**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 January 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
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              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
      definitions of “large accelerated filer” and “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. o Large
      Accelerated Filer o Accelerated Filer o Non-Accelerated
      Filer x Smaller
      Reporting Company





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





The
      number of shares of Registrant's Common Stock, $.01 par value, outstanding
      as of
      February 29, 2008 was 92,435,855 shares.




**NORTH
        AMERICAN SCIENTIFIC, INC.**




**Index**





**Page****Part
                I –
                Financial
                Information****Item
              1.**
            **Financial
                Statements**Consolidated
                Balance Sheets as of January 31, 2008 and October 31, 2007
            3Consolidated
                Statements of Operations for the three months ended January 31, 2008
                and
                2007
            4Consolidated
                Statements of Cash Flows for the three months ended January 31, 2008
                and
                2007
            5Condensed
                Notes to the Consolidated Financial Statements
            6**Item
              2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of Operations**
            34**Item
              3.**
            **Quantitative
                and Qualitative Disclosures about Market Risk**
            42**Item
              4.**
            **Controls
                and Procedures**
            42**Part
                II – Other Information****Item 1.**
            **Legal
                Proceedings**
            43**Item 1A.**
            **Risk
                Factors**
            43**Item
              2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds**
            55**Item
              4.**
            **Submission
                of Matters to a Vote of Security Holders**
            56**Item
              6.**
            **Exhibits**
            56**Signatures**
            57


-
          2 -


**PART
      II**–**FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Balance Sheets**





**January
                31,**
            
            **October
                31,****2008**
            
            **2007**(Unaudited)**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            8,018,000
            
            $
            609,000Accounts
                receivable, net of reserves
            
            
            2,199,000
            
            
            2,296,000Inventories,
                net of reserves
            
            
            1,509,000
            
            
            1,546,000Prepaid
                expenses and other current assets
            
            
            567,000
            
            
            724,000Total
                current assets
            
            
            12,293,000
            
            
            5,175,000Equipment
                and leasehold improvements, net
            
            
            882,000
            
            
            891,000Intangible
                assets, net
            
            
            103,000
            
            
            110,000Total
                assets
            
            $
            13,278,000
            
            $
            6,176,000**Liabilities
                and Stockholders’ Equity****(Deficit)**Current
                liabilitiesLines
                of credit, net of discount
            
            $
            —
            
            $
            3,241,000Warrant
                derivative
            
            
            —
            
            
            173,000Accounts
                payable
            
            
            1,924,000
            
            
            2,564,000Accrued
                expenses
            
            
            2,559,000
            
            
            3,110,000Total
                current liabilities
            
            
            4,483,000
            
            
            9,088,000Commitments
                and contingenciesStockholders’
                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 shares and 100,000,000 shares
                  authorized; 92,641,876 and 29,601,352 shares issued; and 92,435,855
                  and
                  29,395,331 shares outstanding as of January 31, 2008 and October
                  31, 2007,
                  respectively
            
            
            929,000
            
            
            300,000Additional
                paid-in capital
            
            
            160,415,000
            
            
            145,533,000Treasury
                stock, at cost – 206,021 common shares as of January 31, 2008 and
                October 31, 2007, respectively
            
            
            (227,000
            )
            
            (227,000
            )Accumulated
                deficit
            
            
            (152,322,000
            )
            
            (148,518,000
            )Total
                stockholders’ equity (deficit)
            
            
            8,795,000
            
            
            (2,912,000
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            13,278,000
            
            $
            6,176,000





See
      condensed notes to the consolidated financial statements.


-
          3 -


**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Operations**


**(Unaudited)**





**Three Months Ended January 31,****2008**
            
            **2007**Total
                Revenue –
                net
            
            $
            4,337,000
            
            $
            3,914,000Total
                cost of revenue
            
            
            2,840,000
            
            
            2,498
                000Gross
                profit
            
            
            1,497,000
            
            
            1,416,000Operating
                expensesSelling
                and marketing expenses
            
            
            846,000
            
            
            928,000General
                and administrative expenses
            
            
            2,838,000
            
            
            2,406,000Research
                and development
            
            
            857,000
            
            
            379,000Total
                operating expenses
            
            
            4,541,000
            
            
            3,713,000Loss
                from operations
            
            
            (3,044,000
            )
            
            (2,297,000
            )Interest
                and other (expense) income
            
            
            (977,000
            )
            
            18,000Adjustment
                to fair value of derivatives
            
            
            (311,000
            )
            
            —Loss
                before provision for income taxes
            
            
            (4,332,000
            )
            
            (2,279,000
            )Provision
                for income taxes
            
            
            —
            
            
            —Loss
                from continuing operations
            
            
            (4,332,000
            )
            
            (2,279,000
            )Loss
                from discontinued operations, net of tax benefits
            
            
            (63,000
            )
            
            (916,000
            )Net
                loss
            
            $
            (4,395,000
            )
            $
            (3,195,000
            )Basic
                and diluted loss per share:Basic
                and diluted loss per share from continuing operations
            
            $
            (0.11
            )
            $
            (0.08
            )Basic
                and diluted loss per share from discontinued operations
            
            
            —
            
            
            (0.03
            )Basic
                and diluted loss per share
            
            $
            (0.11
            )
            $
            (0.11
            )Weighted
                average number of shares outstanding
            
            
            38,300,957
            
            
            29,329,016





See
      condensed notes to the consolidated financial statements.


-
          4 -


**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Cash Flows**


**(Unaudited)**





**Three Months Ended January 31,****2008**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (4,395,000
            )
            $
            (3,195,000
            )Net
                loss from discontinued operations
            
            
            (63,000
            )
            
            (916,000
            )Net
                loss from continuing operations
            
            
            (4,332,000
            )
            
            (2,279,000
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            134,000
            
            
            148,000Amortization
                of warrants
            
            
            895,000
            
            
            79,000Change
                in fair value of warrant derivative liability
            
            
            311,000
            
            
            —Provision
                for doubtful accounts
            
            
            35,000
            
            
            176,000Provision
                for inventory reserves
            
            
            (1,000
            )
            
            —Share-based
                compensation expense
            
            
            168,000
            
            
            205,000Changes
                in assets and liabilities, net of discontinued operation:Accounts
                receivable
            
            
            62,000
            
            
            (932,000
            )Inventories
            
            
            37,000
            
            
            (239,000
            )Prepaid
                and other current assets
            
            
            73,000
            
            
            173,000Accounts
                payable
            
            
            (166,000
            )
            
            (403,000
            )Accrued
                expenses
            
            
            152,000
            
            
            79,000Net
                cash used in continuing operations
            
            
            (2,632,000
            )
            
            (2,993,000
            )Net
                cash used in discontinued operations
            
            
            (545,000
            )
            
            (2,005,000
            )Net
                cash used in operating activities
            
            
            (3,177,000
            )
            
            (4,998,000
            )Cash
                flows from investing activities:Proceeds
                from maturity of marketable securities
            
            
            —
            
            
            5,423,000Capital
                expenditures
            
            
            (118,000
            )
            
            (50,000
            )Net
                cash (used in) provided by investing activities
            
            
            (118,000
            )
            
            5,373,000Cash
                flow from financing activities:Net
                repayment of short-term borrowings
            
            
            (3,323,000
            )
            
            —Net
                proceeds from private placement of common stock and
                warrants
            
            
            14,019,000
            
            
            —Proceeds
                from stock purchase plan
            
            
            8,000
            
            
            56,000Purchases
                of treasury stock
            
            
            —
            
            
            (27,000
            )Net
                cash provided by finance activities
            
            
            10,704,000
            
            
            29,000Net
                increase in cash and cash equivalents
            
            
            7,409,000
            
            
            404,000Cash
                and cash equivalents at beginning of period
            
            
            609,000
            
            
            903,000Cash
                and cash equivalents at end of period
            
            $
            8,018,000
            
            $
            1,307,000




Supplemental
      disclosure:


Cash
      paid
      for interest was $108,000 for the three months ended January 31, 2008. No
      interest was paid for the three months ended January 31, 2007. Cash paid for
      income taxes was $4,000 and $10,000 for the three months ended January 31,
      2008
      and 2007, respectively.


