitor in the IMRT/IGRT market is Varian Medical
      Systems, Inc. (“Varian”). Varian is the largest worldwide manufacturer, in
      terms of market share, of linear accelerators. Linear accelerators are the
      machines that generate the radiation energy beams used in both IMRT and
      conventional radiation treatment. Varian also markets its own line of IMRT
      products, including several models of multileaf collimators and an IMRT inverse
      planning software package, which it often includes with its linear accelerators.
      Varian also offers an on-board imaging system (OBI) which integrates CT imaging
      capabilities for daily tumor localization. Varian is also one of the principal
      providers of record and verification systems, which are systems that keep track
      of all critical information in the treatment of radiation therapy patients
      and
      which allow the planning system to communicate with the linear accelerator.
      Varian acquired Zmed, Inc., one of our principal competitors for BAT.
      Varian expects the acquisition to enhance its 3-D ultrasound imaging
      capabilities and offer radiation oncology departments a new line of stereotactic
      positioning accessories and planning software, allowing Varian to directly
      compete against BAT.






We
      also
      compete with Siemens and Elekta, each of which manufactures one or more
      multileaf collimators that compete with MIMiC and, therefore, with our
      integrated system, nomosSTAT. Both companies offer, or plan to offer, on-board
      imaging systems that indirectly compete with BAT. In addition, there are several
      other companies that currently offer or plan to offer IMRT modules, which
      typically add IMRT functionality to conventional radiation treatment planning
      products.






Finally,
      we compete with all manufacturers of conventional radiation therapy products
      many of which are devoting substantial resources to promoting their products.




Our
      brachytherapy business is also subject to intense competition. Our primary
      competitors in the brachytherapy seed business include: Nycomed Amersham PLC
      (through its control of Oncura) and C.R Bard, Inc., both of whom
      manufacture and sell Iodine-125 brachytherapy seeds, as well as distribute
      Palladium-103 seeds manufactured by a third party (in the case of Oncura, we
      currently manufacture a portion of its Palladium-103 seed requirements pursuant
      to a distribution agreement reached in July, 2005); Mentor, which manufactures
      and sells Iodine-125 brachytherapy seeds and currently distributes third party
      manufactured Palladium-103 brachytherapy seeds; and Theragenics Corporation,
      which manufacturers Palladium-103 seeds and sells Palladium-103 and Iodine-125
      brachytherapy seeds directly and its Palladium-103 brachytherapy seeds through
      marketing relationships with third parties. Several additional companies
      currently sell brachytherapy seeds as well. Our SurTRAK strands and needles
      are
      subject to competition from a number of companies, including Worldwide Medical
      Technologies, Inc., and our new ClearPath product for treatment of breast cancer
      faces competition from Cytyc Corp. and BioLucent, Inc.


-
          37
          -





Our
      radiation reference source business also is subject to intense competition.
      Competitors in this industry include AEA Technology PLC and Eckert &
Ziegler AG. We believe that these companies have a dominant position in the
      market for radiation reference source products.





Because
      we are a relatively small company, there is a risk that potential customers
      will
      purchase products from larger manufacturers, even if our products are
      technically superior, based on the perception that a larger, more established
      manufacturer may offer greater certainty of continued product improvements,
      support and service, which could cause our revenues to decline. In addition, many
      of
      our competitors are substantially larger and have greater sales, marketing
      and
      financial resources than we do. Developments by any of these or other companies
      or advances by medical researchers at universities, government facilities or
      private laboratories could render our products obsolete. Moreover, companies
      with substantially greater financial resources, as well as more extensive
      experience in research and development, the regulatory approval process,
      manufacturing and marketing, may be in a better position to seize market
      opportunities created by technological advances in our industry.





**We
      are highly dependent on our direct sales organization, which is small compared
      to many of our competitors and which has relatively limited marketing and sales
      experience in our products. We have also experienced a high degree of turnover
      in our sales organization. Any failure to build, manage and maintain our direct
      sales organization could negatively affect our revenues.**




Our
      current domestic direct sales force is small relative to many of our
      competitors. There is intense competition for skilled sales and marketing
      employees, particularly for people who have experience in the radiation oncology
      market. Accordingly, we could find it difficult to hire or retain skilled
      individuals to sell our products. Any failure to build our direct sales force
      could adversely affect our growth and our ability to meet our revenue goals.




In
      addition, we have experienced higher than anticipated turnover in our domestic
      direct sales force, which has resulted in a relative lack of experience in
      selling our products.  As
      a
      result of our relatively small sales force, the intense competition for skilled
      sales and marketing employees, and the high turnover in our sales force, there
      can be no assurance that our direct sales and marketing efforts will be
      successful. If we are not successful in our direct sales and marketing, our
      sales revenue and results of operations are likely to be materially adversely
      affected.




**We
      depend partially on our relationships with distributors and other industry
      participants to market some of our products, and if these relationships are
      discontinued or if we are unable to develop new relationships, our revenues
      could decline.**




We
      currently rely, and will continue to rely, upon collaborative relationships
      with
      agents and distributors and other industry participants to maintain IMRT/IGRT
      market access to potential customers, particularly in Asia and Europe, and
      our
      business strategy includes entering into more of these relationships in the
      future. Some of the entities with whom we have relationships to help market
      and
      distribute our products also produce or distribute products that directly
      compete with our IMRT/IGRT products.




We
      cannot
      assure you that we will be able to maintain or develop these relationships
      with
      agents and distributors and other industry participants or that these
      relationships will continue to be successful. If any of these relationships
      is
      terminated, not renewed or otherwise unsuccessful, or if we are unable to
      develop additional relationships, our product sales could decline, and our
      ability to grow our IMRT/IGRT business could be adversely affected. This is
      particularly the case with respect to foreign sales of our IMRT/IGRT products,
      where we currently rely, and we will continue to rely, on our distributors'
      expertise regarding foreign regulatory matters and their access to actual and
      potential customers.  -
            38
            -




In
      addition, our 2005 agreement with Oncura for distribution of our Palladium-103
      brachytherapy seeds may be an important component of that business.




We
      do not
      have a direct sales force for our non-therapeutic radiation source products,
      and
      rely entirely on the efforts of agents and distributors for sales of those
      non-brachytherapy products. We cannot assure you that we will be able to
      maintain our existing relationships with our agents and distributors for the
      sale of our non-therapeutic radiation source products.




