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, 2009





or





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


Commission
File Number 0-26670







NORTH
AMERICAN SCIENTIFIC, INC.


(Exact
name of registrant as specified in its charter)





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





20200
Sunburst Street, Chatsworth, CA 91311


(Address
of principal executive offices)





(818)
734-8600


(Registrant's
telephone number, including area code)





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





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See 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, $0.01 par value, outstanding as
of March 19, 2009 was approximately 18,520,000 shares.









NORTH
AMERICAN SCIENTIFIC, INC.




Index





PagePart
      I – Financial InformationItem
      1.
                                                                            Financial
      StatementsCondensed
      Consolidated Balance Sheets as of January 31, 2009 and October 31,
      2008
                                                                            
                                                                            3Condensed
      Consolidated Statements of Operations for the three months
      endedJanuary
      31, 2009 and 2008
                                                                            
                                                                            4Condensed
      Consolidated Statements of Cash Flows for the three months
      endedJanuary
      31, 2009 and 2008
                                                                            
                                                                            5Notes
      to the Condensed Consolidated Financial Statements
                                                                            
                                                                            6Item
      2.
                                                                            Management’s
      Discussion and Analysis of Financial Condition andResults
      of Operations
                                                                            
                                                                            32Item
      3.
                                                                            Quantitative
      and Qualitative Disclosures about Market Risk
                                                                            
                                                                            41Item
      4.
                                                                            Controls
      and Procedures
                                                                            
                                                                            41Part
      II – Other InformationItem
      1.
                                                                            Legal
      Proceedings
                                                                            
                                                                            42Item 1A.
                                                                            Risk
      Factors
                                                                            
                                                                            42Item
      6.
                                                                            Exhibits
                                                                            
                                                                            57Signatures
                                                                            
                                                                            58




- 2
-




PART I – FINANCIAL
INFORMATION
 
 Item
1.   Financial Statements
  NORTH
AMERICAN SCIENTIFIC, INC.
  Condensed
Consolidated Balance Sheets
 (in
thousands, except share data)
 
 January 31,
                                                                            
                                                                            October 31,2009
                                                                            
                                                                            2008(Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                                                                            
                                                                            $
                                                                            2,142
                                                                            
                                                                            
                                                                            $
                                                                            2,256Accounts
      receivable, net of reserves
                                                                            
                                                                            
                                                                            2,052
                                                                            
                                                                            
                                                                            
                                                                            1,907Prepaid
      expenses and other current assets
                                                                            
                                                                            
                                                                            331
                                                                            
                                                                            
                                                                            
                                                                            758Receivable
      from sale of assets (Note 3)
                                                                            
                                                                            
                                                                            423
                                                                            
                                                                            
                                                                            
                                                                            2,190Assets
      held for sale
                                                                            
                                                                            
                                                                            1,963
                                                                            
                                                                            
                                                                            
                                                                            2,166Total
      current assets
                                                                            
                                                                            
                                                                            6,911
                                                                            
                                                                            
                                                                            
                                                                            9,277Equipment
      and leasehold improvements, net
                                                                            
                                                                            
                                                                            344
                                                                            
                                                                            
                                                                            
                                                                            298Intangible
      assets, net
                                                                            
                                                                            
                                                                            23
                                                                            
                                                                            
                                                                            
                                                                            23Other
      assets
                                                                            
                                                                            
                                                                            4
                                                                            
                                                                            
                                                                            
                                                                            4Total
      assets
                                                                            
                                                                            $
                                                                            7,282
                                                                            
                                                                            
                                                                            $
                                                                            9,602Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesLine
      of credit, in default
                                                                            
                                                                            $
                                                                            1,022
                                                                            
                                                                            
                                                                            $
                                                                            —Short-term
      portion of long-term debt, net of discount, in default
                                                                            
                                                                            
                                                                            1,397
                                                                            
                                                                            
                                                                            
                                                                            376Accounts
      payable
                                                                            
                                                                            
                                                                            1,741
                                                                            
                                                                            
                                                                            
                                                                            1,732Accrued
      expenses
                                                                            
                                                                            
                                                                            2,316
                                                                            
                                                                            
                                                                            
                                                                            3,118Total
      current liabilities
                                                                            
                                                                            
                                                                            6,476
                                                                            
                                                                            
                                                                            
                                                                            5,226Long-term
      debt, net of discount
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            988Long-term
      severance liability
                                                                            
                                                                            
                                                                            472
                                                                            
                                                                            
                                                                            
