**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**










**FORM
      10-Q**





x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





**For
      the quarterly period ended July 31, 2008**





or





o
      TRANSITION 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, a non-accelerated filer or a smaller reporting company.
      See
      definition of “large accelerated filer” and “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
      Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller
      Reporting Company 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
      September 2, 2008 was 19,112,003 shares.










**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Index**





**Page******
            ****
            ****
            ****
            ******Part
                I – Financial Information****Item
                1.**
            ****
            **Financial
                Statements**Consolidated
                Balance Sheets as of July 31, 2008 (unaudited) and October 31,
                2007
            
            3Consolidated
                Statements of Operations for the three and nine months ended July
                31, 2008
                and 2007 (unaudited)
            
            4Consolidated
                Statements of Cash Flows for the nine months ended July 31, 2008
                and 2007
                (unaudited)
            
            5Condensed
                Notes to the Consolidated Financial Statements (unaudited)
            
            7**Item
                2.**
            ****
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations**
            
            37**Item
                3.**
            ****
            **Quantitative
                and Qualitative Disclosures about Market Risk**
            
            46**Item
                4.**
            ****
            **Controls
                and Procedures**
            
            46**Part
                II – Other Information****Item
                1.**
            ****
            **Legal
                Proceedings**
            
            47**Item
                1A.**
            ****
            **Risk
                Factors**
            
            47**Item
                6.**
            ****
            **Exhibits**
            
            59**Signatures**
            
            60


2


**PART
      I – FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Balance Sheets**


**(in
      thousands, except share data)**





**July 31,**
            
            **October 31,****2008**
            
            **2007**(Unaudited)**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            1,667
            
            $
            609Accounts
                receivable, net of reserves
            
            
            2,359
            
            
            2,296Inventories,
                net of reserves
            
            
            909
            
            
            984Prepaid
                expenses and other current assets
            
            
            770
            
            
            724Assets
                held for sale
            
            
            609
            
            
            636Total
                current assets
            
            
            6,314
            
            
            5,249Equipment
                and leasehold improvements, net
            
            
            1,507
            
            
            824Intangible
                assets, net
            
            
            105
            
            
            103Total
                assets
            
            $
            7,926
            
            $
            6,176**Liabilities
                and Stockholders’ Equity****(Deficit)**Current
                liabilitiesLines
                of credit, net of discount
            
            $
            —
            
            $
            3,241Short-term
                portion of long-term debt
            
            
            417
            
            
            —Warrant
                derivative
            
            
            —
            
            
            173Accounts
                payable
            
            
            1,912
            
            
            2,564Accrued
                expenses
            
            
            3,171
            
            
            3,110Total
                current liabilities
            
            
            5,500
            
            
            9,088Long-term
                borrowings, net
            
            
            924
            
            
            —Long-term
                severance liability
            
            
            662
            
            
            —Commitments
                and contingencies
            
            
            —
            
            
            —Stockholders’
                Equity (Deficit)Preferred
                stock, $0.01 par value, 2,000,000 shares authorized,no
                shares issued
            
            
            —
            
            
            —Common
                stock, $0.01 par value, 150,000,000 and 100,000,000 sharesauthorized,
                18,544,868 and 5,920,270 shares issued; and 18,503,644 and 5,879,066
                shares outstanding as of July 31, 2008 and October 31, 2007,
                respectively
            
            
            185
            
            
            59Additional
                paid-in capital
            
            
            161,533
            
            
            145,774Treasury
                stock, at cost – 41,204 common shares as of July 31, 2008
                andOctober
                31, 2007
            
            
            (227
            )
            
            (227
            )Accumulated
                deficit
            
            
            (160,651
            )
            
            (148,518
            )Total
                stockholders’ equity (deficit)
            
            
            840
            
            
            (2,912
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            7,926
            
            $
            6,176





The
      accompanying condensed notes are an integral part of the unaudited consolidated
      financial statements.


3


**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Operations**


**(Unaudited)**


**(in
      thousands, except share and per share data)**


**Three months ended July 31,**
              
              **Nine months ended July 31,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Revenue –
                  net
              
              $
              3,418
              
              $
              2,702
              
              $
              10,589
              
              $
              8,156Cost
                  of revenue
              
              
              2,244
              
              
              2,098
              
              
              7,077
              
              
              6,128Gross
                  profit
              
              
              1,174
              
              
              604
              
              
              3,512
              
              
              2,028Operating
                  expensesSelling
                  expenses
              
              
              1,168
              
              
              985
              
              
              3,382
              
              
              2,713General
                  and administrative expenses
              
              
              2,229
              
              
              2,072
              
              
              7,634
              
              
              6,516Research
                  and development
              
              
              843
              
              
              518
              
              
              3,282
              
              
              1,282Severance
              
              
              1,064
              
              
              —
              
              
              1,410
              
              
              —Total
                  operating expenses
              
              
              5,304
              
              
              3,575
              
              
              15,708
              
              
              10,511Loss
                  from operations
              
              
              (4,130
              )
              
              (2,971
              )
              
              (12,196
              )
              
              (8,483
              )Interest
                  and other income (expense), net
              
              
              (10
              )
              
              (69
              )
              
              (958
              )
              
              (98
              )Adjustment
                  to fair value of derivatives
              
              
              —
              
              
              —
              
              
              (311
              )
              
              —Loss
                  before provision for income taxes
              
              
              (4,140
              )
              
              (3,040
              )
              
              (13,465
              )
              
              (8,581
              )Provision
                  for income taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              —Loss
                  from continuing operations
              
              
              (4,140
              )
              
              (3,040
              )
              
              (13,465
              )
              
              (8,581
              )Income
                  (loss) from discontinued operations, net of income tax
                  effect
              
              
              162
              
              
              (7,648
              )
              
              741
              
              
              (8,482
              )Net
                  loss
              
              $
              (3,978
              )
              $
              (10,688
              )
              $
              (12,724
              )
              $
              (17,063
              )Basic
                  and diluted loss per share:Basic
                  and diluted loss per share from continuing operations
              
              $
              (
                  0.22
              )
              $
              (0.52
              )
              $
              (
                  0.91
              )
              $
              (
                  1.46
              )Basic
                  and diluted earnings (loss) per share from discontinued
                  operations
              
              $
              —
              
              $
              (
                  1.30
              )
              $
              0.05
              
              $
              (
                  1.45
              )Basic
                  and diluted loss per share
              
              $
              (0.22
              )
              $
              (
                  1.82
              )
              $
              (
                  0.86
              )
              $
              (
                  2.91
              )Weighted
                  average number of shares outstanding
              
              
              18,488,827
              
              
              5,863,411
              
              
              14,852,304
              
              
              5,865,412





The
      accompanying condensed notes are an integral part of the unaudited consolidated
      financial statements.


4


**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Cash Flows**


**(Unaudited)**


**(in
      thousands, except share data)**





**Nine months ended July 31,****2008**
            
            **2007**Cash flows from operating activities:Net
                loss
            
            $
            (12,724
            )
            $
            (17,063
            )Net
                earnings (loss) from discontinued operations
            
            
            741
            
            
            (8,482
            )Net
                loss from continuing operations
            
            
            (13,465
            )
            
            (8,581
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            364
            
            
            414Amortization
                of warrants
            
            
            895
            
            
            238Change
                in fair value of warrant derivative liability
            
            
            311
            
            
            —Share-based
                compensation expense
            
            
            672
            
            
            490Provision
                for doubtful accounts
            
            
            78
            
            
            (213
            )Provision
                for inventory adjustments
            
            
            (11
            )
            
            88Loss
                on sale of equipment
            
            
            —
            
            
            4Changes
                in assets and liabilities, net of discontinued operation:Accounts
                receivable
            
            
            (141
            )
            
            921Inventories
            
            
            86
            
            
            (369
            )Prepaid
                and other current assets
            
            
            16
            
            
            (26
            )Accounts
                payable
            
            
            (38
            )
            
            8Accrued
                expenses
            
            
            549
            
            
            40Long-term
                severance
            
            
            662
            
            
            —Net
                cash used in continuing operations
            
            
            (10,022
            )
            
            (6,986
            )Net
                cash provided by (used in) discontinued operation
            
            
            218
            
            
            (1,699
            )Net
                cash used in operating activities
            
            
            (9,804
            )
            
            (8,685
            )Cash
                flows from investing activities:Proceeds
                from maturity of marketable securities
            
            
            —
            
            
            8,419Proceeds
                from sale of equipment
            
            
            —
            
            
            15Capital
                expenditures
            
            
            (1,026
            )
            
            (139
            )Investment
                in patents
            
            
            (23
            )
            
            —Net
                cash (used in) provided by continuing operations
            
            
            (1,049
            )
            
            8,295Net
                cash used in discontinued operation
            
            
            (4
            )
            
            (102
            )Net
                cash (used in) provided by investing activities
            
            
            (1,053
            )
            
            8,193Cash
                flow from financing activities:Net
                (payment) borrowings on lines of credit
            
            
            (3,323
            )
            
            1,363Net
                proceeds from long-term borrowing
            
            
            1,500
            
            
            —Net
                proceeds from private placement of common stock and
                warrants
            
            
            13,768
            
            
            —Proceeds
                from exercise of stock options and stock purchase plan
            
            
            23
            
            
            137Fees
                paid to effect reverse stock split
            
            
            (12
            )
            
            —Loan
                origination fees
            
            
            (41
            )
            
            —Purchase
                of stock for treasury
            
            
            —
            
            
            (94
            )Net
                cash provided by financing activities
            
            
            11,915
            
            
            1,406Net
                increase in cash and cash equivalents
            
            
            1,058
            
            
            914Cash
                and cash equivalents at beginning of period
            
            
            609
            
            
            903Cash
                and cash equivalents at end of period
            
            $
            1,667
            
            $
            1,817


5





Supplemental
      disclosure:




Cash
      paid
      for interest was $115 and $9 for the nine months ended July 31, 2008 and 2007,
      respectively. Cash paid for income taxes was $4 and $13 for the nine months
      ended July 31, 2008 and 2007, respectively.


In
      the
      nine months ended July 31, 2008, the Company issued warrants with estimated
      fair
      values of $118 to a bank as consideration for entering into and amending Loan
      Agreements. See Note 8 to the Financial Statements.





In
      the
      nine months ended July 31, 2008 and 2007, there was no cash provided by or
      used
      in financing activities from discontinued operations.





The
      accompanying condensed notes are an integral part of the unaudited consolidated
      financial statements.


6


**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**


**N** **OTE
      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, 2007, 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,
      2007.





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





On
      April
      29, 2008, the Company’s stockholders approved a one share for five shares
      reverse split of the Company’s common stock, which became effective on May 1,
      2008. The number of shares and the per share amounts as of October 31, 2007
      and
      July 31, 2007 have been retrospectively restated for the effect of the reverse
      stock split. The reverse stock split had no effect on the par value of the
      Company’s common stock or the total authorized shares.





*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.  The Company has incurred net losses of
      $12.7 million in the nine months ended July 31, 2008, and $21.0 million and
      $17.1 million for the years ended October 31, 2007 and 2006, respectively.
      In
      addition, the Company has used cash in operations of $9.8 million in the nine
      months ended July 31, 2008, and $12.3 million and $15.9 million for the years
      ended October 31, 2007 and 2006, respectively.  As of July 31, 2008, we had
      an accumulated deficit of $160.7 million; cash and cash equivalents of $1.7
      million, and long-term debt of $1.6 million.





Based
      on
      the Company’s current operating plans, management believes that the Company’s
      existing cash resources and cash forecasted by management to be generated by
      operations, as well as the Company’s short-term and long-term borrowings, lines
      of credit and its ability to raise capital through the sale of its common stock
      and /or securities convertible to common stock, will be sufficient to meet
      working capital and capital requirements through at least the next twelve
      months. In this regard, the Company raised additional financing in the first
      quarter of fiscal 2008 to fund our continuing operations, support the further
      development and launch of ClearPathTM, our unique multicatheter breast
      brachytherapy device for Accelerated Partial Breast Irradiation, and other
      activities. In addition, subsequent to April 30, 2008, the Company negotiated
      a
      $3.0 million term loan, renewed its expired line of credit for $3.0 million
      with
      a bank, and most recently, negotiated a sale of certain assets as described
      in
      Note 3 -Discontinued Operations. However, there is no assurance that the Company
      will be successful with its plans. If events and circumstances occur such that
      the Company does not meet its current operating plans, the Company is unable
      to
      raise sufficient additional equity or debt financing, or such financing is
      insufficient or not available, 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.




The
      Company also expects that in future periods new products and services will
      provide additional cash flow, although no assurance can be given that such
      cash
      flow will be realized, and the Company is presently placing an emphasis on
      controlling expenses.


7


**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**


*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.





*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.





*Inventories*





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.





*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





*Long-Lived
      Assets*





In
      accordance with SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,”
long-lived assets, such as property, plant, and equipment, and purchased
      intangibles subject to amortization, are reviewed for impairment whenever events
      or changes in circumstances indicate that the carrying amount of an asset may
      not be recoverable. Recoverability of assets to be held and used is measured
      by
      a comparison of the carrying amount of an asset to the estimated undiscounted
      future cash flows expected to be generated by the asset. If the carrying amount
      of an asset exceeds its estimated future cash flows, an impairment charge is
      recognized equal to the amount by which the carrying amount of the asset exceeds
      the fair value of the asset. Assets to be disposed of are separately presented
      in the consolidated balance sheet and reported at the lower of the carrying
      amount or fair value less costs to sell, and are no longer
      depreciated.





*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.


8


**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**


*Derivative
      Liabilities*




The
      Company issued warrants in connection with its borrowing activities that
      included an uncertain purchase price. The Company evaluated the warrants under
      SFAS No. 133 - *Accounting
      for Derivative Instruments and Hedging Activities* and
      Emerging Issues Task Force Issue 00-19 - *Accounting
      for Derivative Financial Indexed to, and Potentially Settled in, a Company’s Own
      Stock* and
      determined the warrants should be accounted for as derivative liabilities at
      estimated fair value, and marked-to-market at subsequent measurement dates. The
      Company used the Black-Scholes option-pricing model to determine the fair value
      of the derivative liabilities at each measurement date. Key assumptions of
      the
      Black-Scholes option-pricing model include applicable volatility rates,
      risk-free interest rates and the instruments’ expected remaining life. The
      fluctuations in estimated fair value are recorded as Adjustments to Fair Value
      of Derivatives in the Statement of Operations. On December 12, 2007, the
      uncertain purchase price became certain, and the fair value of the derivatives
      were reclassed from liabilities to equity. See further discussion in Note
      8 - Warrant Derivatives and Note 9 - Borrowings.





*Revenue
      Recognition*





The
      Company sells products for radiation therapy treatment, primarily brachytherapy
      seeds used in the treatment of cancer. 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 supersedes SAB No. 101,
“ *Revenue
      Recognition in Financial Statemen* t *s* ”,
      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.





*Income
      Taxes*




Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled. The Company has recorded 100% valuation allowance
      against its deferred tax assets until such time that it becomes more likely
      than
      not that the Company will realize the benefits of its deferred tax assets.
      On
      November 1, 2007, the Company implemented Financial Accounting Standards Board
      (“FASB”) Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* ,”
(FIN 48). See Note 2 - Income Taxes.





*Share-based
      Compensation*





The
      Company accounts for its share-based payments under the guidance set forth
      in
      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. The Company also applies the guidance found in SEC *Staff
      Accounting Bulletin No. 107* (“SAB
      107”) to with respect to share-based payments and SFAS 123(R).





Under
      SFAS 123(R), the Company attributes the value of share-based compensation to
      expense using the straight-line method. The Company uses a 10% forfeiture
      rate under the straight-line method based on historic and estimated future
      forfeitures. On March 16, 2006, the Company granted 130,100 stock options that
      contain certain market conditions (“2006 Premium Price Awards”) The 2006 Premium
      Price Awards are, to the extent provided by law, incentive stock options that
      have an exercise price of $16.75 per share, which is equal to 159% of the fair
      market value of the Company’s common stock on the grant date. The 2006 Premium
      Price Awards also include a 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 $16.75 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 2006 Premium Price Awards will
      not vest. Subject to the attainment of the market condition by the Company,
      the
      2006 Premium Price Awards will vest, if at all, in equal annual installments
      over a four year period beginning on March 16, 2008, the second anniversary
      of
      the grant date. The 2006 Premium Price Awards have a term of 8 years from the
      date of grant. The 2006 Premium Price Awards, share-based compensation expense
      has been estimated using a 40% forfeiture rate and is included in share-based
      compensation expense.


9


**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**


On
      February 15, 2008, the Company’s Board of Directors approved, subject to the
      approval of the Company’s stockholders, a plan to reprice certain existing
      employee stock options at $2.05 per share, the closing price of the Company’s
      common stock on February 15, 2008. The 2006 Premium Price Awards were re-priced
      to $3.25 per share, which is equal to 159% of the re-priced fair value of the
      Company’s common stock. In addition, the Company’s Board of Directors also
      approved, subject to the approval of the Company’s stockholders, a plan to
      exchange options held by directors of the Company for a one-time stock option
      grant at $2.10 per share, the closing price of the Company’s stock on February
      13, 2008. The Company’s stockholders approved both the employee stock option
      re-pricing plan and the director exchange plan at the annual meeting held on
      April 29, 2008. (See Note 10 – Stockholders’ Equity for further
      discussion). The re-pricing exercise of employee stock options generated $332
      incremental share-based compensation for un-vested and re-priced stock options,
      which is being recognized over the vesting period of the new employee stock
      options. The exchange exercise for the options held by directors of the Company
      generated $166 incremental share-based compensation for un-vested and exchanged
      options, which is being recognized over the three-year vesting period of the
      newly issued director stock options.