In
      the
      three months ended January 31, 2008, the Company issued warrants with estimated
      fair values of $1,316,000 to a bank and other lenders as consideration for
      entering into and amending Loan Agreements. See Note 9 to the Financial
      Statements.


In
      the
      three months ended January 31, 2008 and 2007, there was no cash provided by
      or
      used in investing or financing activities from discontinued
      operation.





See
      condensed notes to the consolidated financial statements.


-
          5 -


**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Condensed
      Notes to Consolidated Financial Statements**


**(Unaudited)**





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





*Basis
      of Presentation*





The
      accompanying consolidated financial statements of the Company are unaudited,
      other than the consolidated balance sheet at October 31, 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.





*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 $4.4
      million in the three months ended January 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 $3.2 million in the three
      months ended January 31, 2008, and $12.3 million and $15.9 million for the
      years
      ended October 31, 2007 and 2006, respectively.  As of January 31, 2008, we
      had an accumulated deficit of $152.3 million; cash and cash equivalents of
      $8.0
      million, and no long-term debt.





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 anticipated available lines of credit, 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. 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 the Company’s line of
      credit (which expired on February 1, 2008) is not renewed, or 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.


-
          6 -




*Use
      of Estimates*





In
      the
      normal course of preparing the financial statements in conformity with generally
      accepted accounting principles in the United States of America, management
      is
      required to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and reported amounts of revenue and
      expenses during the reporting period.  Actual results could differ from
      those amounts.





*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.


-
          7 -





*Intangible
      Assets*





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





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





*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 – Derivative Liabilities and Note 9 - Borrowings.





*Revenue
      Recognition*





The
      Company sells products for radiation therapy treatment, primarily brachytherapy
      seeds used in the treatment of cancer and non-therapeutic sources used in
      calibration. 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 Statement* 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.
      During the three months ended January 31, 2008, 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.


-
          8 -


*Stock-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 650,500 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 $3.35 per share, which is equal to 159% of the fair
      market value of the Company’s common stock on the grant date. The 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 $3.35 on each day over any consecutive four month period beginning
      on any date after the date of grant and ending no later than the third
      anniversary of the date of grant. If the market condition is not satisfied
      by
      the third anniversary of the date of grant, the 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. Share-based compensation expense related to stock options
      and employee stock purchases was $168,000 and $178,000, including expense for
      the 2006 Premium Price Awards, for the three months ended January 31, 2008
      and
      2007, respectively, and 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:


-
          9 -


**Three months ended January 31,****2008**
              
              **2007**Net
                  loss from continuing operations
              
              $
              (4,332,000
              )
              $
              (2,279,000
              )Net
                  loss from discontinued operations
              
              
              (63,000
              )
              
              (916,000
              )Net
                  loss
              
              $
              (4,395,000
              )
              $
              (3,195,000
              )Weighted
                  average shares outstanding - basic
              
              
              38,300,957
              
              
              29,329,016Dilutive
                  effect of stock options
              
              
              —
              
              
              —Weighted
                  average shares outstanding -diluted
              
              
              38,300,957
              
              
              29,329,016Basic
                  and diluted loss per share from continuing operations
              
              $
              (0.11
              )
              $
              (0.08
              )Basic
                  and diluted loss per share from discontinued operations(1)
              
              $
              —
              
              $
              (0.03
              )Basic
                  and diluted loss per share
              
              $
              (0.11
              )
              $
              (0.11
              )




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





Stock
      options to purchase 4,723,659 common shares and 3,169,562 common shares, and
      warrants to purchase 8,888,303 common shares and 594,722 common shares for
      the
      three months ended January 31, 2008 and 2007, respectively, were not
      included in the computation of diluted loss per share for those years because
      their effect would have been anti-dilutive.





*Significant
      Concentrations*





As
      of
      January 31, 2008, there was one customer that made up more than 10% of revenues
      and four customers that individually comprised more than 5% of accounts
      receivable, and one supplier that made up more than 10% of purchases and three
      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 have not yet determined the impact that the adoption of SFAS 159
      will
      have on our financial position, results of operations or cash flows.


-
          10 -





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.




**NOTE
      2 –
      INCOME TAXES**





On
      November 1, 2007, the Company adopted Financial
      Accounting Standards Board (“FASB”) Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109”* ,
      (“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 $152,000 and $440,000, 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 $120,000 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 January 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 January 31, 2008 as a result
      of the limitation.


-
          11 -




Components
      of Deferred taxes and the valuation allowance, after giving effect to the
      statutory limit on the on the Federal and state NOL and Federal R&D Credits
      arising from the change in ownership are:


**January 31, 2008**
              
              **October 31,** **2007**Deferred
                  tax assets :Accrued
                  liabilities
              
              $
              465,000
              
              $
              465,000Accrued
                  decommissioning
              
              
              —
              
              
              —Allowance
                  for doubtful accounts
              
              
              192,000
              
              
              192,000Inventory
                  reserve and capitalized inventory
              
              
              163,000
              
              
              163,000Other
              
              
              10,000
              
              
              10,000Depreciation
                  and amortization
              
              
              1,004,000
              
              
              1,004,000Tax
                  credits
              
              
              —
              
              
              4,814,000Theseus
                  impairment
              
              
              1,850,000
              
              
              1,850,000Net
                  operating loss carryforwards
              
              
              4,066,000
              
              
              59,173,0007,750,000
              
              
              67,671,000Deferred
                  tax liabilities (1)
              
              
              —
              
              
              —Net
                  deferred tax assets
              
              
              7,750,000
              
              
              67,671,000Less:
                  valuation allowance
              
              
              (7,750,000
              )
              
              (67,671,000
              )$
              —
              
              $
              —
 
 (1)
        There
        were no deferred tax liabilities at the respective dates.





**NOTE
      3 –
      DISCONTINUED OPERATION**





*NOMOS*





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 three months ended January 31, 2008 and 2007.


-
          12 -





At
      January 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:





**January 31, 2008**
            
            **January 31, 2007**Net
                revenue (NOMOS)
            
            $
            —
            
            $
            3,646,000Loss
                from discontinued operations before income tax benefit
                (NOMOS)
            
            
            (63,000
            )
            
            (916,000
            )Income
                tax benefit (expense)
            
            
            —
            
            
            —Loss
                from discontinued operations
            
            
            (63,000
            )
            
            (916,000
            )Loss
                from discontinued operations, per share
            
            $
            —
            
            $
            (0.03
            )





**NOTE
      4—ACCOUNTS RECEIVABLE**





Accounts
      receivable consist of the following:




**January 31, 2008**
            
            **October 31, 2007**Accounts
                receivable - trade
            
            $
            2,417,000
            
            $
            2,475,000Less:
                allowance for doubtful accounts
            
            
            (218,000
            )
            
            (179,000
            )$
            2,199,000
            
            $
            2,296,000





The
      provision for doubtful accounts was $35,000 and $176,000 for the three months
      ended January 31, 2008 and 2007, respectively.





**NOTE
      5—INVENTORIES**





Inventories
                consist of the following:**January 31, 2008**
            
            **October 31, 2007**Raw
                materials
            
            $
            1,317,000
            
            $
            1,358,000Work
                in process
            
            
            150,000
            
            
            144,000Finished
                goods
            
            
            247,000
            
            
            250,000Reserve
                for obsolete inventory
            
            
            (205,000
            )
            
            (206,000
            )$
            1,509,000
            
            $
            1,546,000


-
          13 -


The
      provision for inventory reserves included in cost of sales was $1,000 for the
      three months ended January 31, 2008 and there was no provision recorded for
      the three months ended January 31, 2007.