**One
      of our primary markets in our IMRT product line is the market for upgrading
      linear accelerators that do not have IMRT capabilities to provide them with
      IMRT
      capabilities. This market will shrink over time, thereby limiting our potential
      revenues from the upgrading of linear accelerators.**




To
      date,
      a majority of our revenues from the sale of our IMRT products has been derived
      from the sale of these products to customers who decide to upgrade linear
      accelerators that do not have IMRT capabilities to enable them to deliver IMRT
      treatments. Most of these linear accelerators are older models. Selling CORVUS
      to customers with newer multileaf collimator-equipped linear accelerators can
      be
      difficult because these linear accelerators may be offered with IMRT planning
      software at little or no additional cost. Accordingly, to make a sale, we often
      must convince these potential customers that CORVUS is sufficiently superior
      to
      the IMRT or conventional radiation treatment planning software products offered
      by the manufacturer to justify the additional costs of purchase. Selling
      nomosSTAT and MIMiC to potential customers with newer multileaf
      collimator-equipped linear accelerators is even more difficult because, in
      addition to the incremental costs of purchase, these potential customers may
      be
      reluctant to incur the additional effort required to retrofit the factory
      installed multileaf collimator with MIMiC. Over time, if more institutions
      purchase new linear accelerators that are IMRT-equipped or upgrade their older
      accelerators with technology from us or our competitors, the market for
      upgrading linear accelerators that do not have IMRT capabilities will shrink
      and
      may become saturated, which could adversely affect our sales and limit our
      potential revenues from our products.




**We
      might not be able to make our IMRT products compatible with some existing linear
      accelerators and other radiation therapy products. In addition, any future
      changes in the configuration of the most common linear accelerators could
      require costly and time-consuming modifications to our products that could
      harm
      our business.**




Our
      IMRT
      products are designed to be used in conjunction with most linear accelerators
      currently in use. Our products are not currently compatible with all linear
      accelerators. However, when manufacturers modify the design or functionality
      of
      their machines, we are often required to modify our products to ensure
      compatibility. Future changes cannot be predicted and, in the case of changes
      initiated by linear accelerator manufacturers who are our competitors, could
      be
      made or timed to place us at a competitive disadvantage. Responding to these
      changes can be costly and time-consuming. In addition, we could be required
      to
      obtain additional regulatory clearances for any modifications of our products.
      It is also possible that, despite our best efforts, we might be unable to make
      our products compatible with new or modified versions of linear accelerators
      or
      might only be able to do so at a prohibitive expense.




**If
      alternative technologies prove to be superior to IMRT/IGRT or brachytherapy,
      physician adoption of our products could substantially decrease.**  -
            39
            -
   Our
      IMRT/IGRT products face competition from companies that sell conventional
      radiation therapy products as well as from companies that are developing,
      marketing and manufacturing alternative therapies to radiation for the treatment
      of solid tumor cancers. It is possible that advances in the pharmaceutical,
      bio-medical or gene-therapy fields could render some or all radiation therapies,
      whether conventional or based on IMRT/IGRT and brachytherapy, obsolete. Even
      incremental advances in competing technologies could result in the rejection
      of
      our products as a part of a generally accepted diagnostic or treatment regimen.
      If alternative therapies are proven or perceived to offer treatment options
      that
      are superior or more cost effective than the treatments our products provide,
      physician adoption of our products could be negatively affected and our revenues
      from our products could decline.




**There
      is currently a lack of long-term data regarding the safety and effectiveness
      of
      IMRT products and negative data or the continued lack of adequate supporting
      data could adversely affect market acceptance of our IMRT products.**




Although
      we estimate that our IMRT products have been used to treat thousands of patients
      worldwide, this is still a statistically small number, and these treatments
      have
      primarily involved tumors of the prostate, head, neck and spinal cord. Much
      of
      the data produced in current studies using IMRT and our products have involved
      small patient sample sizes, and any positive results of these studies may not
      be
      representative of the results that will be achieved in studies involving larger
      patient sample sizes. If we are unable to obtain additional and more
      comprehensive clinical studies, or if long-term clinical studies fail to confirm
      the effectiveness of IMRT or our products, our sales could fail to increase
      or
      could decrease.




Some
      theoretical and non-clinical studies, meaning studies that are not based on
      significant empirical evidence, have suggested that the use of IMRT and
      potentially our products may cause serious negative side effects, such as a
      risk
      of induced cancer, as a result of the increased radiation delivered to the
      patient. At present, not enough time has passed to determine conclusively the
      long-term side effects. If future clinical studies confirm that these negative
      side effects occur as a result of IMRT treatments, our sales could fail to
      grow
      or could decline. In addition, if it is shown that our products cause harmful
      side effects, the U.S. Food and Drug Administration, or FDA, could require
      us to
      change our product labeling to describe these potential side effects or could
      even rescind the clearances for our products and potentially require a recall
      of
      our products.




IMRT,
      whether using our products or those of our competitors, requires a substantial
      departure from customary quality assurance practices. The complexity and dynamic
      nature of IMRT deliveries make new demands on patient plan and dose
      verification. These difficulties and departures from customary practices may
      impede market acceptance of IMRT in general and our products in particular,
      which could adversely affect our ability to increase sales of our products
      and
      achieve our desired growth rate.




**IMRT
      treatments expose patients to increased radiation leakage, which could
      potentially cause long-term deleterious side effects, including induced cancer.**




In
      both
      IMRT and conventional radiation therapy, there is radiation leakage, which
      means
      radiation that escapes from the linear accelerator and is absorbed by the
      patient outside the area of the patient's body being treated. Linear
      accelerators are the machines that generate the radiation energy beams used
      in
      both IMRT and conventional radiation treatment. Leakage occurs at all times
      when
      the linear accelerator is producing radiation. In IMRT treatments, the linear
      accelerator is required to produce radiation for a longer period of time overall
      as compared to conventional radiation treatments. Also, in IMRT treatments
      there
      is additional leakage that is transmitted through or between the leaves of
      the
      multileaf collimator itself. As a result, there is an increase in the overall
      radiation leakage to which the patient is exposed due to the longer periods
      of
      radiation delivery.




The
      increased radiation leakage associated with IMRT treatments could require
      additional room shielding to protect clinic personnel. In addition, concerns
      have been raised by some researchers that the increase in overall radiation
      leakage to which IMRT patients are exposed may have deleterious long-term
      effects, including the potential for inducing cancer.


-
          40
          -




These
      same studies suggest that an increase in the long-term risk of induced cancers
      from IMRT may be possible. The risk, or perceived risk, of induced cancers
      could
      slow or prevent expanded use of IMRT to treat additional types of cancers and
      could even result in decreased usage of IMRT to treat cancers currently treated
      with IMRT if the increased risk is shown or believed to be significant, which
      could cause our revenues from our products to decline and our business to
      suffer.




**Our
      IMRT/IGRT products are used in connection with the delivery of intense
      radiation. Defects in, or misuse of, our products, or any detrimental side
      effects that result from the use of our products, could result in serious injury
      or death and could require costly recalls or subject us to costly and
      time-consuming product liability claims. This could harm future sales and
      require us to pay substantial damages.**




Our
      IMRT/IGRT products are used in connection with the delivery of high-powered
      external beam radiation to cancer patients. One or more of our IMRT/IGRT
      products could malfunction or be misused and cause serious injury or death
      to a
      patient. In addition, our IMRT/IGRT products might otherwise be determined
      to
      cause serious injury or other detrimental side effects. There is an inherent
      risk in our industry that we could be sued if one of our products results in,
      or
      is alleged to result in, a personal injury. Although we believe that we
      currently have adequate insurance to address anticipated potential liabilities
      associated with product liability, any unforeseen product liability, exposure
      in
      excess of, or outside the scope of, such insurance coverage could adversely
      affect our operating results. Any such claim brought against us, with or without
      merit, could result in significant damage to our business.