                                                                            569Commitments
      and contingencies (Note 9)Stockholders’
      EquityPreferred
      stock, $0.01 par value, 2,000,000 shares authorized; no
    sharesissued
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Common
      stock, $0.01 par value, 150,000,000 shares authorized:18,561,676
      shares issued: and 18,520,472 shares outstanding as of January 31, 2009
      and October 31, 2008, respectively
                                                                            
                                                                            
                                                                            185
                                                                            
                                                                            
                                                                            
                                                                            185Additional
      paid-in capital
                                                                            
                                                                            
                                                                            161,915
                                                                            
                                                                            
                                                                            
                                                                            161,732Treasury
      stock, at cost –  41,204 common shares as of January 31, 2009
      and October 31, 2008
                                                                            
                                                                            
                                                                            (227
                                                                            )
                                                                            
                                                                            
                                                                            (227
                                                                            )Accumulated
      deficit
                                                                            
                                                                            
                                                                            (161,539
                                                                            )
                                                                            
                                                                            
                                                                            (158,871
                                                                            )Total
      stockholders’ equity
                                                                            
                                                                            
                                                                            334
                                                                            
                                                                            
                                                                            
                                                                            2,819Total
      liabilities and stockholders’ equity
                                                                            
                                                                            $
                                                                            7,282
                                                                            
                                                                            
                                                                            $
                                                                            9,602
 
 The
accompanying notes are an integral part of the unaudited condensed consolidated
financial statements.
  - 3
-
  NORTH
AMERICAN SCIENTIFIC, INC.
  Condensed
Consolidated Statements of Operations
 (Unaudited)
 (in
thousands, except share and per share data)
 
 Three Months Ended January 31,2009
                                                                
                                                                2008Operating
      expensesSelling
      and marketing expenses
                                                                
                                                                $
                                                                231
                                                                
                                                                
                                                                $
                                                                142General
      and administrative expenses
                                                                
                                                                
                                                                1,161
                                                                
                                                                
                                                                
                                                                1,882Research
      and development
                                                                
                                                                
                                                                784
                                                                
                                                                
                                                                
                                                                850Total
      operating expenses
                                                                
                                                                
                                                                2,176
                                                                
                                                                
                                                                
                                                                2,874Loss
      from operations
                                                                
                                                                
                                                                (2,176
                                                                )
                                                                
                                                                
                                                                (2,874
                                                                )Interest
      expense
                                                                
                                                                
                                                                76
                                                                
                                                                
                                                                
                                                                1,132Adjustment
      to fair value of derivatives
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (311
                                                                )Interest
      income and other income, net
                                                                
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                —Loss
      before provision for income taxes
                                                                
                                                                
                                                                (2,242
                                                                )
                                                                
                                                                
                                                                (4,317
                                                                )Provision
      for income taxes
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Loss
      from continuing operations
                                                                
                                                                
                                                                (2,242
                                                                )
                                                                
                                                                
                                                                (4,317
                                                                )Loss
      from discontinued operations
                                                                
                                                                
                                                                (426
                                                                )
                                                                
                                                                
                                                                (78
                                                                )Net
      loss
                                                                
                                                                $
                                                                (2,668
                                                                )
                                                                
                                                                $
                                                                (4,395
                                                                )Basic
      and diluted loss per share:Continuing
      operations
                                                                
                                                                $
                                                                (0.12
                                                                )
                                                                
                                                                $
                                                                (0.56
                                                                )Discontinued
      operations
                                                                
                                                                
                                                                (0.02
                                                                )
                                                                
                                                                
                                                                (0.01
                                                                )Net
      loss per share
                                                                
                                                                $
                                                                (0.14
                                                                )
                                                                
                                                                $
                                                                (0.57
                                                                )Weighted
      average number of shares outstanding-basic and diluted
                                                                
                                                                
                                                                18,520,472
                                                                
                                                                
                                                                
                                                                7,660,226
 
 The
accompanying notes are an integral part of the unaudited condensed consolidated
financial statements.
  - 4
-
  NORTH
AMERICAN SCIENTIFIC, INC.
  Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
 (in
thousands)
 
 Three Months Ended January 31,2009
                                                                
                                                                2008Cash
      flows from operating activities:Net
      loss
                                                                
                                                                $
                                                                (2,668
                                                                )
                                                                
                                                                $
                                                                (4,395
                                                                )Net
      loss from discontinued operations
                                                                
                                                                
                                                                (426
                                                                )
                                                                
                                                                
                                                                (78
                                                                )Net
      loss from continuing operations
                                                                
                                                                
                                                                (2,242
                                                                )
                                                                
                                                                
                                                                (4,317
                                                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                                
                                                                
                                                                86
                                                                
                                                                
                                                                