**NOTE
      6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**





Equipment
                and leasehold improvements consist of the following:**January 31, 2008**
            
            **October 31, 2007**Furniture,
                fixtures and equipment
            
            $
            5,031,000
            
            $
            4,913,000Leasehold
                improvements
            
            
            2,194,000
            
            
            2,194,0007,225,000
            
            
            7,107,000Less:
                accumulated depreciation
            
            
            (6,343,000
            )
            
            (6,216,000
            )$
            882,000
            
            $
            891,000


Depreciation
      expense was $127,000 and $141,000 for the three months ended January 31,
      2008 and 2007, respectively.





**NOTE
      7—INTANGIBLE ASSETS**




**January 31, 2008**
            
            **October 31, 2007**Amortizable
                intangible assetsPurchased
                technology
            
            $
            98,000
            
            $
            98,000Existing
                customer relationships
            
            
            11,000
            
            
            11,000Trademark
            
            
            19,000
            
            
            19,000Patents
                and licenses
            
            
            158,000
            
            
            158,000286,000
            
            
            286,000Less:
                accumulated amortization
            
            
            (183,000
            )
            
            (176,000
            )$
            103,000
            
            $
            110,000





Amortization
      expense was $7,000 and $7,000, for the three months ended January 31, 2008
      and 2007, respectively.





The
      estimate of aggregate future amortization expense is as follows:




**For
                the Years Ended October 31,**2008
                (remaining nine months)
            
            $
            21,0002009
            
            
            28,0002010
            
            
            28,0002011
            
            
            26,000$
            103,000


-
          14 -





**NOTE
      8 –
      WARRANT DERIVATIVES**





Warrant
      derivative liabilities were none and $173,000 at January 31, 2008 and October
      31, 2007, respectively. The warrant 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 three months ended January 31, 2008
      are:





**Agility Capital,**
              **LLC**Balance,
                October 31, 2007
            
            $
            173,000Additions:Fair
                Value –
                Warrants issued for Amendment II of the Loan Agreement
            
            
            161,000Fair
                Value Adjustments during the quarter
            
            
            311,000645,000Less:
                Fair value of warrants transferred to permanent equity
            
            
            (645,000
            )Balance,
                January 31, 2008
            
            $
            —





The
      fair
      value of the warrant issued in connection with Amendment II of the Loan
      Agreement 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 quarter have been recorded as Adjustments to Fair Value
      of Derivatives in the Statement of Operations for the three months ended January
      31, 2008. The fair value of the warrants transferred to permanent equity are
      included in Additional Paid-in Capital on the Balance Sheet at January 31,
      2008.





**NOTE
      9 –
      BORROWINGS**





There
      were no borrowings outstanding at January 31, 2008, and borrowings were
      $3,241,000 at October 31, 2007, consisting primarily of lines of credit with
      a
      Bank, and subordinated short-term notes with private lenders. Borrowing
      activities for the three months ended January 31, 2008 are:




-
          15 -




**October
                31,**
            
            
            
            
            
            **January
                31,****2007**
            
            **Borrowings**
            
            **Repayments**
            
            **2008**Silicon
                Valley Bank -Line
                of credit
            
            $
            1,573,000
            
            $
            438,000
            
            $
            (2,011,000
            )
            $
            —Bridge
                loan sub-limit
            
            
            750,000
            
            
            4,189,000
            
            
            (4,939,000
            )
            
            —Subordinated
                short-term notes -Agility
                Capital, LLC
            
            
            1,000,000
            
            
            —
            
            
            (1,000,000
            )
            
            —John
                Friede Note
            
            
            —
            
            
            250,000
            
            
            (250,000
            )
            
            —Three
                Arch Partners, et al
            
            
            —
            
            
            1,000,000
            
            
            (1,000,000
            )
            
            —Total
                borrowings
            
            
            3,323,000
            
            
            5,877,000
            
            
            (9,200,000
            )
            
            —Less
                Unamortized loan discount fees.
            
            
            (82,000
            )
            
            (914,000
            )
            
            996,000
            
            
            —$
            3,241,000
            
            $
            4,963,000
            
            $
            (8,204,000
            )
            $
            —




Interest
      expense was $1,003,000, including $101,000 loan discount fees paid in cash
      and
      $895,000 fair value of warrants amortized in connection with lending activities,
      for the three months ended January 31, 2008. Interest expense was $79,000 for
      the three months ended January 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 $5,000,000. 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 will pay 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
      is secured by all of the assets of the Company and is subject to customary
      financial and other covenants, including reporting requirements.





On
      January 12, 2006, the Company entered into a First Amendment to Loan and
      Security Agreement (the “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
      39,683 shares of the Company’s common stock at an exercise price of $1.89 per
      share.  The warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $51,000 using the Black-Scholes model incorporating the following
      assumptions:





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





The
      value
      of the warrant has been fully amortized over the term of the line of credit
      at
      $5,100 per month, and is included in Interest and Other Expense on the Income
      Statement for the three months ended January 31, 2007.




-
          16 -




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 million to $4 million, and
      increased the minimum tangible net worth that must be maintained by the Company
      from $1.5 million to $5 million. Borrowings under the line of credit 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
      $2,000 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 $1,500,000 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 million to
      $2
      million. The maturity date of the Bridge Loan Sub-limit shall be the earlier
      of
      October 3, 2007 or the date the Company closes a private investment public
      equity transaction. Concurrent with the Third Amendment, the Company issued
      the
      Bank a warrant for 300,000 shares of the Company’s common stock at an exercise
      price of $0.98, 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
      $175,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $
            0.98Dividend
                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 three
      months ended January 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 $750,000 with Agility Capital LLC. In
      connection with the Fourth Amendment, the Bank consented to the NOMOS
      Transaction 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 $750,000
      to up to $1,000,000.





-
          17 -




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 $500,000 in unsecured subordinated debt to Mr. John Friede, or
      an
      entity owned or controlled by Mr. Friede. Mr. Friede is 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 90,909 shares
      of the Company’s common stock, at a warrant price of $0.55 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
      $31,000 using the Black-Scholes model incorporating the following
      assumptions:




Stock
                price
            
            $
            0.55Dividend
                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 three
      months ended January 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 $250,000. In connection with the Eighth Amendment, the Company granted
      a warrant to the Bank to purchase 192,308 shares of the Company’s common stock
      as determined by dividing the warrant price of $50,000 by the $0.26 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
      $33,000 using the Black-Scholes model incorporating the following
      assumptions:


-
          18 -





Stock
                price
            
            $
            0.26Dividend
                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 three
      months ended January 31, 2008.





The
      Company paid the $1,275,000 and $755,000 balance of the Line of Credit and
      the
      Bridge Sub-Limit, including accrued interest on January 23, 2008. The Line
      of
      Credit and the Bridge Sub-Limit agreements were terminated in accordance with
      their terms upon payment of the outstanding balances.





***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 $4,000,000, which supplemented an existing line of credit provided by Silicon
      Valley 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
      Silicon Valley 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 395,000 shares
      of
      the Company’s common stock at an exercise price of $1.89 per share. As a result
      of the private placement of the Company’s common stock completed on June 7,
      2006, 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 395,000 shares to 555,039 shares, and the
      exercise price was decreased from $1.89 per share to $1.35 per share. The
      warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $475,000 using the Black-Scholes model incorporating the following
      assumptions:





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





The
      value
      of the warrant was deferred and amortized over the life of the loan at $26,500
      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.