The
      FDA's
      medical device reporting regulations require us to report any incident in which
      our products may have caused or contributed to a death or serious injury, or
      in
      which our products malfunctioned in a way that would be likely to cause or
      contribute to a death or serious injury if the malfunction recurred. Any
      required filing could result in an investigation of our products and possibly
      subsequent regulatory action against us if it is found that one of our products
      caused the death or serious injury of a patient.




Because
      of the nature of our IMRT/IGRT products and their use, the tolerance for error
      in the design, manufacture or use of our IMRT/IGRT products may be small or
      nonexistent. If a product designed or manufactured by us is defective, whether
      due to design or manufacturing defects, or improper assembly, use or servicing
      of the product or other reasons, the product may need to be recalled, possibly
      at our expense. Furthermore, the adverse effect of a product recall might not
      be
      limited to the cost of the recall. For example, a product recall could cause
      applicable regulatory authorities to investigate us as well as cause our
      customers to review and potentially terminate their relationships with us.
      Recalls, especially if accompanied by unfavorable publicity or termination
      of
      customer contracts, could cause us to suffer substantial costs, lost revenues
      and a loss of reputation, each of which could harm our business. Products as
      complex as our planning and dose calculation software systems may also contain
      undetected software errors or defects when they are first introduced or as
      new
      versions are released. Our products may not be free from errors or defects
      even
      after they have been tested, which could result in the rejection of our products
      by our customers and damage to our reputation, as well as lost revenue, diverted
      development resources and increased support costs. We may also be subject to
      claims for damages related to any errors in our products.




We
      currently maintain product liability insurance, which has deductible amounts
      and
      per claim and aggregate limits. However, we cannot assure you that this
      insurance will continue to be available on terms acceptable to us or in
      sufficient amounts if at all, or that it will provide adequate coverage in
      the
      event that any product liability is actually incurred.




**If
      we are sued for product-related liabilities, the cost could be prohibitive
      to
      us.** ******  -
            41
            -





The
      testing, marketing and sale of human healthcare products entail an inherent
      exposure to product liability claims. Third parties may successfully assert
      product liability claims against us. Although we currently have insurance
      covering claims against our products, we may not be able to maintain this
      insurance at acceptable cost in the future, if at all. In addition, our
      insurance may not be sufficient to cover particularly large claims. Significant
      product liability claims could result in large and unexpected expenses as well
      as a costly distraction of management resources and potential negative publicity
      and reduced demand for our products.




**Currently,
      our products are predominantly used in the treatment of tumors of the prostate,
      head, neck and spinal cord. If we do not obtain wider acceptance of our products
      to treat other types of cancer, our sales could fail to increase and we could
      fail to achieve our desired growth rate.**




Currently,
      our IMRT/IGRT products are predominantly used in the treatment of tumors of
      the
      prostate, head, neck and spinal cord, while our brachytherapy products are
      used
      almost exclusively for the treatment of prostate cancer. Further research,
      clinical data and years of experience will likely be required before there
      can
      be broad acceptance for the use of both our IMRT/IGRT as well as our
      brachytherapy products for additional types of cancer. In particular, some
      recognized members of the radiation oncology community have expressed skepticism
      as to the relative benefits of IMRT treatments other than for limited types
      of
      cancer such as prostate cancer, where mortality is closely linked to recurrence
      of the local tumor. They point out that in many types of cancer, such as breast
      cancer, mortality is usually a result of metastasis, meaning the expansion
      of
      the cancer to other parts of the patient's body, and that eliminating or
      controlling the growth of the local tumor, which is the goal of IMRT treatments,
      does little to prevent this from occurring. If our products do not become more
      widely accepted in treating other types of cancer, our sales could fail to
      increase or could decrease.




**We
      may be required to record additional goodwill impairment in the
      future.**




Under
      SFAS 142 and SFAS 144, goodwill and intangible assets having an indefinite
      life
      are not amortized but are subject to testing at least annually, or more often
      if
      an event occurs or circumstances indicate that the carrying values for goodwill
      and/or intangible assets may be impaired, using a fair value based approach.
      Accounting for impairment contains uncertainty because management must use
      judgment in determining appropriate assumptions to be used in the measurement
      of
      fair value. The Company engaged an appraisal firm to perform an analysis of
      the
      goodwill and intangible assets acquired from NOMOS, to determine the fair value
      thereof under the applicable standards as of the Company’s annual test date of
      September 30, 2005. As a result of this testing, in the fourth quarter of 2005,
      the Company recorded impairments of goodwill and intangible assets of NOMOS
      in
      the amount of $39,884,000, and impairments of goodwill and intangible assets
      of
      Radiation Therapy Products (“RTP”) in the amount of $329,000, in each case due
      to negative operating performance indications including declining sales and
      continued operating losses of the respective business segments.




In
      fiscal
      year 2006, the Company engaged an appraisal firm to perform an analysis of
      the
      goodwill and intangible assets acquired from NOMOS, to determine the fair value
      thereof under the applicable standards as of the Company’s annual test date of
      September 30, 2006. As a result of this testing, the Company determined there
      was no impairment of its goodwill and intangible assets in fiscal year
      2006.




The
      Company will continue to monitor impairment indicators in any of our reporting
      segments. If our future financial performance, including the expected revenue
      growth in the IMRT/IGRT business related to n omosSTAT,
      or other events indicate that the value of our recorded goodwill or intangible
      assets is further impaired, we may record additional impairment charges that
      could have a material adverse effect on our reported results.  -
            42
            -


**We
      rely on several sole source suppliers and a limited number of other suppliers
      to
      provide raw materials and significant components used in our products. A
      material interruption in supply could prevent or limit our ability to accept
      and
      fill orders for our products.**




Although
      we perform final product assembly of our IMRT/IGRT products, we purchase all
      major components for those products from third-party suppliers. We currently
      rely on a single source of supply for several key materials and components,
      the
      most important of which are the tungsten leaves used in our MIMiC multi-leaf
      collimator and all major components used in our BAT targeting system. We also
      obtain various other components for our IMRT/IGRT products from a limited number
      of sources. We cannot produce IMRT/IGRT products without these components.
      In
      the event of any extended or recurring interruption in supply, or if any of
      the
      significant components to our IMRT/IGRT products become obsolete or are no
      longer manufactured, we could be required to redesign our products or seek
      alternative supply sources, which could significantly impair our ability to
      sell
      these products. In some cases, we expect that it would take several months,
      or
      longer, for a new supplier to begin providing components to specification.
      In
      addition, we could be required to make a new or supplemental filing with the
      FDA
      and other applicable regulatory authorities and might have to obtain clearance
      or other regulatory approvals prior to marketing a product containing new
      components. We may be unable to obtain the necessary regulatory clearances
      or
      approvals on a timely basis, if at all, which could cause our revenues to
      decline and our business to suffer.