Share-based
      compensation expense related to stock options and employee stock purchases,
      including the amortized portion of the incremental share-based compensation
      for
      the re-priced employee stock options, the exchanged director stock options
      and
      the 2006 Premium Price Awards, of $237 and $176 for the three months ended
      July
      31, 2008 and 2007, respectively, and $672 and $490 for the nine months ended
      July 31, 2008 and 2007, respectively, was recorded in the financial statements
      as a component of general and administrative expense.





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:


10


**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**





**Three months ended July 31,**
            
            **Nine months ended July 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                loss from continuing operations
            
            $
            (4,140
            )
            $
            (3,040
            )
            $
            (13,465
            )
            $
            (8,581
            )Net
                income (loss) from discontinued operations
            
            
            162
            
            
            (7,648
            )
            
            741
            
            
            (8,482
            )Net
                loss
            
            
            (3,978
            )
            
            (10,688
            )
            
            (12,724
            )
            
            (17,063
            )Weighted
                average shares outstanding - basic
            
            
            18,488,227
            
            
            5,863,411
            
            
            14,852,304
            
            
            5,865,412Dilutive
                effect of stock options and warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —Weighted
                average shares outstanding -diluted
            
            
            18,488,227
            
            
            5,863,411
            
            
            14,852,304
            
            
            5,865,412Basic
                and diluted loss per share from continuing operations
            
            $
            (0.22
            )
            $
            (0.52
            )
            $
            (0.91
            )
            $
            (1.46
            )Basic
                and diluted loss per share from discontinued operations
                (1)
            
            $
            —
            
            $
            (1.30
            )
            $
            0.05
            
            $
            (1.45
            )Basic
                and diluted loss per share
            
            $
            (0.22
            )
            $
            (1.82
            )
            $
            (0.86
            )
            $
            (2.91
            )





(1)
      2008
      Q3 per share amount less than $(0.01)





Stock
      options to purchase 2,379,029 common shares and 909,920 common shares, and
      warrants to purchase 1,876,998 common shares and 118,944 common shares for
      the
      three months ended July 31, 2008 and 2007, respectively, and stock options
      to
      purchase 1,879,898 common shares and 743,474 common shares, and warrants to
      purchase 1,876,998 common shares and 118,944 common shares for the nine months
      ended July 31, 2008 and 2007, respectively, were not included in the computation
      of diluted loss per share for those periods because their effect would have
      been
      anti-dilutive.





*Significant
      Concentrations*





As
      of
      July 31, 2008, there was one customer that made up more than 10% of revenues
      and
      three customers that individually comprised more than 5% of accounts receivable,
      and two suppliers that made up more than 10% of purchases and four suppliers
      that individually comprised more than 5% of accounts payable.





*Recent
      Accounting Pronouncements*





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 157 is effective for fiscal years beginning after November 15,
      2007. On February 12, 2008, the FASB issued FASB Staff Position  FSP
      157-2
      which defers the effective date of SFAS No. 157 for one year for
      non-financial assets and non-financial liabilities that are not recognized
      or
      disclosed at fair value in the financial statements on a recurring basis. 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
      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. The Company is evaluating this standard
      and
      therefore has not yet determined the impact that the adoption of SFAS 159 will
      have on our financial position, results of operations or cash
      flows.


11





**North
      American Scientific, Inc.**


**Condensed
      Notes to Consolidated Financial Statements**


**(Unaudited)**


**(in
      thousands, except share and per share data)**




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), " *Business
      Combinations* "
      ("SFAS 141R"). SFAS 141R establishes principles and requirements for
      how an acquirer recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, any noncontrolling
      interest in the acquiree and the goodwill acquired. SFAS 141R also
      establishes disclosure requirements to enable the evaluation of the nature
      and
      financial effects of the business combination. SFAS 141R is effective for
      fiscal years beginning after December 15, 2008.The Company is currently
      evaluating the potential impact, if any, of the adoption of SFAS 141R on
      its consolidated results of operations and financial condition.




In
      December 2007, the FASB issued SFAS No. 160, " *Noncontrolling
      Interests in Consolidated Financial Statements—an amendment of Accounting
      Research Bulletin No. 51* "
      (“SFAS
      160”). SFAS 160 establishes accounting and reporting standards for ownership
      interests in subsidiaries held by parties other than the parent, the amount
      of
      consolidated net income attributable to the parent and to the noncontrolling
      interest, changes in a parent's ownership interest, and the valuation of
      retained noncontrolling equity investments when a subsidiary is deconsolidated
      SFAS 160  also
      establishes disclosure requirements that clearly identify and distinguish
      between the interests of the parent and the interests of the noncontrolling
      owners SFAS 160  is
      effective for fiscal years beginning after December 15, 2008.The Company is
      currently evaluating the potential impact, if any, of the adoption
      of SFAS
      160
      on its consolidated results of operations and financial
      condition.





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities – an amendment of FASB
      Statement No. 133* .
      The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. Entities are required to provide enhanced
      disclosures about: (a) how and why an entity uses derivative instruments;
      (b) how derivative instruments and related hedged items are accounted for
      under SFAS No. 133 and its related interpretations; and (c) how
      derivative instruments and related hedged items affect an entity’s financial
      position, financial performance, and cash flows. This standard is effective
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008, with early application encouraged. The Company is
      currently evaluating the impact, if any, SFAS No. 161 will have on its
      consolidated financial position, results of operations or cash flows.





In
      March
      2007, the FASB ratified Emerging Issues Task Force Issue 06-11, *Accounting
      for Income Tax Benefits of Dividends on Share-Based Payment Awards* ,
      (“EITF
      Issue 06-11” ). Beginning January 1, 2008, the Company adopted EITF Issue
      06-11. In accordance with the EITF Issue, the Company records a credit to
      additional paid-in capital for tax deductions resulting from a dividend payment
      on non-vested share awards the Company expects to vest. The adoption of EITF
      Issue 06-11 did not have any impact on the Company’s consolidated financial
      statement during the quarter ended July 31, 2008.





In
      May
      2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles”, (“SFAS No.
      162”* ).
      SFAS
      No. 162 identifies the sources of accounting principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). This Statement is effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
      Generally Accepted Accounting Principles”. The Company currently adheres to the
      hierarchy of GAAP as presented in SFAS No. 162, and does not expect its adoption
      will have a material impact on its consolidated results of operations and
      financial condition.





In
      June
      2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
      03-6-1, *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* (“FSP
      EITF 03-6-1”). The FSP provides that unvested share-based payment awards that
      contain nonforfeitable rights to dividends or dividend equivalents (whether
      paid
      or unpaid) are participating securities and shall be included in the computation
      of earnings per share pursuant to the two-class method in accordance with SFAS
      128, Earnings per Share. The FSP is effective for financial statements issued
      for fiscal years beginning after December 15, 2008, and interim periods within
      those years. Upon adoption, the Company is required to retrospectively adjust
      its earnings per share data to conform with the provisions in this FSP. Early
      application of this FSP is prohibited. The Company is currently evaluating
      the
      impact this FSP will have on its consolidated financial statements.


12


**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**




**NOTE
      2  – INCOME TAXES**





On
      November 1, 2007, the Company adopted FIN 48. FIN 48 which
      clarifies the accounting for uncertainty in income taxes by prescribing the
      recognition threshold a tax position is required to meet before being recognized
      in the financial statements and also provides guidance on de-recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. As a result of the adoption of FIN 48, the
      Company reduced the liability for net unrecognized tax benefits, classified
      in
      other assets and accrued liabilities, by $152 and $440, respectively, and
      accounted for this as a cumulative effect of a change in accounting principle
      that was recorded as an increase to retained deficit. In implementing
      FIN 48, the Company has classified $120 as current income taxes payable,
      and, reduced to zero, both its short-term and long-term income tax receivable
      and long-term income tax payable.




Upon
      adoption of FIN 48, the Company recognizes interest expense within Interest
      and Other Expenses and penalties within General and Administrative expenses
      accrued on unrecognized tax benefits.
      As of the date of adoption of FIN 48, the Company had accrued a nominal
      amount for interest and penalties. There was not a material change to this
      amount as of July 31, 2008.





As
      of
      October 31, 2007, the Company had generated $141.0 million and $116.0 million
      of
      Federal and state Net Operating Loss Carry-forwards (“NOL”), respectively and
      $4.8 million of Federal Research & Development Credits (“R&D Credits”)
      through its recurring operating losses, and its acquisition of Theseus
      Corporation in 2000 and NOMOS Corporation in 2004. The tax effect of the Federal
      and state NOL and R&D Credits have been carried as a component of its
      deferred tax assets, and completely offset by a valuation allowance. The Federal
      NOL and R&D Credits are subject to certain statutory limitations, which
      reduce the value of the Federal NOL and R&D Credits that can be used to
      offset future income under certain sections of the Internal Revenue Service
      Code
      Section 382 and Section 383, collectively the “Code”. The statutory limitations
      are imposed upon a change of ownership, as defined within the Code. As a result
      of the Company’s January 2008 PIPE transaction (See Note 10—Stockholders’
Equity) the Company has experienced a change in ownership under the Code.
      Federal statutory limitations under the sections are generally accepted as
      limitations by the states in which the Company currently files state returns.
      The effect of the change of ownership has been to reduce to $10.2 million the
      statutory limit on each of the Federal and State NOL and to eliminate the
      R&D Credits available to the Company, as determined under the Code. Based on
      its effective tax rate 40%, the Company recorded a $59.9 million decrease to
      its
      deferred tax assets and its valuation allowance at July 31, 2008 as a result
      of
      the limitation.





**NOTE
      3  – DISCONTINUED OPERATIONS**





August
      29, 2008, the Company entered into an agreement relating to the sale of the
      Company’s non-therapeutic product line to Eckert & Ziegler Isotope Products,
      Inc. (“EZIP”). The sale was completed on September 5, 2008. The Company expects
      its departure from the non-therapeutic business will allow it to concentrate
      on
      its core business of brachytherapy products and to provide necessary working
      capital. The agreement for the sale will transfer inventory, certain fixed
      assets and intellectual property with a carrying value of $0.6 million to
      EZIP.  in
      return
      for a purchase price of up to $6.0 million, to be paid $3.0 million at closing
      and $2.0 million in January 2009. An additional $1.0 million may be paid to
      the
      Company upon the achievement of certain milestones in September 2009. The
      carrying value of the assets to be included in the sale are shown as Assets
      Held
      for Sale on the Company’s Consolidated Balance Sheet as follows:




Assets
        held for sale consist of the following:


**July 31, 2008**
            
            **October 31, 2007**Inventory
            
            $
            591
            
            $
            561Fixed
                Assets, net of accumulated depreciation of $444 and $385 at July
                31, 2008
                and October 31, 2007, respectively
            
            
            12
            
            
            68Intellectual
                property, net of accumulated amortization of $6 and $5 at July 31,
                2008
                and October 31, 2007, respectively
            
            
            6
            
            
            7$
            609
            
            $
            636


13




**North
        American Scientific, Inc.**
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 **(in
        thousands, except share and per share data)**
  On
      August
      3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology
      business (“NOMOS”), which develops and markets IMRT/IGRT products used during
      external beam radiation therapy for the treatment of cancer. The Company expects
      that the divestiture of NOMOS will allow it to better utilize financial
      resources to benefit the marketing and development of innovative brachytherapy
      products for the treatment of cancer. On September 17, 2007, the Company
      executed a purchase and sale agreement with Best Medical International, Inc.
      (“Best”) to purchase, for $0.5 million, certain assets and to assume certain
      liabilities of NOMOS, with a carrying value of $0.4 million, after giving effect
      to a $6.7 million impairment write-down in the third quarter of fiscal year
      2007. The Company incurred $0.5 million in legal and other closing costs in
      connection with the sale. The operations of NOMOS are shown as discontinued
      operations for the nine months ended July 31, 2008 and 2007.





At
      July
      31, 2008 and October 31, 2007, the Company has included in its Accounts Payable
      and Accrued Liabilities on its Balance Sheet $0.5 million and $1.1 million
      of
      retained obligations to its vendors, customers and former employees of the
      NOMOS
      operation, respectively, to be paid in accordance with their terms.





Summarized
      statement of earnings data for discontinued operations for the:





**Three months ended July 31,**
            
            **Nine months ended July 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net revenue:Non-therapeutic
                Product Line
            
            $
            845
            
            $
            735
            
            $
            2,650
            
            $
            2,983Nomos
                Operations
            
            
            —
            
            
            3,065
            
            
            —
            
            
            9,136Total
                net revenue
            
            
            845
            
            
            3,800
            
            
            2,650
            
            
            12,119Income
                (loss) from discontinued operations before income tax
                benefit:Non-therapeutic
                Product Line
            
            
            177
            
            
            70
            
            
            869
            
            
            1,188Nomos
                Operations
            
            
            (15
            )
            
            (7,718
            )
            
            (128
            )
            
            (9,670
            )Income
                tax benefit (expense)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss) from discontinued operations
            
            
            162
            
            
            (7,648
            )
            
            741
            
            
            (8,482
            )Basic
                and diluted earnings (loss) from discontinued operations, per share
                (1)
            
            $
            —
            
            $
            (1.30
            )
            $
            0.05
            
            $
            (1.45
            )


(1)
      2008
      Q3 per share amount less than $(0.01)





**NOTE
      4—ACCOUNTS RECEIVABLE**





Accounts
      receivable consist of the following:





**July 31, 2008**
            
            **October 31, 2007**Accounts receivable - trade
            
            $
            2,624
            
            $
            2,475Less:
                allowance for doubtful accounts
            
            
            (265
            )
            
            (179
            )$
            2,359
            
            $
            2,296




The
      provision for doubtful accounts was $21 and $103 expense reduction for the
      three
      months ended July 31, 2008 and 2007, respectively, and $79 expense and $213
      expense reduction for the nine months ended July 31, 2008 and 2007,
      respectively.


14


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


**NOTE
      5—INVENTORIES**




Inventories
        consist of the following:


**July 31, 2008**
            
            **October 31, 2007**Raw materials
            
            $
            866
            
            $
            891Work in
                process
            
            
            62
            
            
            98Finished
                goods
            
            
            175
            
            
            185Reserve
                for excess inventory
            
            
            (194
            )
            
            (190
            )$
            909
            
            $
            984




The
      provision for inventory reserves included in cost of sales was $24 and $10
      for
      the three months and nine months ended July 31, 2008 and $88 for the three
      months and nine months ended July 31, 2007.




**NOTE
      6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**





**July 31, 2008**
            
            **October 31, 2007**Furniture, fixtures and equipment
            
            $
            5,040
            
            $
            4,461Leasehold
                improvements
            
            
            2,625
            
            
            2,1947,665
            
            
            6,655Less:
                accumulated depreciation
            
            
            (6,158
            )
            
            (5,831
            )$
            1,507
            
            $
            824





Depreciation
      expense was $124 and $114 for the three months ended July 31, 2008 and 2007,
      respectively, and $347 and $392 for the nine months ended July 31, 2008 and
      2007, respectively.


15




North
      American Scientific, Inc.


Condensed
      Notes to Consolidated Financial Statements


(Unaudited)


(in
      thousands, except share and per share data)


**NOTE
      7—INTANGIBLE ASSETS**


**July 31, 2008**
              
              **October 31, 2007**Amortizable
                  intangible assetsPurchased
                  technology
              
              $
              158
              
              $
              98Existing
                  customer relationships
              
              
              11
              
              
              11Trademark
              
              
              19
              
              
              19Patents
                  and licenses
              
              
              108
              
              
              146296
              
              
              274Less:
                  accumulated amortization
              
              
              (191
              )
              
              (171
              )$
              105
              
              $
              103





Amortization
      expense was $7 for the three months ended July 31, 2008 and 2007, respectively
      and $21 for the nine months ended July 31, 2008 and 2007,
      respectively.