-
          19 -





*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
      provides for advances of up to $750,000 subject to the achievement of certain
      milestones. Amounts owing under the Agility Loan Agreement are secured by all
      of
      the Company's assets, and are subordinated to amounts owing under the line
      of
      credit with Silicon Valley Bank. The Agility Loan Agreement does not contain
      financial covenants; however, the Company is subject to other customary
      covenants, including reporting requirements, and events of default. The Company
      is 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 $20,000
      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 $10,000 per month, and is included in Interest and Other
      Expense on the Income Statement. The Company further covered $15,000 of
      Agility’s legal fees in connection with the Agility Loan Agreement, which are
      recorded as general and administrative expenses.





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 $1,000,000. Amounts advanced under the Agility Loan Agreement
      are subordinated to the existing line of credit provided by Silicon Valley
      Bank.
      In addition, within the First Amendment, Agility consented to the Company
      incurring up to $500,000 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 $10,000 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 $20,000, 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 $250,000.
      The
      loan modification and extension fee has been amortized over the term of the
      loan
      and is included in Interest and Other Expense at January 31, 2008. The Company
      has repaid the balance on the Agility Loan Agreement, plus accrued interest
      as
      of January 31, 2008.





In
      connection with the Agility Loan Agreement, on September 21, 2007, the Company
      granted Agility a $262,500 warrant to purchase 345,395 shares of the Company’s
      common stock at an exercise price of $0.76 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 on the date of grant
      to
      be $149,000 using the Black-Scholes model incorporating the following
      assumptions:




Stock
                price
            
            $
            0.65Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            69
            %Risk-free
                interest rate
            
            
            4.4
            %Expected
                life
            
            
            7
                years


-
            20 -


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 $362,500 warrant to purchase 476,974 shares of the
      Company’s common stock at an exercise price of $0.76 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 on the date of grant
      to
      be $253,000 using the Black-Scholes model incorporating the following
      assumptions:




Stock
                price
            
            $
            0.76Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            71
            %Risk-free
                interest rate
            
            
            4.3
            %Expected
                life
            
            
            7
                years





The
      warrant price per share and the number of shares to be issued under the terms
      of
      the Revised Warrant will adjust to the price at which the Company next issues
      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 falls below a certain price point, the
      Company would not have 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 $0.246.
      Pursuant to the terms of the Revised Warrant, the Company increased to 1,473,577
      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 $394,000 and
      $173,000 at December 12, 2007 and October 31, 2007, respectively, using the
      Black-Scholes model incorporating the following assumptions:




**December 12, 2007**
            
            **October 31, 2007**Stock
                price
            
            $
            0.35
            
            $
            0.56Dividend
                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 January 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 January 31, 2007. The $394,000 fair value of the Revised Warrant
      at
      December 12, 2007 has been reclassified to permanent equity as Additional
      Paid-in Capital as of January 31, 2008 in accordance with the guidance under
      EITF 00-19.




-
          21 -




In
      connection with the Second Amendment, the Company granted Agility a $231,250
      warrant to purchase 420,455 shares of the Company’s common stock at an exercise
      price of $0.55 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 warrant price per share and the number of shares to be issued
      under
      the terms of the Agility Second Warrant will adjust to the price at which the
      Company next issues 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 $0.246. Pursuant
      to
      the terms of the Agility Second Warrant, the Company increased to 940,041 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 $251,000
      and $161,000 at December 12, 2007 and November 20, 2007, respectively, using
      the
      Black-Scholes model incorporating the following assumptions:




**December 12, 2007**
            
            **November 20, 2007**Stock
                price
            
            $
            0.35
            
            $
            0.55Dividend
                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 $161,000 fair value of the Agility Second Warrant was
      classified as debt discount and has been fully amortized to interest and other
      expense as of January 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 January 31, 2008. The $251,000 fair value
      of
      the Agility Second Warrant at December 12, 2007 has been reclassified to
      permanent equity as Additional Paid-in Capital as of January 31, 2008 in
      accordance with the guidance under EITF 00-19.





In
      connection with the Third Amendment, the Company granted Agility a $200,000
      warrant (the “Agility Third Warrant”) to purchase 813,008 shares of the
      Company’s common stock at an exercise price of $0.246 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
      $158,000 using the Black-Scholes model incorporating the following
      assumptions:




Stock
                price
            
            $
            0.26Dividend
                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 three months ended January 31, 2008. The
      $158,000 fair value of the Agility Third Warrant at the grant date has been
      classified as permanent equity in Additional Paid-in Capital as of January
      31,
      2008 in accordance with the guidance under EITF 00-19.





In
      addition, under the terms of the collective outstanding warrants granted to
      Agility, the Company has until July 31, 2008 (the “Filing Date”), to file a
      registration statement on Form S-3 or applicable form covering the resale of
      the
      warrant shares on a registration statement (the “Registration Statement”) with
      the Securities Exchange Commission (the “SEC”). The warrant shares, or the
      common stock into which the warrant shares are convertible (the “Shares”), shall
      be “Registrable Securities”, and the holder shall have the rights of a “Holder”
under such investor rights agreement or registration rights agreement as the
      Company may enter into from time to time. If the Registration Statement (i)
      has
      not been filed with the SEC by the Filing Date, (ii) has not been declared
      effective by the SEC within 45 days thereafter, or (iii) after the Registration
      Statement is declared effective by the SEC, is suspended by Company or ceases
      to
      remain continuously effective as to all Shares for which it is required to
      be
      effective (a “Registration Default”), for any 30-day period (a “Penalty Period”)
      during which the Registration Default remains uncured, the holder may acquire
      an
      additional number of Shares equal to 50,000 shares for each such penalty period,
      but not more that 600,000 shares in the aggregate. All expenses incurred in
      connection with any registration, qualification, exemption or compliance
      pursuant to these provisions shall be borne by Company.


-
          22 -





*John
      Friede Note*





On
      October 30, 2007, the Company entered into a Loan Agreement (the “Friede Loan
      Agreement”) with Friede, a stockholder and former director of the Company.
      Subject to the terms of the Friede Loan Agreement, Friede agreed to loan the
      Company $500,000 in two installments of $250,000 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 $250,000 installment. The Company
      and Friede amended the Friede Loan Agreement on November 20, 2007, prior to
      funding of the second $250,000 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 $250,000 from $500,000. 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 $200,000 Warrant (the “Friede Warrant”) to purchase 307,692 shares of
      the Company’s common stock at $0.65 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 $119,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $
            0.57Dividend
                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
      three months ended January 31, 2008. The
      $119,000 fair value of the Friede Warrant at the grant date has been classified
      as permanent equity in Additional Paid-in Capital as of January 31, 2008 in
      accordance with the guidance under EITF 00-19.





*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
      pending private investment public equity financing transaction on January 18,
      2008. The Company paid $20,000 loan fee in connection with the Three Arch Loan
      Agreement, which has been amortized to Interest and Other Expenses as January
      31, 2008. The balance of the Three Arch Loan Agreement, plus accrued interest,
      were paid in full as of January 31, 2008.