We
      also
      depend upon a limited number of outside unaffiliated suppliers for our
      radioisotopes. Our principal suppliers are Nordion International, Inc. and
      a company in Russia. We also utilize other commercial isotope manufacturers
      located in the United States and overseas. To date, we have been able to obtain
      the required radioisotopes for our products without any significant delays
      or
      interruptions. Currently, we rely exclusively upon Nordion International for
      our
      supply of the Palladium-103 isotope; if Nordion International ceases to supply
      isotopes in sufficient quantity to meet our needs, there may not be adequate
      alternative sources of supply. If we lose any of these suppliers (including
      any
      single-source supplier), we would be required to find and enter into supply
      arrangements with one or more replacement suppliers. Obtaining alternative
      sources of supply could involve significant delays and other costs and these
      supply sources may not be available to us on reasonable terms or at all. Any
      disruption of supplies could delay delivery of our products that use
      radioisotopes, which could adversely affect our business and financial results
      and could result in lost or deferred sales.




**If
      we are unable to attract and retain qualified employees, we may be unable to
      meet our growth and revenue needs.**




Our
      success is materially dependent on a limited number of key employees, and,
      in
      particular, the continued services of L. Michael Cutrer, our president and
      chief
      executive officer, and James W. Klingler, our chief financial officer. In
      November 2006, we announced that L. Michael Cutrer plans to transition from
      the
      position of president and chief executive officer to become the Company’s
      executive vice president and chief technology officer. The Board of Directors
      has initiated a search for his successor; however, there can be no certainty
      as
      to whether or when a successor will be identified and hired. As chief technology
      officer, we expect that Mr. Cutrer would, in addition to other responsibilities,
      continue to play an active leadership role in the Company’s breast brachytherapy
      program and to remain a member of the Company’s Board of Directors. We carry key
      employee insurance for Mr. Cutrer in the amount of $2.5 million. Our
      future business and financial results could be adversely affected if the
      services of Messrs. Cutrer or Klingler or other key employees cease to be
      available. To our knowledge, none of our key employees have any plans to retire
      or leave in the near future.




Our
      future success and ability to grow our business will depend in part on the
      continued service of our skilled personnel and our ability to identify, hire
      and
      retain additional qualified personnel. Although some employees are bound by
      a
      limited non-competition agreement that they sign upon employment, few of our
      employees are bound by employment contracts, and it is difficult to find
      qualified personnel, particularly medical physicists and customer service
      personnel, who are willing to travel extensively. We compete for qualified
      personnel with medical equipment manufacturers, universities and research
      institutions. Because the competition for these personnel is intense, costs
      related to compensation may increase significantly.  -
            43
            -




Even
      when
      we are able to hire a qualified medical physicist, engineer or other technical
      person, there is a significant training period of up to several months before
      that person is fully capable of performing the functions we need. This could
      limit our ability to expand our business.




**The
      medical device industry is characterized by competing intellectual property,
      and
      we could be sued for violating the intellectual property rights of others.**




The
      medical device industry is characterized by a substantial amount of litigation
      over patent and other intellectual property rights. Our competitors, like
      companies in many high technology businesses, continually review other
      companies' products for possible conflicts with their own intellectual property
      rights. Determining whether a product infringes a patent involves complex legal
      and factual issues, and the outcome of patent litigation actions is often
      uncertain. Our competitors could assert that our products and the methods we
      employ in the use of our products are covered by United States or foreign patent
      rights held by them. In addition, because patent applications can take many
      years to issue, there could be applications now pending of which we are unaware,
      which could later result in issued patents that our products infringe. There
      could also be existing patents that one or more of our products could
      inadvertently be infringing of which we are unaware.




While
      we
      do not believe that any of our products, services or technologies infringe
      any
      valid intellectual property rights of third parties, we may be unaware of
      third-party intellectual property rights that relate to our products, services
      or technologies. As the number of competitors in the radiation oncology market
      grows, and as the number of patents issued in this area grows, the possibility
      of a patent infringement claim against us going forward increases. We could
      incur substantial costs and diversion of management resources if we have to
      assert our patent rights against others. An unfavorable outcome to any
      litigation could harm us. In addition, we may not be able to detect infringement
      or may lose competitive position in the market before we do so.




To
      address patent infringement or other intellectual property claims, we may have
      to enter into license agreements and technology cross-licenses or agree to
      pay
      royalties at a substantial cost to us. We may be unable to obtain necessary
      licenses. A valid claim against us and our failure to obtain a license for
      the
      technology at issue could prevent us from selling our products and materially
      adversely affect our business, financial results and future prospects.




**If
      we fail to protect our intellectual property rights or if our intellectual
      property rights do not adequately cover the technologies we employ, or if such
      rights are declared to be invalid, other companies may take advantage of our
      technology ideas and more effectively compete directly against us, or we might
      be forced to discontinue selling certain products.**




Our
      success depends in part on our ability to obtain and enforce patent protections
      for our products and operate without infringing on the proprietary rights of
      third parties. We rely on U.S. and foreign patents to protect our intellectual
      property. We also rely significantly on trade secrets and know-how that we
      seek
      to protect. We attempt to protect our intellectual property rights by filing
      patent applications for new features and products we develop. We enter into
      confidentiality or license agreements with our employees, consultants,
      independent contractors and corporate partners, and we seek to control access
      to
      our intellectual property and the distribution of our products, documentation
      and other proprietary information. We plan to continue these methods to protect
      our intellectual property and our products. These measures may afford only
      limited protection. In addition, the laws of some foreign countries may not
      protect our intellectual property rights to the same extent as do the laws
      of
      the United States.  -
            44
            -




If
      a
      competitor infringes upon our patent or other intellectual property rights,
      enforcing those rights could be difficult, expensive and time-consuming, making
      the outcome uncertain. Competitors could also bring actions or counterclaims
      attempting to invalidate our patents. Even if we are successful, litigation
      to
      enforce our intellectual property rights or to defend our patents against
      challenge could be costly and could divert our management's attention.




In
      1998
      (prior to our acquisition of NOMOS Corporation), NOMOS became involved in a
      lawsuit, which NOMOS initiated, involving a NOMOS patent relating to the
      ultrasound localization techniques that is used in BAT. In January 2003,
      the district court entered judgment against NOMOS on its infringement claims.
      NOMOS appealed this judgment to the United States Court of Appeals for the
      Federal Circuit. In February 2004, the circuit court upheld the district court's
      judgment and we filed a petition for rehearing, which was denied on
      March 11, 2004. We cannot predict what the adverse effect the result of
      this litigation will have on our future sales of related products.