The
      estimate of aggregate future amortization expense is as follows:





**For
                the Years Ended October 31,**2008
                (remaining three months)
            
            $
            72009
            
            
            332010
            
            
            332011
            
            
            31Thereafter
            
            
            8$
            112




**NOTE
      8  – WARRANT DERIVATIVES**





There
      were no warrant derivative liabilities outstanding at July 31, 2008, and warrant
      derivative liabilities were $173 at October 31, 2007. The warrant derivative
      liabilities are recorded at estimated fair value and are marked-to-market at
      each subsequent measurement date. The liabilities were incurred when the Company
      issued warrants to a lender with an uncertain pricing component in connection
      with its borrowing activities (see Note 9—Borrowings – Agility Capital
      LLC). The uncertain pricing component became certain on December 12, 2007,
      upon
      the signing of the Securities Purchase Agreements with certain Investors, and
      the Company reclassed the fair value of the warrant derivatives from liability
      to equity. See Note 10—Stockholders’ Equity. The Company has accounted for the
      warrant derivative liabilities in accordance with guidance under SFAS No. 133
      and EITF 00-19. Changes in the liability warrants balance for the nine months
      ended July 31, 2008 are:


16


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)
  **Agility Capital,**
                **LLC**Balance,
                  October 31, 2007
              
              $
              173Additions:Fair
                  Value – Warrants issued for Second Amendment to the Loan
                  Agreement
              
              
              161Fair
                  Value Adjustments during the period
              
              
              311645Less:
                  Fair value of warrants transferred to permanent equity
              
              
              (645
              )Balance,
                  July 31, 2008
              
              $
              —





The
      fair
      value of the warrant issued in connection with the Second Amendment to the
      Loan
      Agreement with Agility Capital, LLC has been recorded as Loan Discount Fees
      and
      amortized to Interest and Other Expense over the term of the loan amendment,
      and
      the fair value adjustments during the period have been recorded as Adjustments
      to Fair Value of Derivatives in the Statement of Operations for the nine months
      ended July 31, 2008. The fair value of the warrants transferred to permanent
      equity are included in Additional Paid-in Capital on the Balance Sheet at July
      31, 2008.




**NOTE
      9 – BORROWINGS**





The
      borrowings were $1,341, net of discount at July 31, 2008, and $3,241 at October
      31, 2007, consisting of a loan and lines of credit with a bank, and subordinated
      short-term notes with private lenders. Borrowing activities for the nine months
      ended July 31, 2008 are:


**October 31,**
              
              
              
              
              
              **July 31,****2007**
              
              **Borrowings**
              
              **Repayments**
              
              **2008**Silicon Valley Bank -Line
                  of credit
              
              $
              1,573
              
              $
              438
              
              $
              (2,011
              )
              $
              —Bridge
                  loan sub-limit
              
              
              750
              
              
              4,189
              
              
              (4,939
              )
              
              —Short-term
                  portion of long-term debt
              
              
              —
              
              
              417
              
              
              —
              
              
              417Subordinated
                  short-term notes -Agility
                  Capital, LLC
              
              
              1,000
              
              
              —
              
              
              (1,000
              )
              
              —John
                  Friede Note
              
              
              —
              
              
              250
              
              
              (250
              )
              
              —Three
                  Arch Partners, et al
              
              
              —
              
              
              1,000
              
              
              (1,000
              )
              
              —Total
                  borrowings
              
              
              3,323
              
              
              6,294
              
              
              (9,200
              )
              
              417Less
                  Unamortized loan discount fees.
              
              
              (82
              )
              
              (914
              )
              
              996
              
              
              —Total
                  short-term borrowings
              
              $
              3,241
              
              $
              5,380
              
              $
              (8,204
              )
              $
              417Long-Term
                  Borrowings:Growth
                  Capital Loan
              
              
              —
              
              
              1,083
              
              
              —
              
              
              1,083Less
                  Unamortized loan discount fees.
              
              
              —
              
              
              (159
              )
              
              —
              
              
              (159
              )Total
                  long-term borrowings
              
              $
              —
              
              $
              924
              
              
              —
              
              
              924


17





North
      American Scientific, Inc.


Condensed
      Notes to Consolidated Financial Statements


(Unaudited)


(in
      thousands, except share and per share data)




Interest
      expense was $7, excluding $41 loan discount fees paid in cash and $118 fair
      value of warrants issued in connection with lending activities, for the nine
      months ended July 31, 2008. Interest expense was $246 for the nine months ended
      July 31, 2007, primarily from the amortization of loan discount fees in
      connection with lending activities.





***Lines
      of Credit***





*Silicon
      Valley Bank*





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. The line of credit had an initial 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 paid interest on the borrowings under
      the line of credit at the Bank’s prime rate, or, if certain financial tests are
      not satisfied, at the Bank’s prime rate plus 1.5%. The line of credit was
      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 “First Amendment”) with the Bank.  The First
      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 First 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
      7,936
      shares of the Company’s common stock at an exercise price of $9.45 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 using the Black-Scholes model incorporating the following
      assumptions:




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





The
      value
      of the warrant has been fully amortized over the term of the line of credit
      at
      $5 per month, and is included in Interest and Other Expense on the Income
      Statement for the nine months ended July 31, 2007.




On
      October 31, 2006, the Company entered into a Second Amendment to the Loan
      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 $5.0 million to $4.0 million,
      and
      increased the minimum tangible net worth that must be maintained by the Company
      from $1.5 million to $5.0 million. Borrowings under the line of credit continued
      to be subject to a borrowing base formula. Borrowings bore 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, fell below 1.00 to 1.00. At such time as the Company’s
      quick ratio fell below 1.00 to 1.00, borrowings bore interest at the prime
      rate
      plus 1.50%, and the Company paid 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
      per month during 2007. The fees are included in Interest and Other Expenses
      for
      the three months ended January 31, 2007.




On
      August
      24, 2007, the Company entered into a Third Amendment to the Loan Agreement
      (the
“Third Amendment”) with the Bank. The Third Amendment added a Bridge Loan
      Sub-limit to the Loan Agreement of up to $1.5 million at an interest rate of
      prime plus 4.0%, subject to a borrowing base formula, and decreased the minimum
      tangible net worth that must be maintained by the Company from $5.0 million
      to
      $2.0 million. The maturity date of the Bridge Loan Sub-limit was the earlier
      of
      October 3, 2007 or the date the Company closed a private investment public
      equity transaction. Concurrent with the Third Amendment, the Company issued
      the
      Bank a warrant for 60,000 shares of the Company’s common stock at an exercise
      price of $4.90, the closing price of the Company’s common stock on August 24,
      2007. The Company calculated the fair value of the warrant on the date of grant
      to be $175 using the Black-Scholes model incorporating the following
      assumptions:




18





North
      American Scientific, Inc.


Condensed
      Notes to Consolidated Financial Statements


(Unaudited)


(in
      thousands, except share and per share data)




Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            67
            %Risk-free
                interest rate
            
            
            4.4
            %Expected
                life
            
            
            5
                years





The
      value
      of the warrant has been amortized over the term of the line of credit, and
      is
      included in Interest and Other Expense on the Income Statement for the nine
      months ended July 31, 2008.





On
      September 14, 2007, the Company entered into a Fourth Amendment to the Loan
      Agreement (the “Fourth Amendment”) with the Bank. The Fourth Amendment included:
      (i) a forbearance by the Bank from exercising its rights and remedies against
      the Company, until such time as the Bank determines in its discretion to cease
      such forbearance, due to the default under the Loan Agreement resulting from
      the
      Company failing to comply with the tangible net worth covenant in the Loan
      Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a
      subordinated debt facility of up to $750 with Agility Capital LLC. In connection
      with the Fourth Amendment, the Bank consented to the divestiture of NOMOS and
      released its lien on the NOMOS assets.





On
      October 3, 2007, the Company entered into a Fifth Amendment and Forbearance
      to
      the Loan Agreement (the “Fifth Amendment”) with the Bank. The Fifth Amendment
      includes: (i) an extension of the maturity date of the Loan Agreement to
      November 9, 2007, and an extension of the maturity date of the Bridge Loan
      Sub-limit to the earlier of November 9, 2007 or the date the Company closes
      a
      private investment public equity transaction, (ii) a forbearance by the Bank
      from exercising its rights and remedies against the Company, until such time
      as
      the Bank determines in its discretion to cease such forbearance, due to the
      defaults under the Loan Agreement resulting from the Company failing to comply
      with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
      August 31, 2007 and September 30, 2007, and (iii) a consent to an increase
      in
      the Company’s subordinated debt facility with Agility Capital LLC from $750 to
      up to $1.0 million.




On
      October 29, 2007, the Company entered into a Sixth Amendment and Forbearance
      to
      the Loan Agreement (the “Sixth Amendment”) with the Bank. The Sixth Amendment
      includes: (i) an extension of the maturity date of the Loan Agreement to
      November 20, 2007, and an extension of the maturity date of the Bridge Loan
      Sub-limit to the earlier of November 20, 2007 or the date the Company closes
      a
      private investment public equity transaction, (ii) a forbearance by the Bank
      from exercising its rights and remedies against the Company, until such time
      as
      the Bank determines in its discretion to cease such forbearance, due to the
      defaults under the Loan Agreement resulting from the Company failing to comply
      with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
      August 31, 2007 and September 30, 2007, and (iii) a consent to the Company’s
      issuing up to $500 in unsecured subordinated debt to Mr. John Friede, or an
      entity owned or controlled by Mr. Friede. At the time, Mr. Friede was a
      significant stockholder of the Company, and was a director of the Company at
      the
      date of the agreement.




On
      November 20, 2007, the Company entered into a Seventh Amendment and Forbearance
      to its Loan Agreement (the “Seventh Amendment”) with the Bank. The Seventh
      Amendment includes: (i) an extension of the maturity date of the Loan Agreement
      to December 20, 2007, and an extension of the maturity date of the Bridge Loan
      Sub-limit to the earlier of December 20, 2007 or the date the Company closes
      a
      private investment public equity transaction, and (ii) a forbearance by the
      Bank
      from exercising its rights and remedies against the Company, until such time
      as
      the Bank determines in its discretion to cease such forbearance, due to the
      defaults under the Loan Agreement resulting from the Company failing to comply
      with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
      August 31, 2007 and September 30, 2007. In connection with the Seventh
      Amendment, the Company granted a warrant to the Bank to purchase 18,181 shares
      of the Company’s common stock, at a warrant price of $2.75 per share, which is
      equal to the closing price of the Company’s common stock on November 20, 2007,
      the date the Company’s Board of Directors approved the issuance of this warrant.
      The number of shares are subject to adjustment as
      provided by the terms of the warrant. 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 $31 using the Black-Scholes model
      incorporating the following assumptions:




19


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            71
            %Risk-free
                interest rate
            
            
            3.5
            %Expected
                life
            
            
            5
                years




The
      value
      of the warrant has been amortized over the term of the line of credit, and
      is
      included in Interest and Other Expense on the Income Statement for the nine
      months ended July 31, 2008.




On
      December 18, 2007, the Company, entered into an Eighth Amendment and Forbearance
      to the Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth
      Amendment includes: (i) an extension of the maturity date of the Loan Agreement
      to the earlier of February 1, 2008 or the date the Company completes its private
      placement, (ii) a forbearance by the Bank from exercising its rights and
      remedies against the Company, until such time as the Bank determines in its
      discretion to cease such forbearance, due to the defaults under the Loan
      Agreement resulting from the Company failing to comply with the tangible net
      worth covenant in the Loan Agreement as of July 31, 2007, August 31, 2007,
      September 30, 2007 and October 31, 2007 and (iii) a consent from the Bank to
      allow the Company to repay its outstanding loan from Mr. John A. Friede in
      the
      amount of $250. In connection with the Eighth Amendment, the Company granted
      a
      warrant to the Bank to purchase 38,461 shares of the Company’s common stock as
      determined by dividing the warrant price of $50 by the $1.30 warrant price
      per
      share, which is equal to the closing price of the Company’s common stock on
      December 18, 2007, the date the Company’s Board of Directors approved the
      issuance of this warrant. The number of shares are subject to adjustment as
      provided by the terms of the warrant. 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 $33 using the Black-Scholes model
      incorporating the following assumptions:




Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            82
            %Risk-free
                interest rate
            
            
            3.5
            %Expected
                life
            
            
            5
                years





The
      value
      of the warrant has been amortized over the term of the line of credit, and
      is
      included in Interest and Other Expense on the Income Statement for the nine
      months ended July 31, 2008.





The
      Company paid the $1,275 and $755 outstanding balance of the Line of Credit
      and
      the Bridge Sub-Limit, including accrued interest on January 23, 2008. The Bridge
      Sub-Limit agreement was terminated in accordance with its terms upon payment
      of
      the outstanding balance.





On
      May
      28, 2008, the Company entered into a Ninth Amendment to the Loan Agreement
      (the
“Ninth Amendment”) with the Bank. The Ninth Amendment renews the revolving
      credit facility under which the Company may borrow an additional $3.0 million
      based upon eligible receivables. The revolving credit facility is payable
      monthly and carries interest at prime plus 0.50%, and is subject to certain
      financial covenants. The revolving credit facility expires 24 months from the
      date of execution of the Ninth Amendment.





The
      Ninth
      Amendment also includes a $3.0 million Growth Capital Loan which provides for
      an
      advance period during which $1.5 million was advanced to the Company on June
      7,
      2008, and $1.5 million may be advanced to the Company no later than September
      30, 2008. The Growth Capital Loan provides for interest only payments through
      the advance period at prime plus 2.25%, and 36 month repayment including
      principal and interest. At July 31, 2008, $0.5 million and $0.9 million, net
      of
      loan origination fees of $0.1 million is included in the Balance Sheet as
      short-term and long-term borrowings, respectively. Interest expense on the
      Growth Capital Loan amounted to $17 through July 31, 2008, and is included
      in
      interest and other expenses on the Statement of Operations.





20


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


In
      connection with the Ninth Amendment, the Company granted a warrant to the Bank
      to purchase 99,337 shares of the Company’s common stock as determined by
      dividing the warrant price of $150 by the $1.51 warrant price per share, which
      is equal to the closing price of the Company’s common stock on May 19, 2008, the
      date the Company’s Board of Directors approved the issuance of this warrant. The
      number of shares are subject to adjustment as provided by the terms of the
      warrant. 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
      $118
      using the Black-Scholes model incorporating the following
      assumptions:


Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            89
            %Risk-free
                interest rate
            
            
            3.3
            %Expected
                life
            
            
            5
                years





The
      total
      debt discount of $118 is recorded as net to the total borrowings in the Ninth
      Amendment. The debt discount of $59 related to the revolving line of credit
      facility is amortized over the life of the facility. The remaining debt discount
      related to the Growth Capital Loan is determined through allocation based on
      the
      relative fair value of the loan and the relative fair value of the warrant.
      The
      amount allocated to the warrant, accounted for as debt discount, is amortized
      over the life of the Growth Capital Loan.




At
      July 31, 2008, the Company was not in compliance with
      the Tangible Net Worth covenant as defined in the Ninth Amendment. On September
      11, 2008, the Company and the Bank executed the Tenth Amendment to the Loan
      Agreement which provides a waiver to the Company for its non-compliance with
      the
      Tangible Net Worth Covenant for an indefinite period.




***Subordinated
      Short-Term Borrowings***





*Partners
      for Growth, LLC*





On
      March
      28, 2006, the Company entered into a Loan and Security Agreement (the “PFG Loan
      Agreement”) **** with
      Partners for Growth, LLC (“PFG”) for a secured, revolving line of credit of up
      to $4,000, which supplemented an existing line of credit provided by the Bank.
      The line of credit had a term of eighteen months, and earned interest at prime
      rate as quoted in *The*  *Wall
      Street Journal* .
      Borrowings under the line of credit were subject to a borrowing base formula.
      Amounts owing under the line of credit were secured by all of the assets of
      the
      Company and were subordinated to amounts owing under the line of credit with
      the
      Bank. The line of credit did not contain financial covenants; however the
      Company was subject to other customary covenants, including reporting
      requirements, and events of default. In connection with the PFG Loan Agreement,
      the Company also granted PFG a warrant to purchase 79,000 shares of the
      Company’s common stock at an exercise price of $9.45 per share. As a result of
      the private placement of the Company’s common stock completed on June 7, 2006,
      and pursuant to the anti-dilution terms of the warrant issued to PFG, the
      warrant was amended to increase the number of shares of the Company’s common
      stock that PFG can purchase from 79,000 shares to 111,007 shares, and the
      exercise price was decreased from $9.45 per share to $6.75 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 using
      the Black-Scholes model incorporating the following
      assumptions:


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





The
      value
      of the warrant was deferred and amortized over the life of the loan at $27
      per
      month and is included in Interest and Other Expense on the Income Statement.
      As
      of October 31, 2007, the value of the warrant was fully amortized. On August
      30,
      2007 the Company terminated the PFG Loan Agreement with PFG by mutual consent.
      As a result of the termination, PFG released all liens on the Company’s assets.
      There were no outstanding borrowings under the PFG Loan Agreement at the date
      of
      termination.





*Agility
      Capital, LLC*





On
      September 21, 2007, the Company entered into a Loan Agreement (the “Agility Loan
      Agreement”) with Agility Capital, LLC (“Agility”). The Agility Loan Agreement
      provided for advances of up to $750 subject to the achievement of certain
      milestones. Amounts owing under the Agility Loan Agreement were secured by
      all
      of the Company's assets, and were subordinated to amounts owing under the line
      of credit with the Bank. The Agility Loan Agreement did not contain financial
      covenants; however, the Company is subject to other customary covenants,
      including reporting requirements, and events of default. The Company was
      obligated to pay interest on borrowings under the Agility Loan Agreement at
      the
      prime rate, as quoted in *The
      Wall Street Journal* ,
      plus 6%
      . The Agility Loan Agreement term was 60 days, and all amounts outstanding
      thereunder were due and payable on November 20, 2007. The Company paid an
      origination fee of $20 to Agility in connection with the Agility Loan Agreement.
      The origination fee and legal expenses were amortized over the term of the
      Agility Loan Agreement at $10 per month, and is included in Interest and Other
      Expense on the Income Statement. The Company further covered $15 of Agility’s
      legal fees in connection with the Agility Loan Agreement, which were recorded
      as
      general and administrative expenses.