-
          23 -





In
      connection with the Three Arch Loan Agreement, the Company granted the Lenders
      warrants (the “Three Arch Warrants”) to purchase, in the aggregate, 1,025,639
      shares of the Company’s common stock at a purchase price of $0.39 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 $329,000 using the Black-Scholes model incorporating the following
      assumptions:




Stock
                price
            
            $
            0.44Dividend
                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 three months ended January 31, 2008. The
      $329,000 fair value of the Three Arch Warrants at the grant date has been
      classified as permanent equity in Additional Paid-in Capital as of January
      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 three months ended January 31,
      2008:





**Statement
                of Operations****Warrant
                coverage for:**
            
            **Number
                of**
              **Warrant**
              **Shares**
            
            **Interest
                Expense**
            
            **Fair
                Value**
              **Expense**Carry
                forward from October 31, 2007:Deferred
                loan discount fees amortized in 2008
            
            
            —
            
            $
            64,000
            
            $
            —Issued
                in first quarter of 2008:Silicon
                Valley Bank Line of Credit:Amendment
                7
            
            
            90,909
            
            
            31,000
            
            
            —Amendment
                8
            
            
            192,308
            
            
            33,000
            
            
            —John
                Friede Note
            
            
            307,692
            
            
            119,000
            
            
            —Agility
                Capital, LLC Note:Fair
                value change – 2007 warrants
            
            
            1,473,577
            
            
            —
            
            
            221,000Amendment
                2
            
            
            420,455
            
            
            161,000
            
            
            90,000Amendment
                3
            
            
            813,008
            
            
            158,000
            
            
            —Three
                Arch Partners, et al Note
            
            
            1,025,639
            
            
            329,000
            
            
            —4,323,588
            
            $
            895,000
            
            $
            311,000





-
          24 -




**NOTE
      10—STOCKHOLDERS' EQUITY**





***Preferred
      Stock***





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




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





*2006
      PIPE*





Pursuant
      to the terms of the Securities Purchase Agreements dated June 6, 2006 (the
“2006
      Securities Purchase Agreements”), the Company completed a private placement (the
“2006 Private Placement”) of 12,291,934
      shares of the Company’s common stock on June 7, 2006 at a purchase price of
      $1.95 per share as well as warrants to purchase an additional 6,145,967 shares
      of the Company’s common stock at an exercise price of $2.08 per share (the “2006
      Warrants”) for an aggregate consideration of approximately $24.0 million (before
      cash commissions and expenses of approximately $2.0 million). The 2006 Warrants
      are exercisable beginning 180 days after the date of closing until 7 years
      after
      the date of closing. The values of the 2006 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 2006 Warrants were evaluated
      under SFAS 133 and EITF 00-19, and the Company determined that the 2006 Warrants
      have been correctly classified as equity.





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





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


-
          25 -





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





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





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





*2007
      PIPE*





Pursuant
      to the terms of the Securities Purchase Agreements dated December 12, 2007
      (the
“2007 Securities Purchase Agreements”), the Company completed a private
      placement (the “2007 Private Placement”) of 63,008,140
      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 $0.246 per share as well as warrants to purchase an additional
      3,150,407 shares of the Company’s common stock (the “2007 Warrants”) at an
      exercise price of $0.246 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
            
            
            40,650,420
            
            
            2,032,521SF
                Capital
            
            
            10,162,600
            
            
            508,130CHL
            
            
            12,195,120
            
            
            609,756


-
            26 -




Prior
      to
      the closing of the transaction, Three Arch Partners owned 5,121,638 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
      2007
      Warrants are exercisable beginning 180 days after the date of closing until
      7
      years after the date of closing. The values of the 2007 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 2007 Warrants
      were evaluated under SFAS 133 and EITF 00-19, and the Company determined that
      the 2007 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 stockholder approval of a majority of stockholders on January 17,
      2008
      of the 2007 Private Placement and to 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 pursuant to a Consent Solicitation to its
      Stockholders on December 31, 2007





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. Under the 2007 Securities Purchase Agreement, the Company
      has agreed to use its reasonable best efforts to prepare and file a registration
      statement on Form S-3 or other applicable form available to the Company to
      register the resale of the Registrable Securities. If the Company fails to
      file
      a registration statement or such registration statement is not declared
      effective between the time it files its next Annual Report on Form 10-K and
      the
      180th date after the closing of the 2007 Private Placement, or, if additional
      registration statements are required to be filed to register such shares because
      of limitations imposed by the staff of the SEC on the number of shares that
      may
      be registered on behalf of selling stockholders on Form S-3, within 45 days
      of
      filing each such additional registration statement (or 90 days if such filing
      is
      reviewed by the SEC), the Company will be liable for certain specified
      liquidated damages as set forth in the 2007 Securities Purchase Agreement.
      The
      Company has agreed to maintain the effectiveness of the registration statement
      until the earliest of (i) the second anniversary of the closing of the 2007
      Private Placement, (ii) such time as all Registrable Securities have been
      sold pursuant to the registration statement or (iii) the date on which all
      of the Registrable Securities may be resold by each of the Investors without
      registration pursuant to Rule 144(k). The Company will pay all expenses incurred
      in connection with the registration, other than fees and expenses, if any,
      of
      counsel or other advisors to the Investors or underwriting discounts, brokerage
      fees and commissions incurred by the Investors, if any, in connection with
      an
      underwritten offering of the Registrable Securities .





The
      2007
      Securities Purchase Agreement contains certain customary closing conditions,
      as
      well as the requirement that the Company decrease the number of members of
      the
      Board from nine members to seven members at or by the time of its next annual
      meeting of stockholders. 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 5,000,000 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.
      Under
      the 2007 Securities Purchase Agreement, the Company has agreed to add two new
      independent members to the Board at or before the Company’s next annual meeting.





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.


-
          27 -





The
      sale
      of the Shares, the Warrants and the Warrant Shares have not been registered
      under the Securities Act of 1933, as amended (the “Securities Act”), or any
      state securities laws. The Company is relying upon the exemptions from
      registration provided by Section 4(2) of the Securities Act and Regulation
      D
      promulgated under that section. Each Investor has represented that it is an
      accredited investor, as such term is defined in Regulation D under the
      Securities Act, and that it was acquiring the Shares and Warrants for its own
      account and not with a view to or for sale in connection with any distribution
      thereof, and appropriate legends will be affixed to the Shares and Warrants.




*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 January 31, 2008, 1,592,293 options underlying 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
      1,700,000 shares, plus any shares from the 1996 Plan that are subsequently
      terminated, expire unexercised or forfeited, to employees of the Company through
      incentive stock options, non-qualified options, stock appreciation rights,
      restricted stock and restricted stock units. Since its inception, 1,516,625
      shares have been transferred into the 2006 Plan from the 1996 Plan. The exercise
      price of an option is equal to the fair market value of the Company’s stock on
      the date of the grant. For the three months ended January 31, 2008, 600,000
      stock option awards were granted under the 2006 Plan, and 1,502,155 shares
      were
      available for grant at January 31, 2008.





In
      March 2003, the Company's stockholders approved the 2003 Non-Employee
      Directors' Equity Compensation Plan ("Directors' Plan"). The Directors' Plan
      supersedes prior provisions for grants of stock options to non-employee
      directors contained in the 1996 Plan. Under the Directors' Plan, the Company
      may
      issue up to 500,000 shares to non-employee directors of the Company through
      non-qualified options or restricted stock. The exercise price of an option
      is
      equal to the fair market value of the Company's stock on the date of grant.
      Options and restricted stock vest equally over a three-year period. The options
      expire ten years from the date of grant. In the three months ended January
      31,
      2008, no stock options shares were granted to non-employee directors under
      the
      Directors’ Plan. At January 31, 2008, there were 15,000 shares available for
      grant under the Directors’ Plan.


-
          28 -





On
      April
      23, 2007, the Company granted stock options with respect to 1,800,000 shares
      of
      its common stock in connection with the employment by the Company of its new
      CEO, John B. Rush. Options with respect to 600,000 shares of the Company’s
      common stock were issued under the 2006 Plan. Options with respect to the
      remaining 1,200,000 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 $1.16, 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.