Even
      if
      we are able to effectively enforce our existing proprietary rights to the
      fullest extent permitted by law, this would not protect us from competition.
      We
      do not have any patents on IMRT delivery or planning generally, and we have
      competitors that currently market and sell IMRT planning and delivery products
      including inverse planning systems similar to our CORVUS product. In addition,
      our competitors could design around our patents or develop products that provide
      comparable or superior outcomes without infringing on our patents or other
      proprietary rights. The confidentiality agreements with our employees,
      consultants and other third parties may not be enforceable or may not provide
      meaningful protection for our trade secrets or other proprietary information
      in
      the event of unauthorized use or disclosure.




In
      2006,
      we licensed intellectual property which was the subject of litigation brought
      by
      WorldWide Medical Technologies in U.S. District Court against both the Company
      as well as their former employee, Richard Terwilliger, who is currently our
      Vice-President of New Product Development. This intellectual property relates
      to
      the Company’s brachytherapy business, specifically, certain needle-loading and
      stranding technologies. While the Company does not believe that it has any
      liability in this matter, and is vigorously defending itself in the litigation,
      we cannot predict what effect an adverse result from this litigation would
      have
      on our future sales of the products at issue.




**We
      use radioactive materials which are subject to stringent regulation and which
      may subject us to liability if accidents occur** .





We
      manufacture and process radioactive materials which are subject to stringent
      regulation. We operate under licenses issued by the California Department of
      Health which are renewable every eight years. We received a renewal of our
      license for our North Hollywood facility in 1998 and we were issued a license
      for our Chatsworth facility in March 1999. California is one of the
      "Agreement States," which are so named because the Nuclear Regulatory
      Commission, or NRC, has granted such states regulatory authority over
      radioactive materials, provided such states have regulatory standards meeting
      or
      exceeding the standards imposed by the NRC. Most users of our products must
      obtain licenses issued by the state in which they reside (if they are Agreement
      States) or the NRC. Use licenses are also required by some of the foreign
      jurisdictions in which we may seek to market our products.





Although
      we believe that our safety procedures for handling and disposing of these
      radioactive materials comply with the standards prescribed by state and federal
      regulations, the risk of accidental contamination or injury from these materials
      cannot be completely eliminated. In the event of such an accident, we could
      be
      held liable for any damages that result. We believe we carry reasonably adequate
      insurance to cover us in the event of any damages resulting from the use of
      hazardous materials.




**Healthcare
      reforms, changes in health-care policies and unfavorable changes to third-party
      reimbursements for use of our products, could cause declines in the revenues
      of
      our products.**




-
          45
          -


Hospitals
      and freestanding clinics may be less likely to purchase our products if they
      cannot be assured of receiving favorable reimbursement for treatments using
      our
      products from third-party payors, such as Medicare, Medicaid and private health
      insurance plans. Generally speaking, Medicare pays hospitals, freestanding
      clinics and physicians a fixed amount for services using our products,
      regardless of the costs incurred by those providers in furnishing the services.
      Such providers may perceive the set reimbursement amounts as inadequate to
      compensate for the costs incurred and thus may be reluctant to furnish the
      services for which our products are designed. Moreover, third-party payors
      are
      increasingly challenging the pricing of medical procedures or limiting or
      prohibiting reimbursement for some services or devices, and we cannot be sure
      that they will reimburse our customers at levels sufficient to enable us to
      achieve or maintain sales and price levels for our products. There is no uniform
      policy on reimbursement among third-party payors, and we can provide no
      assurance that procedures using our products will qualify for reimbursement
      from
      third-party payors or that reimbursement rates will not be reduced or
      eliminated. For example, we have previously been informed that some private
      third-party payors regard IMRT as investigational or experimental and do not
      provide reimbursement for these services at this time. A reduction in or
      elimination of third-party payor reimbursement for treatments using our products
      would likely have a material adverse effect on our revenues.




Furthermore,
      any federal and state efforts to reform government and private healthcare
      insurance programs could significantly affect the purchase of healthcare
      services and products in general and demand for our products in particular.
      We
      are unable to predict whether potential reforms will be enacted, whether other
      healthcare legislation or regulation affecting the business may be proposed
      or
      enacted in the future or what effect any such legislation or regulation would
      have on our business, financial condition or results of operations.




The
      federal Medicare program currently reimburses hospitals and freestanding clinics
      for both IMRT/IGRT and brachytherapy treatments. Medicare reimbursement amounts
      typically are reviewed and adjusted at least annually. Medicare reimbursement
      policies are reviewed and revised on an ad hoc basis. Adjustments could be
      made
      to these reimbursement policies or amounts, which could result in reduced or
      no
      reimbursement for IMRT/IGRT and brachytherapy services. Changes in Medicare
      reimbursement policies or amounts affecting hospitals and freestanding clinics
      could negatively affect market demand for our products.




With
      respect to brachytherapy in particular, medicare reimbursement amounts for
      seeding are currently significantly less than for radical prostatectomy, or
      RP.
      Although seeding generally requires less physician time than RP, lower
      reimbursement amounts, when combined with physician familiarity with RP, may
      create disincentives for urologists to perform seeding.




Private
      third-party payors often adopt Medicare reimbursement policies and payment
      amounts. As such, Medicare reimbursement policy and payment amount changes
      concerning our products also could be extended to private third-party payor
      reimbursement policies and amounts and could affect demand for our products
      in
      those markets as well.




Acceptance
      of our products in foreign markets could be affected by the availability of
      adequate reimbursement or funding, as the case may be, within prevailing
      healthcare payment systems. Reimbursement, funding and healthcare payment
      systems vary significantly by country and include both government-sponsored
      healthcare and private insurance. We can provide no assurance that third-party
      reimbursement will be made available with respect to treatments using our
      products under any foreign reimbursement system.




Problems
      with any of these reimbursement systems that adversely affect demand for our
      products could cause our revenues from our products to decline and our business
      to suffer.




Also,
      we,
      our distributors and healthcare providers performing radiation therapy
      procedures are subject to state and federal fraud and abuse laws prohibiting
      kickbacks and, in the case of physicians, patient self-referrals. We may be
      subjected to civil and criminal penalties if we or our agents violate any of
      these prohibitions.


-
          46
          -


**We
      are subject to extensive government regulation applicable to the manufacture
      and
      distribution of our products. Complying with the Food And Drug Administration
      and other domestic and foreign regulatory bodies is an expensive and
      time-consuming process, whose outcome can be difficult to predict. If we fail
      or
      are delayed in obtaining regulatory approvals or fail to comply with applicable
      regulations, we may be unable to market and distribute our products or may
      be
      subject to civil or criminal penalties.**





We
      and
      some of our suppliers and distributors are subject to extensive and rigorous
      government regulation of the manufacture and distribution of our products,
      both
      in the United States and in foreign countries. Compliance with these laws and
      regulations is expensive and time-consuming, and changes to or failure to comply
      with these laws and regulations, or adoption of new laws and regulations, could
      adversely affect our business.