21


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


On
      October 18, 2007, the Company entered into a First Amendment (the “First
      Amendment”) to the Agility Loan Agreement. The First Amendment provides for
      advances of up to $1,000. Amounts advanced under the Agility Loan Agreement
      are
      subordinated to the existing line of credit provided by the Bank. In addition,
      within the First Amendment, Agility consented to the Company incurring up to
      $500 of subordinated unsecured indebtedness to Mr. John A. Friede or an entity
      owned or controlled by him (“Friede”), provided that Friede executes and
      delivers to Agility a subordination agreement pursuant to which the debt owed
      by
      the Company to Friede will be subordinated to the debt owed to Agility. The
      Company paid an origination fee of $10 to Agility in connection with the First
      Amendment.





On
      November 20, 2007, the Company executed a Second Amendment to the Agility Loan
      Agreement (the “Second Amendment”) with Agility to extend the maturity date of
      the Agility Loan Agreement from November 20, 2007 to December 21,
      2007.





On
      December 20, 2007, the Company executed a Third Amendment to the Agility Loan
      Agreement (the “Third Amendment”) with Agility. The Third Amendment includes (i)
      an extension of the maturity date of the Loan Agreement to February 1, 2008,
      (ii) a loan modification and extension fee of $20, paid by the Company upon
      the
      execution of the amendment, and (iii) a consent from Agility to allow the
      Company to repay its outstanding loan from Friede in the amount of $250. The
      loan modification and extension fee has been amortized over the term of the
      loan
      and is included in Interest and Other Expense at July 31, 2008. The Company
      has
      repaid the balance on the Agility Loan Agreement, plus accrued interest as
      of
      July 31, 2008.





In
      connection with the Agility Loan Agreement, on September 21, 2007, the Company
      issued a warrant exercisable into 69,079 shares of the Company’s common stock at
      an exercise price of $3.80 per share, as determined by the closing price of
      the
      Company’s common stock on September 20, 2007, the day immediately preceding the
      issue date of the warrant (the “Initial Warrant”). The Initial Warrant will
      expire in seven years unless previously exercised.





The
      Company calculated the fair value of the Initial Warrant of 69,079 shares on
      the
      date of grant to be $149 using the Black-Scholes model incorporating the
      following assumptions:


Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            69
            %Risk-free
                interest rate
            
            
            4.4
            %Expected
                life
            
            
            7
                years





In
      connection with the First Amendment, and in exchange for Agility’s returning to
      the Company the Initial Warrant issued on September 21, 2007, the Company
      granted Agility a revised $363 warrant to purchase 95,394 shares of the
      Company’s common stock at an exercise price of $3.80 per share, as determined by
      the closing price of the Company’s common stock on September 20, 2007, the day
      immediately preceding the issue date of the Initial Warrant (the “Revised
      Warrant”). The Revised Warrant will expire in seven years unless previously
      exercised.




The
      Company calculated the fair value of the Revised Warrant of 95,394 shares on
      the
      date of grant to be $253 using the Black-Scholes model incorporating the
      following assumptions:





22


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)





Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            71
            %Risk-free
                interest rate
            
            
            4.3
            %Expected
                life
            
            
            7
                years





The
      terms
      of the Revised Warrant provided that the price per share and the number of
      shares to be issued under the the Revised Warrant will adjust to the price
      at
      which the Company next issued its common stock or other equity-linked
      securities, provided that any amount is outstanding under the Agility Loan
      Agreement. In evaluating the terms of the Revised Warrant under EITF 00-19 *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”* (“EITF
      00-19”), the Company was unable to determine the price at which it will next
      issue its common stock or other equity-linked securities at the date the warrant
      was issued. If that next issue price was below a certain price point, the
      Company would not have had sufficient authorized shares to settle the warrant
      after considering all other commitments that may require the issuance of its
      common stock during the life of the Revised Warrant. The Company concluded
      that
      the Revised Warrant is correctly classified as a liability and has been revalued
      to fair value each reporting period. At December 12, 2007, the Company entered
      into a Securities Purchase Agreement to issue shares of its Common Stock at
      $1.23. Pursuant to the terms of the Revised Warrant, the Company increased
      to
      294,715 the number of shares to be issued under the Revised Warrant, and
      revalued the Revised Warrant at that date.




The
      Company calculated the fair value of the Revised Warrant to be $394 and $173
      at
      December 12, 2007 and October 31, 2007, respectively, using the Black-Scholes
      model incorporating the following assumptions:


23


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)
  **December 12, 2007**
              
              **October 31, 2007**Dividend
                  yield
              
              
              0
              %
              
              0
              %Expected
                  volatility
              
              
              74
              %
              
              71
              %Risk-free
                  interest rate
              
              
              3.7
              %
              
              4.3
              %Expected
                  life
              
              
              7
                  years
              
              
              7
                  years





The
      Initial Warrant has been fair valued and classified as a liability at the time
      of the grant. The fair value of $148,830 for the Initial Warrant was classified
      as debt discount and has been fully amortized to interest and other expense
      as
      of July 31, 2008. The Revised Warrant has been fair valued and the change in
      the
      fair value of the Initial Warrant and the Revised Warrant was expensed as of
      October 31, 2007. The subsequent change in the fair value of the Revised Warrant
      has been recorded as fair value expense and is included in Interest and Other
      Expense at July 31, 2008. The $394 fair value of the Revised Warrant at December
      12, 2007 has been reclassified to permanent equity as Additional Paid-in Capital
      as of July 31, 2008 in accordance with the guidance under EITF
      00-19.





In
      connection with the Second Amendment, the Company granted Agility a $231 warrant
      to purchase 84,091 shares of the Company’s common stock at an exercise price of
      $2.75 per share, as determined by the closing price of the Company’s common
      stock on November 19, 2007, the day immediately preceding the issue date of
      the
      Warrant (the “Agility Second Warrant”). The Agility Second Warrant will expire
      in seven years unless previously exercised. Similar to the Revised Warrant,
      the
      terms of the Agility Second Warrant provided that the price per share and the
      number of shares to be issued under the Agility Second Warrant will adjust
      to
      the price at which the Company next issued its common stock or other
      equity-linked securities, provided that any amount is outstanding under the
      Agility Loan Agreement. As with the Revised Warrant, the Company concluded
      that
      the Agility Second Warrant is correctly classified as a liability and has been
      revalued to fair value each reporting period. At December 12, 2007, the Company
      entered into a Securities Purchase Agreement to issue shares of its Common
      Stock
      at $1.23. Pursuant to the terms of the Agility Second Warrant, the Company
      increased to 188,008 the number of shares to be issued under the Agility Second
      Warrant, and revalued the Agility Second Warrant at that date.





The
      Company calculated the fair value of the Agility Second Warrant to be $251
      and
      $161 at December 12, 2007 and November 20, 2007, respectively, using the
      Black-Scholes model incorporating the following assumptions:





**December 12, 2007**
              
              **November 20, 2007**Dividend
                  yield
              
              
              0
              %
              
              0
              %Expected
                  volatility
              
              
              74
              %
              
              71
              %Risk-free
                  interest rate
              
              
              3.7
              %
              
              3.7
              %Expected
                  life
              
              
              7
                  years
              
              
              7
                  years





The
      Agility Second Warrant has been fair valued and classified as a liability at
      the
      time of the grant. The $161 fair value of the Agility Second Warrant was
      classified as debt discount and has been fully amortized to interest and other
      expense as of July 31, 2008. The subsequent change in the fair value of the
      Agility Second Warrant has been recorded as fair value expense and is included
      in Interest and Other Expense at July 31, 2008. The $251 fair value of the
      Agility Second Warrant at December 12, 2007 has been reclassified to permanent
      equity as Additional Paid-in Capital as of July 31, 2008 in accordance with
      the
      guidance under EITF 00-19.





In
      connection with the Third Amendment, the Company granted Agility a $200 warrant
      (the “Agility Third Warrant”) to purchase 162,601 shares of the Company’s common
      stock at an exercise price of $1.23 per share, as determined by the issue price
      of the Company’s common stock pursuant to the Securities Purchase Agreements
      dated December 12, 2007. The Agility Third Warrant will expire in seven years
      unless previously exercised. The Company calculated the fair value of the
      warrant on the date of grant to be $158 using the Black-Scholes model
      incorporating the following assumptions:


24





North
      American Scientific, Inc.


Condensed
      Notes to Consolidated Financial Statements


(Unaudited)


(in
      thousands, except share and per share data)


Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            79
            %Risk-free
                interest rate
            
            
            3.7
            %Expected
                life
            
            
            7
                years





The
      value
      of the Agility Third Warrant has been amortized over the term of the line of
      credit, and is included in Interest and Other Expense on the Income Statement
      for the nine months ended July 31, 2008. The $158 fair value of the Agility
      Third Warrant at the grant date has been classified as permanent equity in
      Additional Paid-in Capital as of July 31, 2008 in accordance with the guidance
      under EITF 00-19.





In
      addition, in accordance with the terms of the collective outstanding warrants
      granted to Agility, the Company filed a registration statement on Form S-3
      covering the resale of the warrant shares (the “Registration Statement”) with
      the Securities Exchange Commission (the “SEC”) on July 16, 2008. The
      Registration Statement was declared effective by the SEC on July 24, 2008





*John
      Friede Note*





On
      October 30, 2007, the Company entered into a Loan Agreement (the “Friede Loan
      Agreement”) with Friede, at the time a significant stockholder and director of
      the Company. Subject to the terms of the Friede Loan Agreement, Friede agreed
      to
      loan the Company $500 in two installments of $250 each. The loan was unsecured
      and subordinated to the loan agreements with Silicon Valley Bank and Agility
      Capital LLC. On November 1, 2007, the Company executed the promissory note
      underlying the loan, and received the first $250 installment. The Company and
      Friede amended the Friede Loan Agreement on November 20, 2007, prior to funding
      of the second $250 installment, to extend the maturity date of the Friede Loan
      Agreement from November 20, 2007 to December 20, 2007, and to reduce the
      borrowing capacity to $250 from $500. The loan balance, plus accrued interest
      were paid in full on December 20, 2007.





In
      connection with the Friede Loan Agreement, the Company agreed to issue to the
      Lender a $200 Warrant (the “Friede Warrant”) to purchase 61,538 shares of the
      Company’s common stock at $3.25 Exercise Price. The Friede Warrant will expire 7
      years from the date of issue unless previously exercised. The Company calculated
      the fair value of the Friede Warrant on the date of grant to be $119 using
      the
      Black-Scholes model incorporating the following assumptions:


Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            71
            %Risk-free
                interest rate
            
            
            4.2
            %Expected
                life
            
            
            7
                years





The
      value
      of the Friede Warrant has been amortized over the term of the line of credit,
      and is included in Interest and Other Expense on the Income Statement for the
      nine months ended July 31, 2008. The $119 fair value of the Friede Warrant
      at
      the grant date has been classified as permanent equity in Additional Paid-in
      Capital as of July 31, 2008 in accordance with the guidance under EITF
      00-19.


25





North
      American Scientific, Inc.


Condensed
      Notes to Consolidated Financial Statements


(Unaudited)


(in
      thousands, except share and per share data)





*Three
      Arch Capital (et al)*




On
      December 7, 2007, the Company entered into a Loan Agreement (the “Three Arch
      Loan Agreement”) with Three Arch Capital, L.P., TAC Associates, L.P., Three Arch
      Partners IV, L.P. and Three Arch Associates IV, L.P. (the “Lenders”). The
      Lenders are, collectively, the largest stockholder of the Company, and Dr.
      Wilfred Jaeger and Roderick Young, are directors of the Company and affiliates
      of the Lenders. The transaction contemplated by the Three Arch Loan Agreement
      was approved by a committee of the Company’s Board of Directors consisting only
      of disinterested directors.





Under
      the
      Three Arch Loan Agreement, the Lenders loaned $1.0 million to the Company and
      the Company issued notes to the Lender (the “Notes”). The Notes bear interest at
      an annual rate equal to the prime rate plus six percent (6%) and are
      subordinated to the Company’s indebtedness to Silicon Valley Bank and Agility
      Capital LLC. The Notes became due and payable upon the close of the Company’s
      private investment public equity financing transaction on January 18, 2008.
      The
      Company paid $20 loan fee in connection with the Three Arch Loan Agreement,
      which has been amortized to Interest and Other Expenses as of July 31, 2008.
      The
      balance of the Three Arch Loan Agreement, plus accrued interest, were paid
      in
      full as of July 31, 2008.





In
      connection with the Three Arch Loan Agreement, the Company granted the Lenders
      warrants (the “Three Arch Warrants”) to purchase, in the aggregate, 205,127
      shares of the Company’s common stock at a purchase price of $1.95 per share. The
      Three Arch Warrants will expire 7 years from the date of issue unless previously
      exercised. The Company calculated the fair value of the Three Arch Warrants
      on
      the date of grant to be $329 using the Black-Scholes model incorporating the
      following assumptions:


Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            74
            %Risk-free
                interest rate
            
            
            3.8
            %Expected
                life
            
            
            7
                years





The
      value
      of the Three Arch Warrants has been amortized over the term of the line of
      credit, and is included in Interest and Other Expense on the Income Statement
      for the nine months ended July 31, 2008. The $329 fair value of the Three Arch
      Warrants at the grant date has been classified as permanent equity in Additional
      Paid-in Capital as of July 31, 2008 in accordance with the guidance under EITF
      00-19.





The
      following table summarizes the warrant activity and related interest and fair
      value impact on the Company’s operations for the nine months ended July 31,
      2008:


26





North
      American Scientific, Inc.


Condensed
      Notes to Consolidated Financial Statements


(Unaudited)


(in
      thousands, except share and per share data)


**Statement of Operations****Warrant coverage for:**
            
            **Number of**
              **Warrant**
              **Shares**
            
            **Amortization**
              **of Interest**
              **Expense**
              **related to Fair
                Value of**
              **Warrant**
            
            **Adjustment to**
              **Fair Value**
              **Expense
                of the**
              **Warrant in**
              **Accordance with**
              **EITF00-19**Carry
                forward from October 31, 2007:Deferred
                loan discount fees amortized in 2008
            
            
            —
            
            $
            64
            
            $
            —Issued
                in first quarter of 2008:Silicon
                Valley Bank Line of Credit:Amendment
                7
            
            
            18,181
            
            
            31
            
            
            —Amendment
                8
            
            
            38,461
            
            
            33
            
            
            —Amendment
                9
            
            
            99,337
            
            
            —
            
            
            —John
                Friede Note
            
            
            61,538
            
            
            119
            
            
            —Agility
                Capital, LLC Note:Fair
                value change – 2007 warrants
            
            
            294,715
            
            
            —
            
            
            221Amendment
                2
            
            
            188,008
            
            
            161
            
            
            90Amendment
                3
            
            
            162,601
            
            
            158
            
            
            —Three
                Arch Partners, et al Note
            
            
            205,127
            
            
            329
            
            
            —964,051
            
            $
            895
            
            $
            311




**NOTE
      10—STOCKHOLDERS' EQUITY (DEFICIT)**





***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.




***Sale
      of Common Stock and Warrants***





*2007
      PIPE*





Pursuant
      to the terms of the Securities Purchase Agreement dated December 12, 2007 (the
      “2007 Securities Purchase Agreement”), the Company completed a private placement
      (the “2007 Private Placement”) of 12,601,628 shares of the Company’s common
      stock on January 18, 2008 with Three Arch Partners IV, L.P. and affiliated
      funds
      (“Three Arch Partners”), SF Capital Partners Ltd. (“SF Capital”) and CHL Medical
      Partners III, L.P. and an affiliated fund (“CHL,” and together with Three Arch
      Partners and SF Capital, the “Investors”) at a purchase price of $1.23 per share
      as well as warrants to purchase an additional 630,081 shares of the Company’s
      common stock (the “Warrants”) at an exercise price of $1.23 per share for an
      aggregate consideration of approximately $15.5 million (before cash commissions
      and expenses of approximately $1.5 million). The purchase price represents
      a 40%
      discount to the volume weighted average price of the Common Stock on the Nasdaq
      Global Market, as reported by Bloomberg Financial Markets, for the 20 trading
      day period ending on the trading day immediately preceding the date of the
      2007
      Securities Purchase Agreement.   The Investors purchased the following
      amounts of securities in the offering:




Investor
            
            Shares
            
            Warrants
              (Shares issuable
              upon exercise)Three
                Arch Partners
            
            
            8,130,084
            
            
            406,504SF
                Capital
            
            
            2,032,520
            
            
            101,626CHL
            
            
            2,439,024
            
            
            121,951


27


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


Prior
      to
      the closing of the transaction, Three Arch Partners owned 1,024,327 shares
      of
      common stock of the Company. After the transaction was consummated, Three Arch
      Partners’ percentage ownership of the outstanding common stock increased from
      approximately 17.3% to 49.5% (and 43.9% of the common stock on a fully diluted
      basis).





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 Sheets. 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
      terms
      of the 2007 Private Placement were approved by a committee of the Company’s
      Board of Directors consisting only of disinterested directors. The Company
      received approval of a majority of the Company’s stockholders on January 17,
      2008 of the 2007 Private Placement and amendment of its Certificate of
      Incorporation to increase the number of shares of common stock it is authorized
      to issue to 150,000,000 shares.