At
      January 31, 2008, a total of 6,508,918 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
            
            
            1,732,441
            
            
            2,414,109
            
            $
            0.03
                - $24.54Granted
            
            
            (1,453,000
            )
            
            1,453,000
            
            $
            1.92
                - $ 3.35Forfeited
                and expired
            
            
            (194,441
            )
            
            (426,618
            )
            $
            1.11
                - $16.75Exercised
            
            
            —
            
            
            (2,186
            )
            $
            1.11
                - $ 1.12Additional
                shares reserved
            
            
            1,700,000
            
            
            —Balance
                at October 31, 2006
            
            
            1,785,000
            
            
            3,438,305
            
            $
            0.03
                - $24.54Granted
            
            
            (2,464,470
            )
            
            2,464,470
            
            $
            0.93
                - $ 1.23Forfeited
                and expired
            
            
            1,481,275
            
            
            (1,395,662
            )
            $
            0.70
                - $24.24Exercised
            
            
            —
            
            
            —
            
            
            —Additional
                shares reserved
            
            
            1,200,000
            
            
            —
            
            
            —Balance
                at October 31, 2007
            
            
            2,001,805
            
            
            4,507,113
            
            $
            0.03
                - $23.50Granted
            
            
            (600,000
            )
            
            600,000
            
            $
            0.27
                - $ 0.33Forfeited
                and expired
            
            
            115,350
            
            
            (115,350
            )
            $
            2.23
                - $16.75Exercised
            
            
            —
            
            
            —
            
            
            —Balance
                at January 31, 2008
            
            
            1,517,155
            
            
            4,991,763
            
            $
            0.03
                - $23.50








There
      were 1,675,421, 1,669,521 and 1,878,663 options exercisable with weighted
      average exercise prices of $6.76, $6.94 and $8.57 at January 31, 2008, October
      31, 2007 and 2006, respectively.





-
          29 -




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




**Employee
                Options Outstanding**
            
            **Employee
                Options Exercisable****Range
                of**
              **Exercise
                Prices**
            
            **Shares**
            
            **Weighted
                Avg.**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**$0.03
                - $0.94
            
            
            1,121,470
            
            
            9.74
            
            $
            0.59
            
            
            7,000
            
            $
            0.03$0.95
                - $1.16
            
            
            1,800,000
            
            
            9.22
            
            
            1.16
            
            
            337,500
            
            
            1.16$1.17
                - $3.97
            
            
            947,250
            
            
            6.76
            
            
            2.56
            
            
            220,378
            
            
            2.66$3.94
                - $7.60
            
            
            581,293
            
            
            3.94
            
            
            7.07
            
            
            568,793
            
            
            7.06$7.61
                - $23.50
            
            
            541,750
            
            
            3.57
            
            
            11.69
            
            
            541,750
            
            
            11.694,991,763
            
            
            7.64
            
            $
            3.13
            
            
            1,675,421
            
            $
            6.76




The
      average fair value for accounting purposes of options granted was $0.17, $0.63
      and $1.09 for the three months ended January 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 January 31, 2008 and October 31, 2007:


**Number
                  of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Weighted Avg.**
                **Remaining**
                **Contractual**
                **Life
                  (Years)**
              
              **Intrinsic Value***As
                  of October 31, 2007:*Employee
                  Options Outstanding
              
              
              4,507,113
              
              $
              3.52
              
              
              7.54
              
              $
              3,710Employee
                  Options Expected to Vest
              
              
              2,837,592
              
              $
              0.56
              
              
              2.82
              
              $
              —Employee
                  Options Exercisable
              
              
              1,669,521
              
              $
              6.94
              
              
              5.26
              
              $
              3,710*As
                  of January 31, 2008*Employee
                  Options Outstanding
              
              
              4,991,763
              
              $
              3.13
              
              
              7.64
              
              $
              32,240Employee
                  Options Expected to Vest
              
              
              3,316,342
              
              $
              1.66
              
              
              4.12
              
              $
              30,000Employee
                  Options Exercisable
              
              
              1,675,421
              
              $
              6.76
              
              
              5.26
              
              $
              2,240





*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:




-
          30 -




**Three months**
              **ended January 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





*Anti-Dilution
      Rights*





Option
      grants to certain executive officers carry an anti-dilution provision which
      has
      become effective as a result of the 2007 Private Placement. Options underlying
      approximately 4,095,528 will be granted to four executives upon approval by
      stockholders at the annual meeting to be held on April 29, 2008. The options
      will be granted at a $0.25 exercise price, the price of the Company’s common
      stock on the date the 2007 Private Placement was completed. The options will
      vest at varying rates over four 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 $0.001 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.





*Employee
      Stock Purchase Plan*





In
      March
      2000, the Board of Directors authorized an Employee Stock Purchase Plan ("the
      ESPP") under which 300,000 shares of the Company's common stock are reserved
      for
      issuance. Eligible employees may authorize payroll deductions of up to 15%
      of
      their salary to purchase shares of the Company's common stock at a discount
      of
      up to 15% of the market value at certain plan-defined dates. In the three months
      ended January 31, 2008 and the years ended October 31, 2007 and 2006, the shares
      issued under the ESPP were 32,560, 154,082 shares and 96,489 shares,
      respectively. At January 31, 2008 and October 31, 2007, 187,197 shares and
      219,757 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
      January 31, 2008 and October 31, 2007, a cumulative total of 116,995 shares
      had been repurchased by the Company at a cost of $227,000, respectively, and
      are
      reflected as Treasury Stock on the Balance Sheet at the respective
      dates.




-
          31 -




**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). 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 has 180 calendar days, or until April 2, 2008, to regain compliance.
      If,
      at anytime before April 2, 2008, 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,
      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 April 2, 2008, the Company’s common stock will be delisted, a decision
      which the Company may appeal to a Nasdaq Listing Qualifications Panel.





On
      December 11, 2007, the Company received formal notice that the 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.





On
      February 5, 2008, the Company received notification from NASDAQ that it had
      fully complied with the requirements with respect to the Stockholders’ Equity
      Requirement. The Company remains subject to delisting pursuant to the minimum
      $1.00 share price requirement for continued inclusion under Marketplace Rule
      4450(a)(5). (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 November 2008, 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.




-
          32 -




Future
      minimum lease payments under all operating leases are $305,000 through November
      2008.





*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.




A
      license
      agreement with the University of South Florida Research Foundation, Inc.,
      covering certain patent processes was terminated on November 9, 2007 by mutual
      consent of both parties.





*Employment
      Agreements*





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





*Litigation*





In
      November 2005, the Company was served with a complaint filed in U.S. District
      Court in Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s
      six count complaint alleges breach of a confidentiality agreement, fraud, patent
      infringement, wrongful interference with contractual relations, violation of
      the
      Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
      Practices Act. WWMT alleges that the Company fraudulently obtained WWMT’s
      confidential information during negotiations to purchase WWMT in 2004 and that
      once the Company acquired that information, it 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.  The Company denies liability and intends to vigorously
      defend itself in this litigation as it progresses. No trial date has
      yet been set.




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          33 -




In
      October 2007, 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 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.





**NOTE
      12—SUBSEQUENT EVENTS**





*NASDAQ
      Delisting*





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 and will continue to trade
      under the symbol “NASI.”





The
      Company was also notified by Nasdaq that it continues to remain subject to
      delisting as the bid price of its shares of common stock had closed at less
      than
      $1.00 per share over the previous 30 consecutive business days, and, as a
      result, it did not comply with Marketplace Rule 4450(a)(5). Therefore, in
      accordance with Marketplace Rule 4450(e)(2), the Company was provided 180
      calendar days, or until April 2, 2008 to regain compliance. Upon transfer to
      The
      Nasdaq Capital Market, the Company will be afforded the remainder of this
      compliance period. The Nasdaq Staff also noted that if compliance with the
      $1.00
      bid price requirement cannot be demonstrated by April 2, 2008, the Company
      may
      be afforded an additional compliance period, in accordance with Marketplace
      Rule
      4320(e)(2)(E)(ii).