In
      the
      United States, as a manufacturer and seller of medical devices and devices
      utilizing radioactive by-product material, we and some of our suppliers and
      distributors are subject to extensive regulation by federal governmental
      authorities, such as the United States Food and Drug Administration, or FDA,
      and
      state and local regulatory agencies, such as the State of California, State
      of
      Pennsylvania and the State of Washington **** to
      ensure
      such devices are safe and effective. Such regulations, which include the U.S.
      Food, Drug and Cosmetic Act, or the FDC Act, and regulations promulgated by
      the
      FDA, govern the design, development, testing, manufacturing, packaging,
      labeling, distribution, import/export, possession, marketing, disposal, clinical
      investigations involving humans, sale and marketing of medical devices,
      post-market surveillance, repairs, replacements, recalls and other matters
      relating to medical devices, radiation producing devices and devices utilizing
      radioactive by-product material. State regulations are extensive and vary from
      state to state. Our brachytherapy seeds and IMRT/IGRT products constitute
      medical devices subject to these regulations. Future products in any of our
      business segments may constitute medical devices and be subject to regulation
      as
      such. These laws require that manufacturers adhere to certain standards designed
      to ensure that the medical devices are safe and effective. Under the FDC Act,
      each medical device manufacturer must comply with requirements applicable to
      manufacturing practices.




In
      the
      United States, medical devices are classified into three different categories,
      over which the FDA applies increasing levels of regulation: Class I,
      Class II, and Class III. The FDA has classified all of our IMRT/IGRT
      products to date as Class II devices. Our brachytherapy products have been
      classified as Class I devices. Before a new device can be introduced into the
      United States market, the manufacturer must obtain FDA clearance or approval
      through either a 510(k) premarket notification or a premarket approval, unless
      the product is otherwise exempt from the requirements. Class I devices are
      statutorily exempt from the 510(k) process, unless the device is intended for
      a
      use which is of substantial importance in preventing impairment of human health
      or it presents a potential unreasonable risk of illness or injury.




A
      510(k)
      premarket notification clearance will typically be granted for a device that
      is
      substantially equivalent to a legally marketed Class I or Class II
      medical device or a Class III medical device for which the FDA has not yet
      required submission of a premarket approval. A 510(k) premarket notification
      must contain information supporting the claim of substantial equivalence, which
      may include laboratory results or the results of clinical studies. Following
      submission of a 510(k) premarket notification, a company may not market the
      device for clinical use until the FDA finds the product is substantially
      equivalent for a specific or general intended use. FDA clearance generally
      takes
      from four to twelve months, but it may take longer, and there is no assurance
      that the FDA will ultimately grant a clearance. The FDA may determine that
      a
      device is not substantially equivalent and require submission and approval
      of a
      premarket approval or require further information before it is able to make
      a
      determination regarding substantial equivalence.  -
            47
            -




Most
      of
      the products that we are currently marketing have received clearances from
      the
      FDA through the 510(k) premarket notification process. For any devices already
      cleared through the 510(k) process, modifications or enhancements that could
      significantly affect safety or effectiveness, or constitute a major change
      in
      intended use require a new 510(k) submission and a separate FDA determination
      of
      substantial equivalence. We have made minor modifications to our products and,
      using the guidelines established by the FDA, have determined that these
      modifications do not require us to file new 510(k) submissions. If the FDA
      disagrees with our determinations, we may not be able to sell one or more of
      our
      products until the FDA has cleared new 510(k) submissions for these
      modifications, and there is no assurance that the FDA will ultimately grant
      a
      clearance. In addition, the FDA may determine that future products require
      the
      more costly, lengthy and uncertain premarket approval process under
      Section 515 of the FDC. The approval process under Section 515
      generally takes from one to three years, but in many cases can take even longer,
      and there can be no assurance that any approval will be granted on a timely
      basis, if at all. Under the premarket approval process, an applicant must
      generally conduct at least one clinical investigation and submit extensive
      supporting data and clinical information establishing the safety and
      effectiveness of the device, as well as extensive manufacturing information.
      Clinical investigations themselves are typically lengthy and expensive, closely
      regulated and frequently require prior FDA clearance. Even if clinical
      investigations are conducted, there is no assurance that they will support
      the
      claims for the product. If the FDA requires us to submit a new pre-market
      notification under Section 510(k) for modifications to our existing
      products, or if the FDA requires us to go through the lengthier, more rigorous
      Section 515 pre-market approval process, our product introductions or
      modifications could be delayed or cancelled, which could cause our revenues
      to
      be below expectations.





In
      addition to FDA-required market clearances and approvals, our manufacturing
      operations are required to comply with the FDA's Quality System Regulation,
      or
      QSR, which addresses the quality program requirements, such as a company's
      management responsibility for the company's quality systems, and good
      manufacturing practices, product design, controls, methods, facilities and
      quality assurance controls used in manufacturing, assembly, packing, storing
      and
      installing medical devices. Compliance with the QSR is necessary to receive
      FDA
      clearance or approval to market new products and is necessary for us to be
      able
      to continue to market cleared or approved product offerings. There
      can
      be no assurance that we will not incur significant costs to comply with these
      regulations in the future or that the regulations will not have a material
      adverse effect on our business, financial condition and results of operations.
      Our compliance and the compliance by some of our suppliers with applicable
      regulatory requirements is and will continue to be monitored through periodic
      inspections by the FDA. The
      FDA
      makes announced and unannounced inspections to determine compliance with the
      QSR's and may issue us 483 reports listing instances where we have failed to
      comply with applicable regulations and/or procedures or Warning Letters which,
      if not adequately responded to, could lead to enforcement actions against us,
      including fines, the total shutdown of our production facilities and criminal
      prosecution.




If
      we or
      any of our suppliers fail to comply with FDA requirements, the FDA can institute
      a wide variety of enforcement actions, ranging from a public warning letter
      to
      more severe sanctions such as:




•
fines,
      injunctions and civil penalties;


•
the
      recall or seizure of our products;


•
the
      imposition of operating restrictions, partial suspension or total shutdown
      of
      production;


•
the
      refusal of our requests for 510(k) clearance or pre-market approval of new
      products;


•
the
      withdrawal of 510(k) clearance or pre-market approvals already granted; and


•
      criminal prosecution.