Holders
      of the shares of common stock sold to the Investors (the “Shares”) and the
      shares of common stock issuable upon the exercise of the Warrants (the “Warrant
      Shares” and collectively, with the Shares, the “Registrable Securities”) are
      entitled to certain registration rights as set forth in the 2007 Securities
      Purchase Agreement. In accordance with the 2007 Securities Purchase Agreement,
      the Company filed a registration statement on Form S-3 to register the resale
      of
      the Registrable Securities on July 16, 2008, which was declared effective by
      the
      SEC on July 24, 2008.




Under
      the
      2007 Securities Purchase Agreement, Three Arch Partners has the right to name
      one member to the Board so long as Three Arch Partners beneficially owns greater
      than 1,000,000 shares of common stock of the Company (including shares of common
      stock issuable upon exercise of the Warrants, and as appropriately adjusted
      for
      stock splits, stock dividends and recapitalizations). Two of the current members
      of the Board, Dr. Wilfred E. Jaeger and Roderick A. Young, have been designated
      by Three Arch Partners.




In
      connection with the issuance of the Warrants and upon closing of the
      transaction, the Company entered into warrant agreements with its transfer
      agent
      relating to the Warrants. The warrant agreement relating to the Warrants issued
      to SF Capital contains a non-waivable provision that provides that the number
      of
      shares issuable upon exercise of the Warrants granted to SF Capital pursuant
      to
      the 2007 Private Placement will be limited to the extent necessary to assure
      that, following such exercise, the total number of shares of common stock of
      the
      Company then beneficially owned by such holder and its affiliates does not
      exceed 14.9% of the total number of issued and outstanding shares of common
      stock of the Company (including for such purpose the shares of common stock
      issuable upon such exercise of Warrants). The warrant agreement relating to
      the
      Warrants issued to the other Investors does not contain this provision.





*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. Options vest in accordance with their terms over periods
      up
      to four years and expire ten years from the date of grant. The 1996 Plan expired
      on April 1, 2006. As of July 31, 2008, options underlying 129,654 shares of
      common stock were outstanding under the 1996 Plan.





On
      May 3,
      2006, the Company’s stockholders approved the North American Scientific, Inc.
      2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
      340,000 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. Since its inception, 490,717 shares
      have been transferred into the 2006 Plan from the 1996 Plan. On April 29, 2008,
      the Company’s stockholders approved the adoption of Amendment No. 1 to the 2006
      Plan (the “Amendment”) to (i) increase by 2,000,000 million share the number of
      shares available to be issued under the 2006 Plan, (ii) increase by 35,000
      the
      maximum number of shares under the Plan that may be granted in any one fiscal
      year to an individual participant from 60,000 to 95,000 and (iii) increase
      by
      35,000 the maximum number of shares under the Plan, in connection with a
      participant’s initial service, such participant may be granted from 60,000 to
      95,000 that will not count against the limit set forth in (ii) above. The
      exercise price of an option is equal to the fair market value of the Company’s
      stock on the date of the grant. During nine months ended July 31, 2008,
      1,115,373 stock options were granted under the 2006 Plan, at an exercise price
      ranging from $1.35 to $2.10 per share, and for the nine month period ended
      July
      31, 2007, 122,999 stock options were granted under the 2006 Plan, at an exercise
      price ranging from $4.65 to $5.80 per share As of July 31, 2008, options
      underlying 1,715,344 shares of common stock were available for grant in the
      2006
      Plan.





28


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


On
      April
      23, 2007, the Company granted stock options with respect to 360,000 shares
      of
      its common stock in connection with the employment by the Company of its new
      CEO, John B. Rush. Options with respect to 150,000 shares of the Company’s
      common stock were issued under the 2006 Plan. Options with respect to the
      remaining 240,000 shares of the Company’s common stock were issued as a
      stand-alone grant outside the 2006 Plan and approved by the written consent
      of a
      majority of stockholders on April 20, 2007. The stock options have an exercise
      price of $5.80, which is equal to the fair market value per share of the
      Company’s common stock on the grant date. All of the options have a term of ten
      years and vest monthly over a four-year period. The options remain exercisable
      until the earlier of the expiration of the term of the option or (i) three
      months following Mr. Rush’s date of termination in the case of termination for
      reasons other than cause, death or disability (as such terms are defined in
      his
      employment agreement) or (ii) 12 months following Mr. Rush’s date of termination
      in the case of termination on account of death or disability. In the event
      that
      Mr. Rush is terminated for cause, all outstanding options, whether vested or
      not, will immediately lapse. Pursuant to his employment agreement, stock options
      issued to Mr. Rush were subject to an anti-dilution clause, triggered in the
      event the Company issued additional equity securities within the twenty-four
      months immediately following March 22, 2007, the date of his employment, such
      that the number of options granted to Mr. Rush under the employment agreement
      remains equivalent to 3% of the outstanding common stock of the Company. At
      its
      January 15, 2008 meeting, the Board of Directors, agreed to make an additional
      award to Mr. Rush as part of his employment. As a result of the 2007 Private
      Placement, the Company issued 190,000 and 376,094 options underlying common
      stock from the 2006 Plan and outside the 2006 Plan, respectively, to Mr. Rush
      at
      an exercise price of $1.40 per share, the closing price of the Company’s common
      stock on January 15, 2008, the date the option grant was approved by the Board
      of Directors. The stock options vest 25% upon the first anniversary of the
      grant
      date, and then evenly over the remaining (36) thirty-six months, such that
      all
      options are vested after four years, and have a term of ten years.





In
      addition, three members of the executive management team were granted
      anti-dilution guarantees by the Board of Directors as consideration of their
      employment. The Company issued 440,369 stock options to these executives from
      the 2006 Plan, at an exercise price of $1.40 per share, the closing price of
      the
      Company’s on January 15, 2008, the date the option grant was approved by the
      Board of Directors. Also at the January 15, 2008 meeting, the Board of Directors
      granted, from the 2006 Plan, stock options underlying 156,000 shares of the
      Company’s common stock to certain management employees, at a $1.40 exercise
      price. The stock options vest 25% after a one year cliff, and then evenly over
      the remaining (36) thirty-six months, such that all options are vested after
      four years, and have a term of ten years.


29


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


On
      February 15, 2008, the Company’s Board of Directors approved, subject to the
      approval of the Company’s stockholders, a plan to re-price all existing employee
      stock options at $2.05 per share, the closing price of the Company’s common
      stock on February 15, 2008, except for the 2006 Premium Price Awards, which
      were
      re-priced to $3.25 per share, which is equal to 159% of the re-priced fair
      value
      of the Company’s common stock. The re-pricing applies to all stock options
      outstanding as of February 15, 2008 held by all persons who are currently
      employed or actively engaged by us, including our executive officers, and to
      certain other persons for which the Board determined that re-pricing was
      appropriate (collectively, the “Eligible Participants”). The number of shares
      subject to the new stock options was determined based on a Black-Scholes
      valuation of the existing stock option such that the Black-Scholes value of
      the
      new stock option will approximately equal the Black-Scholes value of the
      existing stock option. All new stock options continue to vest in accordance
      with
      the vesting terms of the existing stock options. All new stock options, to
      the
      extent such option are vested, will be exercisable for a period of seven years.
      The Company’s stockholders approved the re-pricing at their annual meeting on
      April 29, 2008. As a result of the re-pricing exercise, options underlying
      691,852 shares of common stock, with an exercise price ranging from $11.15
      to
      $83.75, were replaced by options underlying 535,257 shares of common stock,
      with
      and exercise price of $2.05 or $3.25 for the 2006 Premium Awards.





The
      following table summarizes the re-pricing activity approved by the Board of
      Directors and stockholders as of July 31, 2008:


**Employee Options Cancelled and Re-priced**
              
              **Re-priced Options Granted****Plan**
              
              **Shares**
              
              **Range of Exercise Price**
              
              **Shares**
              
              **Weighted**
                **Avg.**
                **Exercise**
                **Price**1996 Plan
              
              
              179,060
              
              $
              11.15
              
              
              —
              
              $
              83.75
              
              
              41,595
              
              $
              2.05Premium Price
              
              
              49,900
              
              
              16.75
              
              
              —
              
              
              16.75
              
              
              22,658
              
              
              3.252006
                  Plan
              
              
              222,892
              
              
              4.65
              
              
              —
              
              
              5.80
              
              
              231,004
              
              
              2.05CEO
                  Options
              
              
              240,000
              
              $
              5.80
              
              
              —
              
              $
              5.80
              
              
              240,000
              
              $
              2.05691,852
              
              $
              4.65
              
              
              
              
              $
              83.75
              
              
              535,257
              
              $
              2.05





On
      April
      29, 2008, the Company’s stockholders approved the 2008 Non-Employee Directors’
Equity Compensation Plan (the “2008 Director Plan”). The 2008 Directors Plan
      supersedes the 2003 Non-Employee Directors' Equity Compensation Plan. Under
      the
      2008 Director Plan, the Company may issue up to 1,500,000 shares to eligible
      non-employee directors of the Company through non-qualified options and/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 in accordance with the terms set forth at the time of the grant, and will
      become exercisable provided that the holder is a non-employee director of the
      Company on any such vesting date. The options expire ten years from the date
      of
      grant. Pursuant to the terms of the 2008 Director Plan, the Board of Directors
      and the stockholders approved a one-time non-statutory stock option grant to
      each non-employee director, to purchase 30,000 shares of the Company’s common
      stock, and to the Chairman of the Board, a non-statutory stock option grant
      to
      purchase 45,000 shares of the Company’s common stock, in exchange for all of
      such director’s and the Chairman’s outstanding stock options. As a result, the
      Company cancelled 68,000 stock options, with a range of exercise price between
      $6.15 and $44.00 from the 2003 Non-Employee Director Equity Compensation Plan,
      and issued 195,000 stock options, from the 2008 Director Plan, at an exercise
      price of $2.10 per share, the closing price of the Company’s common stock on the
      Nasdaq Capital Market on February 13, 2008, which is the date the Company’s
      Compensation Committee approved the exchange.





In
      addition, under the terms of the 2008 Director Plan, each non-employee director
      elected to serve on the Board at the annual meeting is granted a non-statutory
      stock option to purchase 10,000 shares of the Company’s common stock. On the
      date of such meeting, the non-employee director elected or appointed Chairman
      of
      the Board shall be granted an additional 10,000 stock options. Each individual
      who is first elected or appointed as a non-employee director
      shall be granted, on the date of such initial election or appointment, a stock
      option to purchase 30,000 shares of common stock. Pursuant to these terms,
      and
      subsequent to its annual meeting on April 29, 2008, the Company issued 100,000
      stock options at a $1.65 exercise price, the closing price of the Company’s
      common stock on April 29, 2008 to its non-employee Directors appointed at the
      annual meeting. The options vest one year from the date of grant and have a
      seven-year term from the date of grant.





30


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


At
      July
      31, 2008, a total of 2,780,004 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, 2005
            
            
            346,488
            
            
            482,822
            
            $
            0.15 - $122.70Granted
            
            
            (290,600
            )
            
            290,600
            
            $
            9.60 - $16.75Forfeited and expired
            
            
            (38,888
            )
            
            (85,324
            )
            $
            5.55 - $83.75Exercised
            
            
            —
            
            
            (437
            )
            $
            5.55 - $5.60Additional shares reserved
            
            
            340,000
            
            
            —
            
            
            —-Balance at October 31, 2006
            
            
            357,000
            
            
            687,661
            
            $
            0.15 - $122.70Granted
            
            
            (492,894
            )
            
            492,894
            
            $
            4.65 - $6.15Forfeited and expired
            
            
            296,255
            
            
            (279,132
            )
            $
            3.50 - $122.70Exercised
            
            
            —
            
            
            —
            
            
            —Additional shares reserved
            
            
            240,000
            
            
            —
            
            
            —Balance at October 31, 2007
            
            
            400,361
            
            
            901,423
            
            $
            0.15 - $117.50Granted
            
            
            (1,649,121
            )
            
            1,649,121
            
            $
            1.05 - $3.35Forfeited and expired
            
            
            (54,834
            )
            
            (55,766
            )
            $
            11.15 -$117.50Exercised
            
            
            —
            
            
            —
            
            
            —Additional shares reserved
            
            
            3,921,868
            
            
            —
            
            
            —Shares cancelled for re-priced
            
            
            691,852
            
            
            (691,852
            )
            $
            4.65 – $83.75Shares cancelled for exchange
            
            
            68,000
            
            
            (68,000
            )
            $
            6.15 – $44.00Shares issued for re-pricing
            
            
            (535,257
            )
            
            535,257
            
            $
            2.05 – $3.25Shares issued in exchange
            
            
            (195,000
            )
            
            195,000
            
            $
            2.10Balance at July 31, 2008
            
            
            2,647,869
            
            
            2,465,183
            
            $
            0.15 - $117.50





There were 256,027 options, 333,904 options and 375,733 options exercisable with weighted
      average exercise prices of $17.37, $34.70 and $42.85 at July 31, 2008, October
      31, 2007 and 2006, respectively.




The
      following table summarizes options outstanding at July 31, 2008 and the related
      weighted average exercise price and remaining contractual life
      information:


31


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)
  **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**$1.05 - $1.35
              
              
              200,054
              
              
              7.69
              
              $
              1.14
              
              
              1,400
              
              $
              0.15$1.40
                  - $1.40
              
              
              1,132,463
              
              
              9.46
              
              $
              1.40
              
              
              —
              
              $
              —$1.60
                  - $1.65
              
              
              310,000
              
              
              7.66
              
              $
              1.63
              
              
              6,250
              
              $
              1.62$2.05
                  - $2.05
              
              
              503,747
              
              
              8.55
              
              $
              2.05
              
              
              135,084
              
              $
              2.05$2.10
                  - $83.75
              
              
              318,919
              
              
              3.43
              
              $
              14.56
              
              
              113,293
              
              $
              36.502,465,183
              
              
              
              
              
              
              
              
              256,027




The
      average fair value for accounting purposes of options granted was $0.92, $3.15
      and $5.45 for the nine months ended July 31, 2008 and for the years ended
      October 31, 2007 and 2006, respectively.





The
      following table summarizes the weighted average price, weighted average
      remaining contractual life and intrinsic value for granted and exercisable
      options outstanding as of July 31, 2008 and October 31, 2007:


**Number of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise Price**
              
              **Weighted Avg.**
                **Remaining**
                **Contractual**
                **Life (Years)**
              
              **Intrinsic Value**
                **(in
                  whole $)***As
                  of October 31, 2007:*Employee
                  Options Outstanding
              
              
              901,423
              
              $
              17.60
              
              
              7.54
              
              $
              3,710Employee
                  Options Expected to Vest
              
              
              567,519
              
              $
              2.80
              
              
              2.82
              
              $
              —Employee
                  Options Exercisable
              
              
              333,904
              
              $
              34.70
              
              
              5.26
              
              $
              3,710*As
                  of July 31, 2008*Employee
                  Options Outstanding
              
              
              2,465,183
              
              $
              3.24
              
              
              8.12
              
              $
              931Employee
                  Options Expected to Vest
              
              
              2,209,156
              
              $
              3.24
              
              
              8.12
              
              $
              —Employee
                  Options Exercisable
              
              
              256,027
              
              $
              17.37
              
              
              6.20
              
              $
              931


*Fair
      Value Disclosures*





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:




**Nine months**
              **ended July 31,**
            
            **Year Ended October 31,****2008**
            
            **2007**
            
            **2006**Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            72
            %
            
            61
            %
            
            63
            %Risk-free
                interest rate
            
            
            3.4
            %
            
            4.8
            %
            
            4.9
            %Expected
                life
            
            
            5
                years
            
            
            5
                years
            
            
            5
                years





*Stockholders'
      Rights Plan*





In
      October 1998, the Board of Directors of the Company implemented a rights
      agreement (the “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 $0.005 per right. The Company also has the ability to amend the
      rights, subject to certain limitations. On May 2, 2007, the Company entered
      into
      a Third Amendment to Rights Agreement, which amended the Rights Agreement to
      provide, among other things, that the Board of Directors of the Company may
      determine that a person who would otherwise become an Acquiring Person (as
      defined in the Rights Agreement) has become such inadvertently, and provided
      certain conditions are satisfied, that such person is not an Acquiring Person
      for any purposes of the Rights Agreement.





32


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


*Employee
      Stock Purchase Plan*





In
      March
      2000, the Board of Directors authorized an Employee Stock Purchase Plan ("the
      ESPP") under which 60,000 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 nine months
      ended July 31, 2008 and the years ended October 31, 2007 and 2006, the shares
      issued under the ESPP were 22,871, 30,816 shares and 19,298 shares,
      respectively. At July 31, 2008 and October 31, 2007, 21,257 shares and
      43,951 shares were available for issuance under the ESPP,
      respectively.





*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
      July
      31, 2008 and October 31, 2007, a cumulative total of 23,399 shares had been
      repurchased by the Company at a cost of $227, which shares are reflected as
      Treasury Stock on the Balance Sheet at the respective dates.