**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.*




-
          34 -




**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 ClearPathTM, our unique
      multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation (“APBI”). Our ClearPath systems are placed through a single incision
      and are designed to conform to the resection cavity, allowing physicians to
      deliver a more conformal therapeutic radiation dose distribution following
      lumpectomy compared to other methods of APBI. The placement of the radiation
      source directly into the post-lumpectomy site reduces the treatment time to
      approximately 5 days compared to 30-35 days for whole breast radiation therapy,
      and reduces the risks associated with external beam radiation treatment.
      ClearPath is designed to accommodate either high-dose, ClearPath-HDRTM, or
      low-dose rate, ClearPath-CRTM, treatment methods. We have received 510(k)
      approval from the United States Food and Drug Administration for a low-dose
      rate, or continuous release treatment utilizing our Prospera® brachytherapy
      seeds, and for a high-dose rate treatment. 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 $500,000. 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.




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.





**Results
      of Operations**





**Three
      Months Ended January 31, 2008 Compared to Three Months Ended January 31,
      2007**





**Total
      Revenue**





**Three Months Ended January 31,****2008**
            
            **2007**
            
            **% Change****($
                millions)**Radiation
                Sources
            
            $
            4.3
            
            $
            3.9
            
            
            10.8
            %




Total
      revenue increased 11.0% to $4.3 million for the three months ended January
      31,
      2008 from $3.9 million for the three months ended January 31, 2007. The increase
      in revenue is due to a $0.8 million, or 30%, increase in sales of our
      brachytherapy seeds and accessories, and a $0.4 million, or 30%, decrease in
      sales of our non-therapeutic products.




-
          35 -




**Gross
      profit**





**Three Months Ended January 31,****2008**
            
            **2007**
            
            **% Change****($
                millions)**Radiation
                Sources
            
            $
            1.5
            
            $
            1.4
            
            
            5.7
            %As
                a percent of total revenue
            
            
            34.5
            %
            
            36.2
            %
            
            (1.7
            )%





Gross
      profit increased $0.1 million, or 5.7%, to $1.5 million for the three months
      ended January 31, 2008 from $1.4 million for the three months ended
      January 31, 2007. The increase in our gross profit is primarily due to
      increased product sales of our brachytherapy seeds and accessories, partially
      offset by a decrease in sales of our non-therapeutic products.





Gross
      profit as a percent of sales decreased to 34.5% in the three months ended
      January 31, 2008 from 36.2% in the three months ended January 31, 2007,
      primarily due to a 16% point decrease in gross profit as a percent of sales
      of
      our non-therapeutic products, partially offset by a 7% point improvement in
      gross profit as a percent of sales of our brachytherapy seeds.





**Selling
      and marketing expenses**





**Three Months Ended January 31,****2008**
            
            **2007**
            
            **% Change****($
                millions)**Selling
                and marketing expenses
            
            $
            0.8
            
            $
            0.9
            
            
            (8.8)
            %As
                a percent of total revenue
            
            
            19.5
            %
            
            23.7
            %





Selling
      and marketing expenses, comprised primarily of salaries, commissions, and
      marketing costs, decreased $0.1 million, or 8.8%, to $0.8 million for the three
      months ended January 31, 2008, from $0.9 million for the three months ended
      January 31, 2007. The decrease in selling and marketing expenses is primarily
      attributed to the timing of trade show expenses.





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





**Three Months Ended January 31,****2008**
            
            **2007**
            
            **% Change****($
                millions)**General
                and administrative expenses
            
            $
            2.8
            
            $
            2.4
            
            
            18.0
            %As
                a percent of total revenue
            
            
            65.4
            %
            
            61.5
            %




-
          36 -




G&A
      increased $0.4 million, or 18.0%, to $2.8 million for the three months ended
      January 31, 2008, from $2.4 million for the three months ended
      January 31, 2007. The increase in G&A is primarily attributed to a $0.3
      million increase in legal fees related to ClearPathTM patent costs, $0.2 million
      increase in other legal fees, $0.2 million increase in consulting fees and
      a
      $0.1 million increase in personnel costs, partially offset by a $0.4 million
      decrease in accounting related fees.




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





**Three Months Ended January 31,****2008**
            
            **2007**
            
            **% Change****($
                millions)**Research
                and development expenses
            
            $
            0.9
            
            $
            0.4
            
            
            126.1
            %As
                a percent of total revenue
            
            
            19.8
            %
            
            9.7
            %





R&D
      increased $0.5 million or 126.0%, to $0.9 million for the three months ended
      January 31, 2008, from $0.4 million for the three months ended
      January 31, 2007. The increase in R&D spending is primarily due to the
      timing of project spending on ClearPath.





**Interest
      and other income, net —** increased
      by $1.0 million to $1.0 million due to an increase in our borrowing activities
      in the first quarter of 2008 and the last half of 2007. Interest expense for
      the
      three months ended January 31, 2008 includes $0.9 million amortization of
      warrants issued as debt discount in connection with the debt and $0.1 million
      of
      cash paid for loan origination and interest on debt.





**Adjustment
      for fair value of derivatives —** increased by $0.3 million to $0.3 million 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, public offerings and from private placements of our common
      stock.  We expect that we will be able to satisfy our longer term
      liquidity needs for research and development, capital expenditures, and
      acquisitions through a combination of cash generated by operations, sales of
      our
      common stock and /or securities convertible to debt, and our anticipated and
      available lines of credit.





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business. However, the Company has continued to incur
      substantial net losses and used substantial amounts of cash. As of January
      31,
      2008, the Company has an accumulated deficit of $152.3 million; cash, cash
      equivalents and marketable securities of $8.0 million and no long-term
      debt.





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




-
          37 -




At
      January 31, 2008, we had cash, and cash equivalents, and investments in
      marketable securities aggregating approximately $8.0 million, an increase of
      approximately $7.4 million from $0.6 million at October 31, 2007. The increase
      was primarily attributed to $14.0 million net proceeds from the sale of our
      common stock in January 2008, partially offset by $3.3 million in payment of
      debt, $3.2 million used in operating activities and $0.1 million used for
      capital expenditures.




Cash
      flows used in operating activities decreased $1.8 million, or 36%, to $3.2
      million for the three months ended January 31, 2008 from $5.0 million for the
      three months ended January 31, 2007, primarily due to a $1.5 million decrease
      in
      cash used in the discontinued NOMOS operations, $1.0 million improved
      collections of accounts receivable, and $0.3 million reduced inventories,
      partially offset by an increase in the net loss from operations, net of non-cash
      expenses, of $1.1 million.





Cash
      flows (used in) provided by investing activities decreased $5.5 million to
      $(0.1) million for the three months ended January 31, 2008, from $5.4 million
      for the three months ended January 31, 2007. The decrease reflects the
      additional draw down of our balance of marketable securities to fund operations
      in 2007, and $0.1 million of capital expenditures in 2008.





Cash
      provided by financing activities increased $10.7 million to $10.7 million for
      the three months ended January 31, 2008, from the three months ended January
      31,
      2007. The increase is due to $14.0 million in net proceeds from the private
      placement of our common stock in 2008 and the payment of $3.3 million in
      debt.





We
      have
      $0.3 million in operating lease obligations for facilities and equipment under
      non-cancelable operating lease agreements. We have also entered into purchase
      commitments to suppliers under blanket purchase orders in the amount of $0.1
      million.





**Critical
      Accounting Policies**





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make judgments, assumptions and estimates that affect
      the
      amounts reported in the Consolidated Financial Statements included in the
      Company’s Form 10-K for the year ended October 31, 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.




-
          38 -




*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.





*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.




-
          39 -





*Revenue
      Recognition*





We
      sell
      products for radiation therapy treatment, primarily brachytherapy seeds used
      in
      the treatment of cancer and non-therapeutic sources used in calibration. 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.
      During the three months ended January 31, 2008, 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.





*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).