Similar
      consequences could arise from our failure, or the failure by any of our
      suppliers, to comply with applicable foreign laws and regulations. Foreign
      regulatory requirements vary by country. In general, our products are regulated
      outside the United States as medical devices by foreign governmental agencies
      similar to the FDA. However, the time and cost required to obtain regulatory
      approvals from foreign countries could be longer than that required for FDA
      clearance and the requirements for licensing a product in another country may
      differ significantly from the FDA requirements. We rely, in part, on our foreign
      distributors to assist us in complying with foreign regulatory requirements.
      We
      may not be able to obtain these approvals without incurring significant expenses
      or at all, and the failure to obtain these approvals would prevent us from
      selling our products in the applicable countries. This could limit our sales
      and
      growth.  -
            48
            -


**Doctors
      and hospitals may not adopt our products and technologies at levels sufficient
      to sustain our business or to achieve our desired growth rate.**




Intensity
      modulated radiation therapy and image-guided radiation therapy are both
      relatively new technologies and, to date, we have attained only limited
      penetration of the total potential worldwide market. Our future growth and
      success depends upon creating broad awareness and acceptance of IMRT/IGRT
      generally and our products in particular by doctors, hospitals and freestanding
      clinics, as well as patients. This will require substantial marketing and
      educational efforts, which will be costly and may not be successful. The target
      customers for our IMRT/IGRT products may not adopt these technologies or may
      adopt them at a rate that is slower than desired. In addition, as described
      above, potential customers who decide to utilize IMRT/IGRT may choose to
      purchase competitors' products. Important factors that will affect our ability
      to attain broad market acceptance of our IMRT/IGRT products include:




•
doctor
      and patient awareness and acceptance of IMRT/IGRT and our products;


•
the
      real or perceived effectiveness and safety of IMRT/IGRT and our products;


•
the
      relationship between the cost of our products and the real or perceived medical
      benefits of IMRT/IGRT and our products;


•
the
      relationship between the cost of our products and the financial benefits to
      our
      customers of using our products, which will be greatly affected by the coverage
      of, and reimbursement for, IMRT/IGRT treatment and ultrasound guidance by
      governmental and private third-party payors; and


•
market
      perception of our ability to continue to grow our business and develop enhanced
      IMRT/IGRT products.




Failure
      of our products to gain broad market acceptance could cause our revenues to
      decline and our business to suffer.




**The
      liquidity of our common stock could be adversely affected if we are delisted
      from The Nasdaq Global Market.**





In
      the
      event that we are unable maintain compliance with all relevant Nasdaq Listing
      Standards, our securities may be subject to delisting from the Nasdaq Global
      Market. If such delisting occurs, the market price and market liquidity of
      our
      common stock may be adversely affected.





Alternatively,
      if faced with such delisting, we may submit an application to transfer the
      listing of our common stock to The Nasdaq Capital Market. Among other
      requirements, The Nasdaq Capital Market has a minimum $2.5 million stockholders’
equity requirement and a $1.00 minimum bid price requirement for continued
      listing.





Alternatively,
      if our common stock is delisted by Nasdaq, our common stock may be eligible
      to
      trade on the American Stock Exchange, the OTC Bulletin Board maintained by
      Nasdaq, another over-the-counter quotation system, or on the pink sheets where
      an investor may find it more difficult to dispose of or obtain accurate
      quotations as to the market value of our common stock, although there can be
      no
      assurance that our common stock will be eligible for trading on any alternative
      exchanges or markets. In addition, we would be subject to Rule 15c2-11
      promulgated by the SEC. If we fail to meet criteria set forth in the rule (for
      example, by failing to file periodic reports as required by the Exchange Act),
      various practice requirements are imposed on broker-dealers who sell securities
      governed by the rule to persons other than established customers and accredited
      investors. For these types of transactions, the broker-dealer must make a
      special suitability determination for the purchaser and have received the
      purchaser's written consent to the transactions prior to sale. Consequently,
      such rule may deter broker-dealers from recommending or selling our common
      stock, which may further affect the liquidity and price of our common
      stock.  -
            49
            -




Delisting
      from Nasdaq would make trading our common stock more difficult for investors,
      potentially leading to further declines in our share price. It would also make
      it more difficult for us to raise additional capital.




**Our
      future growth depends, in part, on our ability to penetrate foreign markets,
      particularly in Asia and Europe. However, we may encounter difficulties in
      gaining acceptance of our products in foreign markets, where we have limited
      experience marketing, servicing and distributing our products, and where we
      will
      be subject to additional regulatory burdens and other
      risks.**




Our
      future profitability will depend in part on our ability to establish, grow
      and
      ultimately maintain our product sales in foreign markets, particularly in Asia
      and Europe. However, we have limited experience in marketing, servicing and
      distributing our products in other countries. In 2006, less than 5% of our
      product revenues and less than 5% of our total revenues were derived from sales
      to customers outside the United States and Canada. Our foreign operations
      subject us to additional risks and uncertainties, including:




•
our
      customers' ability to obtain reimbursement for procedures using our products
      in
      foreign markets;


•
the
      burden of complying with complex and changing foreign regulatory requirements;


•
      language barriers and other difficulties in providing long-range customer
      support and service;


•
longer
      accounts receivable collection times;


•
      significant currency fluctuations, which could cause our distributors to reduce
      the number of products they purchase from us because the cost of our products
      to
      them could fluctuate relative to the price they can charge their customers;


•
reduced
      protection of intellectual property rights in some foreign countries; and


•
the
      interpretation of contractual provisions governed by foreign laws in the event
      of a contract dispute.




Our
      foreign sales of our products could also be adversely affected by export license
      requirements, the imposition of governmental controls, political and economic
      instability, trade restrictions, changes in tariffs and difficulties in staffing
      and managing foreign operations. In addition, we are subject to the Foreign
      Corrupt Practices Act, any violation of which could create a substantial
      liability for us and also cause a loss of reputation in the market.




**As
      part of our business strategy, we intend to pursue transactions that may cause
      us to experience significant charges to earnings that may adversely affect
      our
      stock price and financial condition** .





We
      regularly review potential transactions related to technologies, product
      candidates or product rights and businesses complementary to our business.
      Such
      transactions could include mergers, acquisitions, strategic alliances, licensing
      agreements or co-promotion agreements. Our acquisition of Theseus Imaging
      Corporation in October 2000 and the acquisition of NOMOS, in May 2004, are
      examples of such transactions. In the future, if we have sufficient available
      capital, we may choose to enter into such transactions. We may not be able
      to
      successfully integrate newly acquired organizations, products or technologies
      into our business and the process could be expensive and time consuming and
      may
      strain our resources. Depending upon the nature of any transaction, we may
      experience a charge to earnings which could be material.


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          50
          -


**Operating
      results for a particular period may fluctuate and are difficult to
      predict.**





The
      results of operations for any fiscal quarter or fiscal year are not necessarily
      indicative of results to be expected in future periods. Our operating results
      have in the past been, and will continue to be, subject to quarterly and annual
      fluctuations as a result of a number of factors. As a consequence, operating
      results for a particular future period are difficult to predict. Such factors
      include the following:





·
            Our
                net sales may grow at a slower rate than experienced in previous
                periods
                and, in particular periods, may
                decline;


·
            Our
                brachytherapy product lines may experience some variability in revenue
                due
                to seasonality. This is primarily due to three major holidays occurring
                in
                our first fiscal quarter and the apparent reduction in the number
                of
                procedures performed during summer months, which could affect our
                third
                fiscal quarter results;


·
            Estimates
                with respect to the useful life and ultimate recoverability of our
                carrying basis of assets, including goodwill and purchased intangible
                assets, could change as a result of such assessments and
                decisions;


·
            As
                a result of our growth in past periods, our fixed costs have increased.
                With increased levels of spending and the impact of long-term commitments,
                we may not be able to quickly reduce these fixed expenses in response
                to
                short-term business changes; and


·
            Acquisitions
                that result in in-process research and development expenses may be
                charged
                fully in an individual quarter.