**NOTE
      11—COMMITMENTS AND CONTINGENCIES**





*NASDAQ
      Delisting*





The
      Company received a NASDAQ Stock Market (“Nasdaq”) Staff Deficiency Letter dated
      September 21, 2007 indicating that, based on the Quarterly Report on Form 10-Q
      for the period ended July 31, 2007, Nasdaq had determined that the Company
      was
      not in compliance with the minimum $10 million stockholders’ equity requirement
      for continued listing on the Nasdaq Global Market set forth in Marketplace
      Rule
      4450(a)(3). On December 11, 2007, the Company received formal notice that a
      Nasdaq Listing Qualifications Panel (the “Panel”) had granted the Company’s
      request for a transfer from the Nasdaq Global Market to the Nasdaq Capital
      Market, and continued listing on the Nasdaq Capital Market, subject to the
      following exception:





§
            On
                or before January 17, 2008, the Company was required to inform the
                Panel
                that it has received funds sufficient to put it in compliance with
                the
                Nasdaq Capital Market shareholders’ equity requirement of $2.5 million.
                Within four business days of the receipt of the funds, the Company
                was
                required to make a public disclosure of receipt of the funds and
                file a
                Form 8-K with pro forma financial information indicating that it
                plans to
                report proforma shareholders’ equity of $2.5 million or greater for the
                fiscal year ended October 31, 2007. We informed the Panel of receipt
                of
                sufficient funds on January 18, 2008. The Company publicly disclosed
                receipt of such funds in a press release dated January 22, 2008 and
                filed
                a Form 8-K with respect to this matter on January 25,
                2008.





§
            On
                or before January 31, 2008, the Company was required to file its
                Annual
                Report on Form 10-K for the fiscal year ended October 31, 2007, which
                shall demonstrate proforma shareholder’s equity of $2.5 million or
                greater. The Company filed its Annual Report on Form 10-K on January
                29,
                2008.





Further,
      on October 5, 2007, the Company received a notice from Nasdaq, dated October
      5,
      2007 indicating that for the last 30 consecutive business days, the bid price
      of
      the Company’s common stock had closed below the minimum $1.00
      per
      share requirement for continued inclusion under Marketplace Rule 4450(a)(5).
      Therefore, in accordance with Marketplace Rule 4450(e)(2), the Company had
      180
      calendar days, or until April 2, 2008, to regain compliance. The Company did
      not
      regain compliance with the Rule by April 2, 2008, and on April 4, 2008, Nasdaq
      notified the Company that its common stock would be delisted on April 15, 2008.
      On April 10, 2008, The Company appealed the delisting decision pursuant to
      the
      procedures set forth in the Nasdaq Marketplace Rule 4800 Series, and was granted
      a hearing with a Nasdaq Listing Panel on May 22, 2008 The Company’s common stock
      continued to trade on the Nasdaq Capital Market pending the outcome of such
      hearing.





33


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


On
      February 5, 2008, the Company received a letter from The Nasdaq Stock Market
      (“Nasdaq”) dated February 4, 2008 providing notice that the Company has
      demonstrated compliance with Nasdaq Marketplace Rules, and that the Nasdaq
      Listing Qualifications Panel has determined to continue the listing of the
      Company’s securities on Nasdaq. In addition, the Nasdaq Staff has approved the
      Company’s application to list its common stock on The Nasdaq Capital Market. The
      Company’s common stock was transferred from The Nasdaq Global Market to The
      Nasdaq Capital Market effective February 6, 2008.





On
      April
      29, 2008, the Company’s stockholders approved a 1 share for 5 share reverse
      split to regain compliance with the Nasdaq minimum bid price rule. The reverse
      split became effective on May 1, 2008. The Company’s common stock traded at or
      above the $1.00 minimum bid price for the period May 1, 2008 through May 14,
      2008, which marked 10 consecutive trading days in which the closing bid price
      exceeded the $1.00 minimum. On May 15, 2008, the Company was notified by Nasdaq
      that it had regained compliance with the minimum bid price requirements and
      no
      further action was required. (see Note 12 – Subsequent Events).





*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 which expire at various dates through July 2013, and may be renewed
      by mutual agreement between the Company and the lessors under such leases.
      Future minimum lease payments are subject to annual adjustment for increases
      in
      the Consumer Price Index.





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





**For the Years Ended October 31,**2008
                (remaining three months)
            
            $
            2012009
            
            
            1802010
            
            
            1612011
            
            
            161Thereafter
            
            
            42$
            745





*Third
      Party License Agreements*




We
      license some of the technologies used in our SurTRAK products from IdeaMatrix,
      Inc. Minimum royalty payments under the license agreement are payable annually
      at $125,000 through 2011.





*Outsourcing*





On
      April
      20, 2008, the Company entered into an administrative management agreement with
      third-party administrator (the “Administrator”). Under the terms of the
      agreement, all of the Company’s employees became employees of the Administrator,
      and the Administrator assumed the cost all employee-related health benefit
      costs, workers’ compensation insurance and the payroll and Human Resource
      functions of the Company. The Company pays a monthly fee to the Administrator
      equal to the monthly payroll for its former employees, plus a fixed fee as
      a
      percentage of the payroll costs, to cover the costs of the employees
      participation in the Administrator’s benefit plans, net of employee
      contributions, workers’ compensation costs, and the payroll and Human Resource
      management costs.




34


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


*Agreements*





The
      Company maintains 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 allegedly learned that Richard
      Terwilliger, (our former Vice President of New Product Development) owned
      certain patent rights and that the Company 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 our Vice President of New Product Development. The Company has agreed to
      defend Mr. Terwilliger. The Company has 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. On
      March
      12, 2007, the Court administratively dismissed the action. On or about April
      30,
      2007, the parties filed a Joint Motion to Reopen the Case after Administrative
      Dismissal, which the court subsequently denied without prejudice. The parties
      re-filed the Joint Motion to Reopen the Case, and the Court issued an order
      reopening the case on July 3, 2008. On August 22, 2008, the Court set a
      scheduling order in this matter. The Company denies liability and intends to
      vigorously defend itself in this litigation as it progresses.




In
      October 2s007, the Company was served with a demand for arbitration by
      AnazaoHealth Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading
      services for our Prospera brachytherapy products pursuant to a Services
      Agreement dated as of June 1, 2005, as amended (the “Services Agreement”). In
      its demand for arbitration, AnazaoHealth is seeking indemnification from the
      Company under the Services Agreement for damages arising out of a litigation
      filed against AnazaoHealth in the U.S. District Court for the District of
      Connecticut (the “Connecticut Litigation”) by Richard Terwilliger, Gary
      Lamoureux, World Wide Medical Technologies, LLC, IdeaMatrix, Inc., Advanced
      Care
      Pharmacy, LLC, Advanced Care Pharmacy, Inc., and Advanced Care Medical, Inc.
      The
      plaintiffs in the Connecticut Litigation claim that AnazaoHealth’s provision of
      services in the brachytherapy field infringes their patent rights, and certain
      of the plaintiffs claim that our Prospera products infringes their patent
      rights. The Company denies liability and intends to vigorously defend itself
      in
      this arbitration.




In
      February 2008, an individual plaintiff, Richard Hodge, filed a complaint in
      the
      Multnomah County Circuit Court of the State of Oregon against Bay Area Health
      District, North American Scientific, Inc., NOMOS Corporation and Carl Jenson,
      M.D., alleging the defendants caused Mr. Hodge to receive excessive radiation
      during the course of his IMRT treatment, as a result of a manufacturing and/or
      design defect(s) in the Company’s former CORVUS and BAT products. The plaintiff
      is seeking a judgement of up to $3 million in economic damages and $3 million
      of
      non-economic damages. The Company denies liability and intends to vigorously
      defend itself in this litigation as it progresses. No trial date has
      yet been set.




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.




35


North
        American Scientific, Inc.
 Condensed
        Notes to Consolidated Financial Statements
 (Unaudited)
 (in
        thousands, except share and per share data)


**NOTE
      12—SUBSEQUENT EVENTS**





*NASDAQ
      Delisting*





The
      company received a letter from The NASDAQ Stock Market (“NASDAQ”) dated August
      20, 2008 indicating that for the last 30 consecutive business days, the bid
      price of the Company’s common stock closed below the minimum $1.00 per share
      requirement for continued inclusion under Marketplace Rule 4450(a)(5) (the
      “Rule”). Therefore, in accordance with Marketplace Rule 4450(e)(2), the Company
      has 180 calendar days, or until February 17, 2009, to regain compliance. If,
      at
      anytime before February 17, 2009, the bid price of the Company’s common stock
      closes at $1.00 per share or more for a minimum of 10 consecutive business
      days,
      the Company understands that NASDAQ’s Staff will provide written notification
      that the Company has achieved compliance with the Rule. If the Company does
      not
      regain compliance with the Rule by February 17, 2009, the Company understands
      that NASDAQ’s Staff will provide written notification that the Company’s common
      stock will be delisted. At that time, the Company may appeal the Staff’s
      determination to delist its common stock to a NASDAQ Listing Qualifications
      Panel.





Beyond
      the risk of delisting arising from the $1.00 minimum closing bid price
      requirement, the Company is subject to a number of other requirements under
      Maintenance Standards for continued listing on the Nasdaq Capital Market,
      including but not limited to, a $2.5 million minimum stockholders’ equity under
      Maintenance Standard 1, as set forth in Marketplace Rule 4310(c)(3). Currently,
      the $0.8 million of stockholder’s’ equity at July 31, 2008 is not sufficient to
      meet the minimum required under Maintenance Standard 1.





*Sale
      of Non-Therapeutic Assets*





On
      August
      29, 2008, the Company entered into an agreement relating to the sale of its
      non-therapeutic product line to EZIP. The sale was completed on September 5,
      2008. Under  the terms of the definitive agreement, EZIP purchased certain
      assets of the Company valued up to $6,000. See further discussion in Note 3
–
Discontinued Operations.





*Loan
      Amendment*





On
      September 11, 2008, the Company entered into the Tenth Amendment to the Loan
      Agreement (the “Tenth Amendment”) with the Bank. The Tenth Amendment provides a
      waiver to the Company for its non-compliance with the Tangible Net Worth
      Covenant for an indefinite period.


36





**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 Prospera® brachytherapy seeds and SurTRAKTM needles and strands used
      primarily in the treatment of prostate cancer. We also develop and market
      brachytherapy accessories used in the treatment of disease and calibration
      sources used in medical, environmental, research and industrial
      applications.





In
      November 2006, we announced the introduction of ClearPath TM , our
      unique multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation (“APBI”). APBI is a standard radiation treatment appropriate for all
      women with early stage breast cancer. Typically, patients undergoing radiation
      treatment for breast cancer are treated with external beam radiation (EBR).
      The
      EBR treatments are delivered daily for a period of six weeks. Women who receive
      APBI instead of EBR can be treated in just 5 days with the same level of
      efficacy and with better control of radiation dose to surrounding tissue.
      Management estimates that approximately 250,000 women in the United States
      are
      diagnosed with breast cancer each year. With early detection on the rise, we
      believe the total market for APBI devices in the United States to be as high
      as
      $500 million per year.




Our
      ClearPath systems are designed to place the radiation source directly into
      the
      post-lumpectomy site which reduces the treatment time to approximately 5 days
      compared to six weeks and reduces the risks associated with the external beam
      radiation treatment. Our ClearPath device is placed through a single incision
      and is designed to conform to the tumor resection cavity, allowing physicians
      to
      deliver a more conformal therapeutic radiation dose distribution following
      lumpectomy compared to other methods of APBI. Our ClearPath family of devices
      are designed to deliver either high-dose rate treatment, (ClearPath-HDRTM) or
      low-dose rate continuous treatments (ClearPath-CRTM).





We
      have
      received 510(k) approval from the United States Food and Drug Administration
      for
      both ClearPath-CRTM to enable a low-dose rate, or continuous release treatment
      utilizing our Prospera® brachytherapy seeds, and for ClearPath-HDRTM to enable a
      high-dose rate treatment. Throughout 2007 and the first half of 2008, we have
      been gaining clinical experience with the first generation ClearPath-HDR in
      2007, and we intend to launch the second generation devices in 2008, to be
      followed by the general commercial release of our ClearPath-CR.





On
      September 17, 2007, we completed the sale of all significant assets, including
      licenses, trademarks and brand-names, and selected liabilities of NOMOS
      Corporation to Best Medical, Inc. for $500. We expect that the divestiture
      of
      NOMOS will allow us to better utilize financial resources to benefit the
      marketing and development of innovative brachytherapy products for the treatment
      of cancer. The financial results of NOMOS are reported as a discontinued
      operation in accompanying financial statements.





On
      September 5, 2008 we completed the sale of certain assets, principally our
      non-therapeutic product line to EZIP for an amount valued up to $6,000. The
      assets sold are reported as assets held for sale and the revenues and related
      expenses are reported as a discontinued operation in accompanying financial
      statements.





37




We
      have
      incurred substantial net losses since fiscal year 2000. We expect the losses
      to
      continue for at least the next fiscal year as we continue to develop our
      ClearPath product, and obtaining adequate financing is an important part of
      our
      business strategy. In January 2008, we completed a financing transaction in
      which we raised a net of $14.0 million through a private placement of our common
      stock with three of our major shareholders. The inflow of cash has allowed
      us to
      meet our operating expenses and continued development of our ClearPath
      product.


**Results
        of Operations**
 
 **Three
        Months Ended July 31, 2008 Compared to Three Months Ended July 31,
        2007**
  **Total
                  Revenue**
              
              **Three Months Ended July 31,****2008**
              
              **2007**
              
              **% Change**Radiation
                  Sources
              
              $
              3,418
              
              $
              2,702
              
              
              26
              %
  Total
        revenue increased $716 or 26% to $3,418 for the three months ended July 31,
        2008
        from $2,702 for the three months ended July 31, 2007. The increase in revenue
        is
        due to an approximate $700 or 24% increase in sales volume, primarily of
        our
        palladium brachytherapy seeds. Average selling prices remained consistent
        period
        over period.
 
 **Gross
        profit**
 
 **Three Months Ended July 31,****2008**
              
              **2007**
              
              **% Change**Radiation
                  Sources
              
              $
              1,174
              
              $
              604
              
              
              94
              %**(%
                  of Revenue)**Radiation
                  Sources
              
              
              34
              %
              
              22
              %
              
              54
              %
 
 Gross
        profit increased $570, or 94%, to $1,174 for the three months ended July
        31,
        2008 from $604 for the three months ended July 31, 2007. The increase in
        gross
        profit is due to the $700 increase in revenue noted above and, to a lesser
        extent, an approximate $500 reduction in seed production costs as a result
        of
        lower material costs and increased efficiency in material usage. The increases
        in gross margin were partially offset by an approximate $600 increase in
        material and labor costs as a result of a shift in our product mix to palladium
        seeds from iodine seeds and increased volume and costs of packaging for our
        SurTrak product. Gross profit as a percent of sales increased 54% to 34%
        in the
        three months ended July 31, 2008 from 22% in the three months ended July
        31,
        2007. The increase in our gross profit as a percent of sales is primarily
        due to
        the higher volume in revenue and cost controls implemented to reduce our
        per
        seed production costs, offset somewhat by a shift in product mix to palladium
        from iodine seeds and increased packaging costs for our Surtrak product.
 
 **Selling
        and marketing expenses**
 
 **Three Months Ended July 31,****2008**
              
              **2007**
              
              **% Change**Selling
                  and marketing expenses
              
              $
              1,168
              
              $
              985
              
              
              19
              %As
                  a percent of total revenue
              
              
              34
              %
              
              36
              %
  38
  Selling
        and marketing expenses, comprised primarily of salaries, commissions, and
        marketing costs, increased $183, or 19%, to $1.168 for the three months ended
        July 31, 2008, from $985 for the three months ended July 31, 2007. The increase
        in selling and marketing expenses is primarily attributed to $77 increase
        in
        sales commissions related to the increased sales of brachytherapy products
        and a
        collective $106 increase in printing costs for marketing materials associated
        with our product re-branding, consulting fees and other marketing
        expenses.
 
 **General
        and administrative expenses ("G&A")**
 
 **Three Months Ended July 31,****2008**
              
              **2007**
              
              **% Change**General
                  and administrative expenses
              
              $
              2,229
              
              $
              2,072
              
              
              8
              %As
                  a percent of total revenue
              
              
              65
              %
              
              77
              %
 
 G&A
        increased $157, or 8%, to $2,229 for the three months ended July 31, 2008,
        from
        $2,072 for the three months ended July 31, 2007. The increase in G&A is
        primarily attributed to a $81 increase in the allowance for bad debts, a
        $60
        increase in professional fees and a $99 net increase in other general and
        administrative expense categories, partially offset by a $83 decrease in
        compensation and related expenses.
 
 **Research
        and development (“R&D”)**
 
 **Three Months Ended July 31,****2008**
              
              **2007**
              
              **% Change**Research
                  and development expenses
              
              $
              843
              
              $
              518
              
              
              63
              %As
                  a percent of total revenue
              
              
              25
              %
              
              19
              %
 
 R&D
        increased $325 or 60%, to $843 for the three months ended July 31, 2008,
        from
        $518 for the three months ended July 31, 2007. The increase in R&D spending
        is primarily due to an increase in outside services and spending on product
        development for our ClearPathTM breast brachytherapy device.
 