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 under the
      straight-line method based on historic and estimated future forfeitures. On
      March 16, 2006, we granted 650,500 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 $3.35 per share, which is equal to 159% of the fair market value of our
      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 our common stock is equal to or greater than $3.35 on each day over
      any
      consecutive four month period beginning on any date after the date of grant
      and
      ending no later than the third anniversary of the date of grant. If the market
      condition is not satisfied by the third anniversary of the date of grant, the
      2006 Premium Price Awards will not vest. Subject to the attainment of the market
      condition, 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. Share-based compensation expense
      related to stock options and employee stock purchases was $167,000 and $178,000,
      including expense for the 2006 Premium Price Awards, for the three months ended
      January 31, 2008 and 2007, respectively, and was recorded in the financial
      statements as a component of general and administrative expense.




-
          40 -




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 upon historical
      volatility rates, trended into future years. 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
      No.
      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. We
      do not
      believe that SFAS No. 157 will have a material impact on our financial position,
      results of operations or cash flows.





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





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.We are currently evaluating
      the potential impact, if any, of the adoption of SFAS 141R on our
      consolidated results of operations and financial condition.




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          41 -




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.We are currently evaluating the potential impact, if any,
      of the adoption of SFAS 160 on our consolidated results of operations and
      financial condition.




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




Information
      about market risks for the three months ended January 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 our Chief Financial Officer (“CFO”), of the effectiveness, as of the
      end of the fiscal quarter covered by this report, of the design and operation
      of
      our “disclosure controls and procedures” as defined in Rule 13a-15(e)
      promulgated by the SEC under the Exchange Act. Based upon that evaluation,
      our
      CEO and our CFO concluded that our disclosure controls and procedures, as of
      the
      end of such fiscal quarter, were adequate and effective to ensure that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the SEC’s rules and forms.





**Changes
      in Internal Controls**





There
      has
      been no change in our internal control over financial reporting during the
      quarter ended January 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:





*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.*




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          42 -




**Item
      1. Legal Proceedings**





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




**Item
      1A. Risk Factors**





**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 $4.4
      million in the three months ended January 31, 2008, and $21.0 million and $17.1
      million in our fiscal years ended October 31, 2007 and 2006, respectively.
      In
      addition, w e
      have
      used cash in operations of $3.2 million in the three months ended January 31,
      2008, and $12.3 million and $15.9 million for our fiscal years ended October
      31,
      2007 and 2006, respectively.  As of January 31, 2008, we had an accumulated
      deficit of $152.3 million; cash, cash equivalents and marketable securities
      of
      $8.0 million, and no long-term debt. In
      addition, our line of credit with Silicon Valley Bank expired on February 1,
      2008, and there is no assurance that it will be renewed.





The
      negative cash flow we have sustained has materially reduced our working capital.
      Although our working capital has been replenished to some extent by our January
      2008 equity financing, 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 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;






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          43 -




•
            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; however, we may need to raise additional equity financing, reduce
      operations and take other steps to achieve positive cash flow. 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 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 63,008,140 shares of our
      common stock that also included 3,150,407 shares of common stock issuable upon
      exercise of warrants. This financing resulted in significant dilution of our
      current stockholders. 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.**





On
      October 5, 2007, we received a notice from Nasdaq indicating that, for the
      preceding 30 consecutive days, the bid price of our common stock had closed
      below the minimum $1.00 per share requirement for continued listing. In
      accordance with the Nasdaq rules, we have until April 2, 2008, to regain
      compliance. In order to regain compliance, the bid price of our common stock
      must close at $1.00 per share or more for a minimum of 10 consecutive business
      days. If we do not regain compliance with the rule by April 2, 2008, we
      understand that the Nasdaq Staff will provide written notification to us that
      our common stock will be delisted. At that time, we may appeal the Staff’s
      determination to a Nasdaq Listing Qualifications Panel, but no assurance can
      be
      given that any such appeal would be successful.





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




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          44 -


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;


·
            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.




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          45 -




**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.




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. 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.




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          46 -




**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
      and our non-therapeutic radiation source products.




**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. and Pinestar Technology, Inc. each 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 and our non-therapeutic radiation source
      products.





**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.




-
          47 -




**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, L. Michael Cutrer, our executive vice president and chief
      technology officer, and Troy A. Barring, our chief operating officer. Our future
      business and financial results could be adversely affected if the services
      of
      Messrs. Rush, Cutrer, or Barring 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.




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.




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          48 -




**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.




-
          49 -




**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.




**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.




-
          50 -


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




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




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




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




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





**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.




-
          51 -




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.




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.




-
          52 -




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.




**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
      quarter 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.




-
          53 -




**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;


·
            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




-
          54 -




**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
      $0.15
      and $1.75 per share in the fifty-two week period ended January 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.





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
      63,008,140 shares of common stock and 3,150,407 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
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





**** None.




-
          55 -




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**




On
      December 31, 2007, we filed a Notice of Solicitation of Action of Stockholders
      By Written Consent In Lieu of Meeting of Stockholders with our stockholders
      of
      record as of the close of business on December 14, 2007, seeking consent on
      the
      following proposals:





(1)
      To
      consider and approve the issuance and sale of 63,008,140 shares of our common  stock
      and
      warrants to purchase 3,150,407 shares of our common  stock
      to
      a group of  investors
      pursuant to Securities Purchase Agreements, dated December 12, 2007;
      and




(2)
      To
      amend our Certificate of Incorporation to increase to 150,000,000 shares from  100,000,000
      shares the number of common shares we are authorized to issue.





Proposal
      1 to ratify the Private Placement transaction and Proposal 2 to amend the
      Certificate of Incorporation were approved. The number of shares cast for,
      withheld, abstained and broker non-votes with respect to each proposal were
      as
      follows:





Description
            
            For
            
            Withheld
            
            Abstained
            
            Broker
              Non-Votes(1)Ratify
                Private Placement transaction
            
            
            19,447,367
            
            
            310,795
            
            
            6,697
            
            
            —(2)Amend
                the Certificate of Incorporation
            
            
            19,440,543
            
            
            308,769
            
            
            9,544
            
            
            —





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





(a)  Exhibits.





Exhibits No.
            
            Title3.1
            
            Amended
                and Restated Certificate of Incorporation of the Company, incorporated
                by
                reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
                the year ended October 31, 2007, as filed on January 29,
                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
            
            Securities
                Purchase Agreement, dated December 12, 2007, by and among the Company
                and
                the Purchasers party thereto, incorporated by reference to Exhibit
                10.1 to
                the Company’s Current Report on Form 8-K, filed on December 13,
                2007.10.2
            
            Form
                of Warrant Agreement, incorporated by reference to Exhibit 10.2 to
                the
                Company’s Current Report on Form 8-K, filed on December 13,
                2007.31.1
            
            Certification
                of Chief 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 Chief 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




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**SIGNATURES**




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




NORTH
              AMERICAN SCIENTIFIC, INC.March
                17, 2008
            By:
            /s/
                John B. RushName:
            John
                B. RushTitle:
            President
                andChief
                Executive Officer(Principal
                Executive Officer)March
                17, 2008
            By:
            /s/
                James W. KlinglerName:
            James
                W. KlinglerTitle:
            Senior
                Vice President andChief
                Financial Officer(Principal
                Financial Officer)




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          57 -


**Exhibit
      Index**





**Exhibit No.**3.1
            Amended
                and Restated Certificate of Incorporation of the Company, incorporated
                by
                reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for
                the year ended October 31, 2007, as filed on January 29,
                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
            Securities
                Purchase Agreement, dated December 12, 2007, by and among the Company
                and
                the Purchasers party thereto, incorporated by reference to Exhibit
                10.1 to
                the Company’s Current Report on Form 8-K, filed on December 13,
                2007.10.2
            Form
                of Warrant Agreement, incorporated by reference to Exhibit 10.2 to
                the
                Company’s Current Report on Form 8-K, filed on December 13,
                2007.31.1
            Certification
                of Chief 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 Chief 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.




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