·
            Sales
                of our IMRT/IGRT products are typically heavier in the final month
                of a
                fiscal quarter, leading to a disproportionately high use of cash
                in the
                first two months of a quarter.


·
            Changes
                or anticipated change in third-party reimbursement amounts or policies
                applicable to treatments using our
                products;


·
            Timing
                of the announcement, introduction and delivery of new products or
                product
                enhancements by us and by our competitors;


·
            The
                possibility that unexpected levels of cancellations of orders or
                backlog
                may affect certain assumptions upon which we base our forecasts and
                predictions of future performance;


·
            Changes
                in the general economic conditions in the regions in which we do
                business;


·
            Unfavorable
                outcome of any litigation; and


·
            Accounting
                adjustments such as those relating to reserves for product recalls,
                stock
                option expensing as required under SFAS No. 123R and changes in
                interpretation of accounting
                pronouncements





**Being
      a public company significantly increases our administrative
      costs.**





The
      Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the
      SEC
      and listing requirements subsequently adopted by NASDAQ in response to
      Sarbanes-Oxley, have required changes in corporate governance practices,
      internal control policies and audit committee practices of public companies.
      These rules, regulations, and requirements have significantly increased our
      legal, financial, compliance and administrative costs, and have made certain
      other activities more time consuming and costly, as well as requiring
      substantial time and attention of our senior management. The Company expects
      its
      continued compliance with these and future rules and regulations to continue
      to
      require significant resources. These new rules and regulations also may make
      it
      more difficult and more expensive for us to obtain director and officer
      liability insurance in the future, and could make it more difficult for us
      to
      attract and retain qualified members for our Board of Directors, particularly
      to
      serve on our audit committee.


-
          51
          -


**Our
      publicly-filed SEC reports are reviewed by the SEC from time to time and any
      significant changes required as a result of any such review may result in
      material liability to us and have a material adverse impact on the trading
      price
      of our common stock.**




The
      reports of publicly-traded companies are subject to review by the SEC from
      time
      to time for the purpose of assisting companies in complying with applicable
      disclosure requirements and to enhance the overall effectiveness of companies
      public filings, and comprehensive reviews of such reports are now required
      at
      least every three years under the Sarbanes-Oxley Act of 2002. While we believe
      that our previously filed SEC reports comply, and we intend that all future
      reports will comply in all material respects with the published rules and
      regulations of the SEC, we could be required to modify or reformulate
      information contained in prior filings as a result of an SEC review.  Any
      modification or reformulation of information contained in such reports could
      be
      significant and result in material liability to us and have a material adverse
      impact on the trading price of our common stock.





**Market
      volatility and fluctuations in our stock price and trading volume may cause
      sudden decreases in the value of an investment in our common stock.**





The
      market price of our common stock has historically been, and we expect it to
      continue to be, volatile. The price of our common stock has ranged between
      $1.03
      and $2.58 in the fifty-two week period ended October 31, 2006. The stock market
      has from time to time experienced extreme price and volume fluctuations,
      particularly in the medical device sector, which have often been unrelated
      to
      the operating performance of particular companies. Factors such as announcements
      of technological innovations or new products by our competitors or disappointing
      results by third parties, as well as market conditions in our industry, may
      significantly influence the market price of our common stock. Our stock price
      has also been affected by our own public announcements regarding such things
      as
      quarterly sales and earnings. Consequently, events both within and beyond our
      control may cause shares of our stock to lose their value rapidly.





In
      addition, sales of a substantial number of shares of our common stock by
      stockholders could adversely affect the market price of our shares. In the
      fourth quarter of 2006, our shares had an average daily trading volume of only
      approximately 36,000 shares. In connection with our June 2006 sale of
      common stock and accompanying warrants, we filed resale registration statements
      covering an aggregate of up to 12,291,934 shares of common stock and 6,145,967
      shares of common stock issuable to upon exercise of warrants for the benefit
      of
      the selling security holders. The actual or anticipated resale by such investors
      under these registration statements may depress the market price of our common
      stock. Bulk sales of shares of our common stock in a short period of time could
      also cause the market price for our shares to decline.





**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





**** None.


-
            52
            -


**Issuer
      Purchases of Equity Securities**




The
      following table provides information with respect to the shares of common stock
      repurchased by us during the quarter ended January 31, 2007.


**Period**
            
            **Total
                Number of**
              **Shares Purchased**
            
            **Average Price**
              **Paid
                Per**
              **Share**
            
            **Total
                Number of**
              **Shares Purchased as**
              **Part
                of Publicly**
              **Announced Plans or**
              **Programs**
            
            **Approximate
                Dollar Value**
              **of Shares that May**
              **Yet
                Be Purchased**
              **Under the Plans or**
              **Programs**November
                1 - 30, 2006
            
            
            7,640
            
            $
            1.00
            
            
            7,640
            
            $
            9,859,000.December
                1 - 31, 2006
            
            
            14,955
            
            $
            0.99
            
            
            14,955
            
            $
            9,844,000.January
                1 - 31, 2007
            
            
            4,100
            
            $
            1.01
            
            
            4,100
            
            $
            9,840,000.Total
            
            
            26,695
            
            $
            1.00
            
            
            26,695





In
      October 2001, the Board of Directors authorized a stock repurchase program
      to acquire up to $10 million of the Company's common stock in the open
      market at any time. The number of shares of common stock actually acquired
      by
      the Company will depend on subsequent developments and corporate needs, and
      the
      repurchase of shares may be interrupted or discontinued at any time. As of
      January 31, 2007 and October 31, 2006, a cumulative total of 48,795 shares
      and 22,100 shares had been repurchased by the Company at a cost of $160,000
      and
      $133,000, respectively and are reflected as Treasury Stock on the Balance Sheet
      at the respective dates. We
      expect repurchases will be made in accordance with Rule 10b-18 and include
      a
      plan designed to satisfy the Rule 10b5-1 safe harbor.











**Item
      6.**  **Exhibits**





(
              )
            Exhibits.





Exhibits
                  No.
              Title31.1
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200231.2
              Certification
                  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200232.1
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002


-
          53
          -




**SIGNATURES**




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





NORTH
              AMERICAN SCIENTIFIC, INC.March
              16, 2007
            By:
            /s/ L.
              Michael CutrerName:L.
                Michael Cutrer
              Title:President
                andChief
                Executive Officer(Principal
                Executive Officer) March
              16, 2007
            By:
            /s/James
              W. KlinglerName:James
                W. Klingler
              Title:Senior
                Vice President andChief
                Financial Officer(Principal
                Financial Officer)


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          54
          -