 Severance
        Expense
  **Three Months Ended July 31,****2008**
              
              **2007**
              
              **% Change**Severance
                  expenses
              
              $
              1,064
              
              $
              —
              
              
              100
              %As
                  a percent of total revenue
              
              
              31
              %
              
              —
              %
 
 Severance
        expense of $1,064 is related to negotiated severance contracts with three
        employees whose positions with the Company were eliminated.
 
 **Interest
        and other income (expense), net** — reflects
        interest income on our cash balances from overnight sweep activities during
        the
        three months ended July 31, 2008, and, for the three months ended July 31,
        2007,
        reflects $162 warrant amortization expense, partially offset by interest
        income
        on our cash balances.
  **Nine
        months ended July 31, 2008 Compared to Nine months ended July 31,
        2007**
  **Total
                  Revenue**
              
              **Nine months ended July 31,****2008**
              
              **2007**
              
              **% Change**Radiation
                  Sources
              
              $
              10,589
              
              $
              8,156
              
              
              30
              %
  39
  Total
        revenue increased $2,433 or 30% to $10,589 for the nine months ended July
        31,
        2008 from $8,156 for the nine months ended July 31, 2007. The increase in
        our
        Radiation Sources business primarily reflects both an increase in sales of
        and
        shift in product mix to our palladium brachytherapy seeds.
  **Gross
        profit**
 
 **Nine months ended July 31,****2008**
              
              **2007**
              
              **% Change**Radiation Sources
              
              $
              3,512
              
              $
              2,028
              
              
              73
              %**(%
                  of Revenue)**Radiation
                  Sources
              
              
              33
              %
              
              25
              %
              
              32
              %
 
 Gross
        profit increased $1,484, or 73%, to $3,512 for the nine months ended July
        31,
        2008 from $2,028 for the nine months ended July 31, 2007. The increase in
        gross
        profit is the result of the increases in total revenue as noted above, and
        to a
        lesser extent, an approximate $400 reduction in seed production costs as
        a
        result of lower material costs and increased efficiency in material usage.
        The
        gains in gross profit were somewhat offset by an approximate $1,300 increase
        in
        overall costs due to a shift in product mix to palladium seeds sales. Our
        gross
        profit as a percent of sales increase 32% to 33% for the nine months ended
        July
        31, 2008 from 25% for the nine months ended July 31, 2007, primarily due
        to
        lower average production costs per seed, offset by the change in product
        mix
        towards palladium seeds.
 
 **Selling
        and marketing expenses**
  **Nine months ended July 31,****2008**
              
              **2007**
              
              **% Change**Selling
                  and marketing expenses
              
              $
              3,382
              
              $
              2,713
              
              
              25
              %As
                  a percent of total revenue
              
              
              32
              %
              
              33
              %
 
 Selling
        and marketing expenses, comprised primarily of salaries, commissions, and
        marketing costs, increased $669, or 25%, to $3,382 for the nine months ended
        July 31, 2008, from $2,713 for the nine months ended July 31, 2007. The increase
        in selling and marketing expenses is primarily attributed to a $174 increase
        in
        research grants provided to qualified organizations, a $202 increase in
        commissions related to the increased sales of brachytherapy products, a $72
        increase in consulting fees, $146 in costs incurred for re-branding and an
        approximate $75 net increase all other marketing expenses.
 
 **General
        and administrative expenses ("G&A")**
 
 **Nine
                  months ended July 31,****2008**
              
              **2007**
              
              **%
                  Change**General
                  and administrative expenses
              
              $
              7,634
              
              $
              6,516
              
              
              17
              %As
                  a percent of total revenue
              
              
              72
              %
              
              80
              %
 
 G&A
        increased $1,118, or 17%, to $7,634 for the nine months ended July 31, 2008,
        from $6,516 for the nine months ended July 31, 2007. The increase in G&A is
        primarily attributed to a $291 increase in bad debt expense, $88 increase
        in
        loan origination fees related to borrowing activities in the first quarter
        of
        2008, a $508 increase in compensation and related expenses, an increase of
        $80
        in travel expenses, $87 increase in share based compensation expense and
        a $129
        net increase in other general and administrative expense categories, partially
        offset by a $65 decrease in insurance costs as a result of the disposition
        of
        the NOMOS operation.
 
 40
  Research
        and development (“R&D”)
 
 **Nine months ended July 31,****2008**
              
              **2007**
              
              **% Change**Research
                  and development expenses
              
              $
              3,282
              
              $
              1,282
              
              
              156
              %As
                  a percent of total revenue
              
              
              31
              %
              
              16
              %
 
 R&D
        increased $2,000 or 156%, to $3,282 for the nine months ended July 31, 2008,
        from $1,282 for the nine months ended July 31, 2007. The increase in R&D
        spending is primarily due to a $1,479 increase in spending on product
        development for our ClearPathTM breast brachytherapy device, a $327 increase in
        salaries and related employment expenses, a $92 increase in travel expenses
        and
        a $102 increase in professional fees relating to new product development.
 
 Severance
        Expenses
 
 **Nine months ended July 31,****2008**
              
              **2007**
              
              **% Change**Severance
                  expenses
              
              $
              1,410
              
              $
              —
              
              
              100
              %As
                  a percent of total revenue
              
              
              13
              %
              
              —
              %
 
 Severance
        expense of $1,410 is related to negotiated severance contracts with three
        employees whose positions with the Company were eliminated.
 
 **Interest
        and other income (expense), net** — increased
        by $850 to $948 due to an increase in our borrowing activities in the first
        six
        months of 2008 and the last half of 2007. Interest expense for the nine months
        ended July 31, 2008 includes $895 amortization of warrants issued as debt
        discount in connection with the debt and $53 of cash paid for loan origination
        and interest on debt.
 
 **Adjustment
        for fair value of derivatives** — increased from $0 to $311 as a result of fluctuations recorded in the fair
        value
        of warrants issued in connection with our borrowing activities.
 
 **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, short-term borrowings, public offerings, private placements of
        our
        common stock and most recently the sale of certain assets.  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, short-term and long-term borrowings, lines
        of
        credit and our ability to raise capital through the sale of our common stock,
        and/or securities convertible to debt.
 
 To
        supplement our available cash, on May 28, 2008, we entered into a Ninth
        Amendment to our previously expired borrowing arrangement with Silicon Valley
        Bank. The Ninth Amendment provides us with $6,000 available borrowing capacity
        as follows:
 
 §
              a
                  $3.0 million Growth Capital term loan, to be funded one half in
                  June 2008
                  and one half no later than September 2008. Interest accrues at
                  the Bank
                  prime rate plus 2.25% and is payable on the outstanding principal
                  balance
                  monthly from the date of the first borrowing. The principal balance
                  of the
                  Growth Capital loan is repayable in equal installments of $83,333
                  over
                  thirty-six (36) months beginning in the month after the loan is
                  fully
                  funded; and




41





§
            a
                $3.0 million revolving credit facility based upon eligible receivables
                balance as defined by the Ninth Amendment, which is payable monthly.
                Interest on the revolving credit facility is payable monthly at Bank
                prime
                plus 0.50% per annum, and may increase to Bank prime plus 1.5% if
                we fail
                to meet the Quick Ratio Test as defined in the Ninth Amendment. The
                revolving line of credit matures in twenty-four (24) months from
                the date
                of signing. The revolving line of credit is subject to certain financial
                covenants, which cross over to the Growth Capital Loan in the event
                that
                both facilities have an outstanding balance on any given
                month.





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 July 31,
      2008, the Company has an accumulated deficit of $161,533; cash, cash equivalents
      and marketable securities of $1,667, long-term debt of $1,342 and remaining
      available financing arrangements of $4,500.





Based
      on
      our current operating plans, management believes that the existing cash
      resources and cash forecasted by management to be generated by operations,
      as
      well as our short-term and long-term borrowings, lines of credit and our ability
      to raise capital through the sale of our common stock and/or securities
      convertible to debt, will be sufficient to meet working capital and capital
      requirements through at least the next twelve months. In this regard, we raised
      additional financing in the first quarter of fiscal 2008 to fund our continuing
      operations, support the further development and launch of ClearPathTM, our unique
      multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation, and other activities. In addition, on May 28, 2008, we negotiated
      a
      $3,000 term loan and renewed our expired line of credit for $3,000 with a bank
      and most recently the sale of certain assets. However, there is no assurance
      that we will be successful with our plans. If events and circumstances occur
      such that we do not meet our current operating plans, we are unable to raise
      sufficient additional equity or debt financing, or such financing is
      insufficient or not available, 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.




We
      also
      expect that in future periods new products and services will provide additional
      cash flow, although no assurance can be given that such cash flow will be
      realized, and we are presently placing an emphasis on controlling
      expenses.





As
      of
      July 31, 2008, we had cash, and cash equivalents aggregating approximately
      $1,667, an increase of approximately $1,058 from $609 at October 31, 2007.
      The
      increase was primarily attributed to $13,768 net proceeds from the sale of
      our
      common stock in January 2008, proceeds of $1,500 from the Growth Capital Loan,
      partially offset by $3,323 in payment of debt, $9,804 used in operating
      activities and $1,053 used for capital expenditures.




Cash
      flows used in operating activities, excluding cash used in discontinued
      operations, increased $3,036, or 43%, to $10,022 for the nine months ended
      July
      31, 2008 from $6,986 for the nine months ended July 31, 2007, primarily due
      to





§
            $4,884
                million increase in our net loss from continuing
                operations;


§
            $1,062
                decline in collections of accounts receivable due to higher sales
                volume
                and extended terms offered to certain
                customers;





which
      were partially offset by





§
            $455
                reduction in inventory expenditures resulting from lower inventory
                costs
                and increased efficiency in inventory
                usage;


§
            $1,125
                increase from accounts payable and accrued liabilities as we attempt
                to
                more closely align our expenditures with our collections;
                and


§
            $1,288
                increase generated by non-cash expenses such as the amortization
                of
                warrants, the change in fair value of warrant derivative liabilities,
                share-based compensation expense and the provision for doubtful
                accounts,





Cash
      used
      in discontinued operations during the nine months ended July 31, 2008 reflects
      the cash generated by the discontinued operations of the non-therapeutic product
      line, partially offset by payments of legacy accounts payable and accrued
      liabilities retained by us in accordance with the terms of sale of our NOMOS
      operation.


42





Cash
      used
      in investing activities decreased $9,246 to $1,053 cash used in investing
      activities to purchase machinery and equipment relating to research and
      development activities, from $8,193 cash provided by investing activities from
      liquidating short-term investments to supply cash to support
      operations.





Cash
      provided by financing activities increased $10,509 to $11,915 for the nine
      months ended July 31, 2008 from $1,406 for the nine months ended July 31, 2007.
      The increase reflects proceeds from the 2007 Private Placement and proceeds
      from
      the Growth Capital Loan, partially offset by the repayment of short-term
      borrowings from activity prior to closing the 2007 Private
      Placement.





**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, 2007, 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.




*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 our best estimate of the amount of probable
      credit losses in our existing accounts receivable. We determine 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 we believe that it is
      probable the receivable will not be recovered. We do 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





*Long-Lived
      Assets*





In
      accordance with SFAS No. 144, “ *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,”
      long-lived assets, such as property, plant, and equipment, and purchased
      intangibles subject to amortization, are reviewed for impairment whenever events
      or changes in circumstances indicate that the carrying amount of an asset may
      not be recoverable. Recoverability of assets to be held and used is measured
      by
      a comparison of the carrying amount of an asset to the estimated undiscounted
      future cash flows expected to be generated by the asset. If the carrying amount
      of an asset exceeds its estimated future cash flows, an impairment charge is
      recognized equal to the amount by which the carrying amount of the asset exceeds
      the fair value of the asset. Assets to be disposed of are separately presented
      in the consolidated balance sheet and reported at the lower of the carrying
      amount or fair value less costs to sell, and are no longer
      depreciated.


43





*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.





We
      review
      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.





*Derivative
      Liabilities*





The
      Company issued warrants in connection with its borrowing activities that
      included an uncertain purchase price. The Company evaluated the warrants under
      SFAS No. 133 - *Accounting
      for Derivative Instruments and Hedging Activities* and
      Emerging Issues Task Force Issue 00-19 - *Accounting
      for Derivative Financial Indexed to, and Potentially Settled in, a Company’s Own
      Stock* and
      determined the warrants should be accounted for as derivative liabilities at
      estimated fair value, and marked-to-market at subsequent measurement dates.
      The
      Company used the Black-Scholes option-pricing model to determine the fair value
      of the derivative liabilities at each measurement date. Key assumptions of
      the
      Black-Scholes option-pricing model include applicable volatility rates,
      risk-free interest rates and the instruments’ expected remaining life. The
      fluctuations in estimated fair value are recorded as Adjustments to Fair Value
      of Derivatives in Other Expenses in the Statement of Operations. On December
      12,
      2007, the uncertain purchase price became certain, and the derivative features
      were eliminated. See further discussion in Note 8 and Note 9 of the Financial
      Statements.





*Revenue
      Recognition*





We
      sell
      products for radiation therapy treatment, primarily brachytherapy seeds used
      in
      the treatment of cancer.. 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, we recognize 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.





*Income
      Taxes*





Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled. The Company has recorded 100% valuation allowance
      against its deferred tax assets until such time that becomes more likely than
      not that the Company will realize the benefits of its deferred tax assets.
      On
      November 1, 2007, the Company implemented Financial Accounting Standards Board
      (“FASB”) Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109”* .





*Stock-based
      Compensation*





We
      account for our share-based payments under the guidance set forth in 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 our Employee Stock
      Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair values.
      We also apply the guidance found in SEC *Staff
      Accounting Bulletin No. 107* (“SAB
      107”) to with respect to share-based payments and SFAS 123(R).




44




Under
      SFAS 123(R), we attribute the value of share-based compensation to expense
      using
      the straight-line method. We use a 10% forfeiture rate, and a 40%
      forfeiture rate for the 2006 Premium Price Awards, under the straight-line
      method based on historic and estimated future forfeitures.




We
      use
      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. We use projected volatility rates, which are based primarily upon
      historical volatility rates. Because our 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 our 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.





**Recent
      Accounting Pronouncements**





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 157 is effective for fiscal years beginning after November 15,
      2007. On February 12, 2008, the FASB issued FASB Staff Position FSP 157-2
      which defers the effective date of SFAS No. 157 for one year for
      non-financial assets and non-financial liabilities that are not recognized
      or
      disclosed at fair value in the financial statements on a recurring basis. 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
      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. The Company is evaluating this standard
      and
      therefore has not yet determined the impact that the adoption of SFAS 159 will
      have on our financial position, results of operations or cash
      flows.





In
      March
      2007, the FASB ratified Emerging Issues Task Force Issue 06-11, *Accounting
      for Income Tax Benefits of Dividends on Share-Based Payment Awards* ,
      (“EITF
      Issue 06-11” ). Beginning January 1, 2008, the Company adopted EITF Issue
      06-11. In accordance with EITF Issue 06-11, the Company records a credit to
      additional paid-in capital for tax deductions resulting from a dividend payment
      on non-vested share awards the Company expects to vest. The adoption of EITF
      Issue 06-11 did not have any impact on the Company’s consolidated financial
      statement during the quarter ended July 31, 2008.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), " *Business
      Combinations* "
      ("SFAS 141R"). SFAS 141R establishes principles and requirements for
      how an acquirer recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, any noncontrolling
      interest in the acquiree and the goodwill acquired. SFAS 141R also
      establishes disclosure requirements to enable the evaluation of the nature
      and
      financial effects of the business combination. SFAS 141R is effective for
      fiscal years beginning after December 15, 2008.The Company is currently
      evaluating the potential impact, if any, of the adoption of SFAS 141R on
      its consolidated results of operations and financial condition.




45




In
      December 2007, the FASB issued SFAS No. 160, " *Noncontrolling
      Interests in Consolidated Financial Statements—an amendment of Accounting
      Research Bulletin No. 51* "
      (“SFAS
      160”). SFAS 160 establishes accounting and reporting standards for ownership
      interests in subsidiaries held by parties other than the parent, the amount
      of
      consolidated net income attributable to the parent and to the noncontrolling
      interest, changes in a parent's ownership interest, and the valuation of
      retained noncontrolling equity investments when a subsidiary is deconsolidated
      SFAS 160 also establishes disclosure requirements that clearly identify and
      distinguish between the interests of the parent and the interests of the
      noncontrolling owners SFAS 160 is effective for fiscal years beginning after
      December 15, 2008.The Company is currently evaluating the potential impact,
      if any, of the adoption of SFAS 160 on its consolidated results of operations
      and financial condition.





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities - an amendment of FASB
      Statement No. 133* .
      The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. Entities are required to provide enhanced
      disclosures about: (a) how and why an entity uses derivative instruments;
      (b) how derivative instruments and related hedged items are accounted for
      under SFAS No. 133 and its related interpretations; and (c) how
      derivative instruments and related hedged items affect an entity’s financial
      position, financial performance, and cash flows. This standard is effective
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008, with early application encouraged. The Company is
      currently evaluating the impact, if any, SFAS No. 161 will have on its
      consolidated financial position, results of operations or cash flows.





In
      May
      2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles”, (“SFAS No.
      162”* ).
      SFAS
      No. 162 identifies the sources of accounting principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). This Statement is effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
      Generally Accepted Accounting Principles”. The Company currently adheres to the
      hierarchy of GAAP as presented in SFAS No. 162, and does not expect its adoption
      will have a material impact on its consolidated results of operations and
      financial condition.





In
      June
      2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
      03-6-1, *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* (“FSP
      EITF 03-6-1”). The FSP provides that unvested share-based payment awards that
      contain nonforfeitable rights to dividends or dividend equivalents (whether
      paid
      or unpaid) are participating securities and shall be included in the computation
      of earnings per share pursuant to the two-class method in accordance with SFAS
      128, Earnings per Share. The FSP is effective for financial statements issued
      for fiscal years beginning after December 15, 2008, and interim periods within
      those years. Upon adoption, the Company is required to retrospectively adjust
      its earnings per share data to conform with the provisions in this FSP. Early
      application of this FSP is prohibited. The Company is currently evaluating
      the
      impact this FSP will have on its consolidated financial statements.


*.*


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




Information
      about market risks for the nine months ended July 31, 2008 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, 2007.




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




**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, principal financial officer, 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 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 SEC’s rules and forms.




46




**Changes
      in Internal Controls**





There
      has
      been no change in our internal control over financial reporting during the
      quarter ended July 31, 2008, that has materially affected or is reasonably
      likely 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:





**Item
      1. Legal Proceedings**





See
      Note
      11 of Condensed Notes to Consolidated Financial Statements for information
      regarding legal proceedings.





**Item
      1A. Risk Factors**




*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.*




**We
      have experienced significant losses and expect to incur losses in the future.
      As
      a result, the amount of our cash, cash equivalents, and investments in
      marketable securities has materially declined. We raised additional equity
      financing in January 2008 to fund our continuing operations, support the further
      development and launch of ClearPath and other activities. 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 $12.7
      million in the nine months ended July 31, 2008, and $21.0 million and $17.1
      million in our fiscal years ended October 31, 2007 and 2006, respectively.
      In
      addition, we have used cash in operations of $9.8 million in the nine months
      ended July 31, 2008, and $12.3 million and $15.9 million for our fiscal years
      ended October 31, 2007 and 2006, respectively.  As of July 31, 2008, we had
      an accumulated deficit of $160.7 million; cash and cash equivalents of $1.7
      million, and long-term debt of $1.6 million.





To
      supplement our available cash, on May 28, 2008, we entered into a Ninth
      Amendment to our previously expired borrowing arrangement with Silicon Valley
      Bank. The Ninth Amendment provides us with $6.0 million available borrowing
      capacity as follows:





§
            a
                $3.0 million Growth Capital term loan, to be funded one half in June
                2008
                and one half no later than September 2008. Interest accrues at the
                Bank
                prime rate plus 2.25% and is payable on the outstanding principal
                balance
                monthly from the date of the first borrowing. The principal balance
                of the
                Growth Capital loan is repayable in equal installments of $83,333
                over
                thirty-six (36) months beginning in the month after the loan is fully
                funded; and


§
            a
                $3.0 million revolving credit facility based upon eligible receivables
                balance as defined by the Ninth Amendment, which is payable monthly.
                Interest on the revolving credit facility is payable monthly at Bank
                prime
                plus 0.50% per annum, and may increase to Bank prime plus 1.5% if
                we fail
                to meet the Quick Ratio Test as defined in the Ninth Amendment. The
                revolving line of credit matures in twenty-four (24) months from
                the date
                of signing. The revolving line of credit is subject to certain financial
                covenants, which cross over to the Growth Capital Loan in the event
                that
                both facilities have an outstanding balance on any given
                month.




47




The
      negative cash flow we have sustained has materially reduced our working capital.
      Continued negative cash flow could materially and negatively impact our ability
      to fund future operations and continue to operate as a going concern. Management
      has taken and continues to take actions intended to improve our results. These
      actions include sales of certain product lines, 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 additional financing, our
      ability to increase revenues and to reduce further our losses from operations,
      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.





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 develop, market and sell our products, including
                the successful further development and launch of our new ClearPath
                device
                for treatment of breast cancer;


§
            Continued
                scientific progress in our discovery and research
                programs;


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


§
            Structuring
                our businesses in alignment with their revenues to reduce operating
                losses;


§
            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.





We
      completed a private placement of $15.5 million of our common stock in January
      2008, raising a net $14.0 million; however, we may need to raise additional
      equity financing, reduce operations and take other steps to achieve positive
      cash flow.




In
      September 2008, we sold our non-therapeutic product line, which resulted in
      immediate cash proceeds of $3.0 million. However, we will no longer generate
      revenue from the sales of our non-therapeutic products and our revenue will
      be
      entirely based on sales of our therapeutic products.




We
      also
      may be required to curtail our expenses or to take steps that could hurt our
      future performance, including but not limited to, the termination of major
      portions of our research and development activities, 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. We cannot assure you that we will be successful in these efforts
      or
      that any or some of the above factors will not negatively impact us. We believe
      that we will have or be able to obtain sufficient cash to sustain us at least
      through the next twelve months.




**Future
      financing transactions will likely have dilutive and other negative effects
      on
      our existing stockholders.**





In
      January 2008, we completed a private placement of 12,601,628 shares of our
      common stock that also included 630,081 shares of common stock issuable upon
      exercise of warrants. This financing resulted in significant dilution of our
      current stockholders, such that the three participants in the private placement
      transaction now control in excess of 70% of our outstanding common stock. If
      we
      raise additional equity financing in the future, the percentage ownership held
      by existing stockholders would be further reduced, and existing stockholders
      may
      experience further significant dilution. In addition, new investors 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.





**Our
      stock price currently does not meet the minimum bid price for continued listing
      on the Nasdaq Capital Market. Our ability to publicly or privately sell equity
      securities and the liquidity of our common stock could be adversely affected
      if
      we are delisted from the Nasdaq Capital Market or if we are unable to transfer
      our listing to another stock market.**





At
      points
      during the past 52 weeks, the minimum bid price for our common stock listed
      on
      the Nasdaq Capital Market has closed below the $1.00 minimum. On October 5,
      2007, we received a notice from Nasdaq, dated October 5, 2007 indicating that
      for the last 30 consecutive business days, the bid price of our common stock
      had
      closed below the minimum $1.00 per share requirement for continued inclusion
      under Marketplace Rule 4450(a)(5). We were able to regain compliance with the
      $1
      minimum bid requirement by effecting a 1 share for 5 share reverse
      stock split, which was approved by our stockholders on April 29, 2008 and became
      effective on May 1, 2008. Our common stock traded at or above the $1.00 minimum
      bid price for the period May 1, 2008 through May 14, 2008, which marked 10
      consecutive trading days in which the closing bid price exceeded the $1.00
      minimum. On May 15, 2008, we were notified by Nasdaq that our common stock
      had
      regained compliance with the minimum bid price requirements and no further
      action was required on our part.




48




On
      August
      20, 2008, we received notice from Nasdaq indicating that for the last 30
      consecutive business days, the bid price of the Company’s common stock closed
      below the minimum $1.00 per share requirement for continued inclusion under
      Marketplace Rule 4450(a)(5) (the “Rule”). The Company has 180 calendar days, or
      until February 17, 2009, to regain compliance. If, at anytime before February
      17, 2009, the bid price of the Company’s common stock closes at $1.00 per share
      or more for a minimum of 10 consecutive business days, the Company understands
      that NASDAQ’s Staff will provide written notification that the Company has
      achieved compliance with the Rule. If the Company does not regain compliance
      with the Rule by February 17, 2009, the Company understands that NASDAQ’s Staff
      will provide written notification that the Company’s common stock will be
      delisted. At that time, the Company may appeal the Staff’s determination to
      delist its common stock to a NASDAQ Listing Qualifications Panel.




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, delisting from Nasdaq could adversely affect our ability to raise
      additional financing through the public or private sale of equity securities.
      We
      may need to raise additional financing in fiscal 2008 to fund our continuing
      operations, support the launch and further development of ClearPath, and other
      activities. Delisting from Nasdaq also 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
      common stock is subject to continued listing requirements of the Nasdaq Capital
      Market. Our ability to publicly or privately sell equity securities and the
      liquidity of our common stock could be adversely affected if we are delisted
      from the Nasdaq Capital Market.**





Beyond
      the risk of delisting arising from the $1.00 minimum closing bid price
      requirement, our common stock is subject to a number of other requirements
      under
      Maintenance Standards for continued listing on the Nasdaq Capital Market,
      including but not limited to, a $2.5 million minimum stockholders’ equity under
      Maintenance Standard 1, as set forth in Marketplace Rule 4310(c)(3). Currently,
      our $0.8 million of stockholder’s’ equity at July 31, 2008, which balance does
      not reflect the September 2008 sale of certain assets from our non therapeutic
      product line, is not sufficient to meet the minimum required under Maintenance
      Standard 1. However, after including the results
      of the September 2008 sale of certain assets from our non therapeutic product
      line, we did have sufficient stockholders' equity to satisfy Maintenance
      Standard 1.





Delisting
      from Nasdaq could adversely affect our ability to raise additional financing
      through the public or private sale of equity securities. We may need to raise
      additional financing in fiscal 2008 to fund our continuing operations, support
      the launch and further development of ClearPath, and other activities. Delisting
      from Nasdaq also 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.





**Success
      of our ClearPath breast brachytherapy device will be dependent upon a variety of
      factors.**





We
      previously have announced the introduction of ClearPath, a new brachytherapy
      device for the treatment of breast cancer. Because we believe that our ClearPath
      device has certain technical and market advantages, we expect that this device
      may generate significant revenues in the future. There are a number of factors
      which could affect our ability to achieve this goal, including:




§
            The
                successful further development of a commercially marketable
                device;






49




§
            The
                successful launch of a marketing and sales program for this
                device;


§
            Our
                ability to protect our intellectual property through patents and
                licenses
                and avoid infringement of intellectual property of
                others;


§
            The
                successful completion of technical improvements to the
                device;


§
            Our
                ability to successfully manufacture production quantities of the
                device;


§
            The
                acceptance of the device by physicians and health professionals as
                an
                alternative to other approaches to delivering radiation to a cancer
                patient’s breast tissue or to other products using a similar approach but
                employing different competitive technologies;
                and


§
            Our
                ability to hire and train a direct sales force to sell the
                device.





**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.




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' responses to new product developments;


•
      manufacturing cost overruns;


•
failure
      to obtain customer acceptance and payment; 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, as
      competition erodes average selling prices. 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.




**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, larger more
      experienced sales forces 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 or be unable to develop significant sources of
      revenue.**




We
      believe that our Prospera brachytherapy seeds, our SurTRAK strands and needles
      and our new ClearPath device can 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 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.




50




Our
      primary competitors in the brachytherapy seed business include: C.R.
      Bard, Inc. Oncura, and Core Oncology, all 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 and Core Oncology, we
      currently manufacture a portion of their Palladium-103 seed requirements
      pursuant to distribution agreements reached with Oncura in July 2005 and with
      Core Oncology in August 2007); 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.





Our
      new
      ClearPath-HDR device for treatment of breast cancer is, like its competitors,
      designed to connect to a source of high-dose-rate (HDR) radiation, which is
      administered in a specially shielded room in a hospital. It faces competition
      from Hologic, Inc., SenoRx, Inc. and Cianna Medical (previously BioLucent,
      Inc.). The MammoSite RTS device from Hologic, Inc., currently the market leader,
      uses a balloon and catheter system to place the radiation source directly into
      the post-lumpectomy cavity. The Contura MLB device developed by SenoRx, Inc.
      also uses a balloon and catheter system to deliver the radiation dose. The
      SAVI
      device manufactured by Cianna Medical does not use a balloon and is comprised
      of
      an expandable bundle of 6 catheters.





Our
      radiation reference source business also is subject to intense competition.
      Competitors in this industry include AEA Technology PLC and Eckert &
Ziegler AG. Eckert & Ziegler purchased our Non-Therapeutic Product Line in
      September 2008. 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. Also, we will need to hire and train additional
      sales representatives to sell our ClearPath device. 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.




As
      a
      result of our relatively small sales force the need to hire and train additional
      sales representatives to sell our ClearPath device, and the intense competition
      for skilled sales and marketing employees, 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.**




Our
      2005
      agreement with Oncura, Inc. and our 2007 agreement with Core Oncology, Inc.
      for
      distribution of our Palladium-103 brachytherapy seeds are important components
      of that business. In addition, 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 Palladium-103 brachytherapy seeds.




51




**We
      depend partially on our relationships with two large customers that each
      comprise more than 10% of our revenue. If these relationships are discontinued
      or if we are unable to develop new relationships, our revenues could
      decline.**




Our
      sales
      to Oncura, Inc. comprised more than 10% of our revenue for fiscal 2007. We
      cannot assure you that we will be able to maintain our existing relationships
      with our large customers for the sale of our Palladium-103 brachytherapy seeds.





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





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 revenues are primarily derived from products predominantly used in the
      treatment of tumors of the prostate. 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 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 our
      brachytherapy products for additional types of cancer. 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
      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.**





We
      depend
      upon a limited number of outside unaffiliated suppliers for our radioisotopes.
      Our principal suppliers are Nordion International, Inc. and Eckert &
Ziegler AG. 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 John B. Rush, our president and chief
      executive officer, Troy A. Barring, our chief operating officer and Brett L.
      Scott our Senior Vice President and Chief Financial Officer. Our future business
      and financial results could be adversely affected if the services of Messrs.
      Rush, Barring, Scott 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.




52




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,
      which
      may require us to withdraw certain products from the
      market.**




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.




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
      2006, we licensed intellectual property which was later the subject of
      litigation brought by WorldWide Medical Technologies in U.S. District Court
      against both us and our former employee, Richard Terwilliger, who was previously
      our Vice-President of New Product Development. This intellectual property
      relates to our brachytherapy business, specifically, certain needle-loading
      and
      stranding technologies. While we do not believe that we have any liability
      in
      this matter, and are vigorously defending ourselves 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.




53




**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
      licenses for our North Hollywood and Chatsworth facilities in 2007. 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.





As
      part
      of  the sale of our Non-Therapeutic Product Line  in September
      2007 , we will be closing  our North Hollywood facility
      and  h a ve agreed to decommission the site 
at our expense .   While we believe that our
      current reserves for decommissioning costs are adequate , the actual
      costs may exceed such estimate .




**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, and could hamper the introduction of new
      products.**




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. 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 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 brachytherapy services. Changes in Medicare reimbursement
      policies or amounts affecting hospitals and freestanding clinics could
      negatively affect market demand for our products.





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.




54




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.





**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, 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 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
      brachytherapy products 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.




55




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 are 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.




56




**Our
      future growth depends, in part, on our ability to penetrate foreign markets,
      particularly in Asia and Europe. However, we have encountered 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 fiscal 2007 and the first
      nine
      months of fiscal 2008, 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.




**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
                future sales growth is highly dependent on the successful introduction
                of
                our ClearPath device;


§
            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;






57




§
            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;


§
            Acquisitions
                that result in in-process research and development expenses may be
                charged
                fully in an individual 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. We expect our 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.




**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 while 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
      $0.50
      and $5.65 per share in the fifty-two week period ended July 31, 2008. 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.




58




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
      connection with our January 2008 sale of common stock and accompanying warrants,
      we intend to file resale registration statements covering an aggregate of up
      to 12,601,628 shares of common stock and 630,081 shares of common
      stock issuable 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
      6.**  **Exhibits**




(a)
        Exhibits.





Exhibits
                No.
            
            Title3.1
            
            Amended
                and Restated Certificate of Incorporation of the Company, as amended
                on
                April 30, 2008 by the Certificate of Amendment of Amended Certificate
                of
                Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s
                Quarterly Report on Form 10-Q, filed on June 16, 2008.3.2
            
            Bylaws
                of the Company, (as amended December 5, 2007), incorporated by reference
                to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
                December 11, 2007.10.1
            
            Ninth
                Amendment to Loan and Security Agreement, dated as of May 28, 2008,
                by and
                among the Company, North American Scientific, Inc., a California
                corporation and Silicon Valley Bank, incorporated by reference to
                Exhibit
                10.1 to the Company’s Current Report on Form 8-K, filed on June 16,
                2008.10.2
            
            Form
                of Warrant to purchase common stock of Company, incorporated by reference
                to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June
                16, 2008.31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted 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


59


**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.





September
                12, 2008
            By:
            /s/
                John B. RushName:
            John
                B. RushTitle:
            President,Chief
                Executive Officer andActing
                Chief Financial Officer(Principal
                Executive Officer) and(Principal
                Financial Officer)


60


**Exhibit
      Index**





**Exhibit**
              **#**3.1
            
            Amended
                and Restated Certificate of Incorporation of the Company, as amended
                on
                April 30, 2008 by the Certificate of Amendment of Amended Certificate
                of
                Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s
                Quarterly Report on Form 10-Q, filed on June 16, 2008.3.2
            
            Bylaws
                of the Company, (as amended December 5, 2007), incorporated by reference
                to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
                December 11, 2007.10.1
            
            Ninth
                Amendment to Loan and Security Agreement, dated as of May 28, 2008,
                by and
                among the Company, North American Scientific, Inc., a California
                corporation and Silicon Valley Bank, incorporated by reference to
                Exhibit
                10.1 to the Company’s Current Report on Form 8-K, filed on June 16,
                2008.10.2
            
            Form
                of Warrant to purchase common stock of Company, incorporated by reference
                to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June
                16, 2008.31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.





61