                                                                24Amortization
      of warrants and loan origination fees
                                                                
                                                                
                                                                20
                                                                
                                                                
                                                                
                                                                895Change
      in fair value of warrant derivative liability
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                311Provision
      for doubtful accounts
                                                                
                                                                
                                                                12
                                                                
                                                                
                                                                
                                                                35Loss
      on sale of equipment
                                                                
                                                                
                                                                3
                                                                
                                                                
                                                                
                                                                —Share-based
      compensation expense
                                                                
                                                                
                                                                157
                                                                
                                                                
                                                                
                                                                168Changes
      in assets and liabilities, net of discontinued operations:Accounts
      receivable
                                                                
                                                                
                                                                (157
                                                                )
                                                                
                                                                
                                                                62Prepaid
      expenses and other current assets
                                                                
                                                                
                                                                427
                                                                
                                                                
                                                                
                                                                (32
                                                                )Accounts
      payable
                                                                
                                                                
                                                                93
                                                                
                                                                
                                                                
                                                                (166
                                                                )Accrued
      expenses
                                                                
                                                                
                                                                (754
                                                                )
                                                                
                                                                
                                                                152Long-term
      severance
                                                                
                                                                
                                                                (97
                                                                )
                                                                
                                                                
                                                                —Net
      cash used in continuing operations
                                                                
                                                                
                                                                (2,452
                                                                )
                                                                
                                                                
                                                                (2,868
                                                                )Net
      cash provided by (used in) discontinued operations
                                                                
                                                                
                                                                1,438
                                                                
                                                                
                                                                
                                                                (309
                                                                )Net
      cash used in operating activities
                                                                
                                                                
                                                                (1,014
                                                                )
                                                                
                                                                
                                                                (3,177
                                                                )Cash
      flows from investing activities:Capital
      expenditures
                                                                
                                                                
                                                                (135
                                                                )
                                                                
                                                                
                                                                (118
                                                                )Net
      cash used in investing activities
                                                                
                                                                
                                                                (135
                                                                )
                                                                
                                                                
                                                                (118
                                                                )Cash
      flow from financing activities:Repayment
      of long-term borrowings
                                                                
                                                                
                                                                (45
                                                                )
                                                                
                                                                
                                                                —Net
      proceeds from private placement of common stock and
    warrants
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                14,019Proceeds
      from stock purchase plan
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                8Proceeds
      from (payments on) line of credit
                                                                
                                                                
                                                                1,080
                                                                
                                                                
                                                                
                                                                (3,323
                                                                )Net
      cash provided by financing activities
                                                                
                                                                
                                                                1,035
                                                                
                                                                
                                                                
                                                                10,704Net
      (decrease) increase in cash and cash equivalents
                                                                
                                                                
                                                                (114
                                                                )
                                                                
                                                                
                                                                7,409Cash
      and cash equivalents at beginning of period
                                                                
                                                                
                                                                2,256
                                                                
                                                                
                                                                
                                                                609Cash
      and cash equivalents at end of period
                                                                
                                                                $
                                                                2,142
                                                                
                                                                
                                                                $
                                                                8,018
  The
accompanying notes are an integral part of the unaudited condensed consolidated
financial statements.
  - 5
-
  NORTH
AMERICAN SCIENTIFIC, INC.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (in
thousands, except share and per share data)
 
 NOTE
1—BASIS OF PRESENTATION, CONTINUED EXISTENCE, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 Basis
of Presentation
 
 The
accompanying condensed consolidated financial statements of the Company are
unaudited, other than the condensed consolidated balance sheet at October 31,
2008, 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
condensed 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 condensed 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, 2008.
 
 Certain
reclassifications have been made to prior period balances in order to conform to
the current period presentation.
 
 Continued
Existence
 
 The
Company has incurred net losses of $2,668, $10,945, $20,998 and $17,130 for the
three months ended January 31, 2009 and for the years ended October 31, 2008,
2007 and 2006, respectively, and has used cash in operations of $1,014, $12,015,
$12,318 and $15,921 for the three months ended January 31, 2009 and for the
years ended October 31, 2008, 2007 and 2006, respectively.  As of January
31, 2009, the Company had an accumulated deficit of $161,539, cash and cash
equivalents of $2,142, working capital of $435, and $2,535 of interest-bearing
debt.
 
 The
Company has incurred significant net losses since inception, and has relied on
its ability to obtain financing, which to date has been through the sale of
common shares and the issuance of promissory notes.  Management
expects operating losses and negative cash flows to continue for the forseeable
future as the Company incurs additional costs and expenses related to the
continued development of its products, and obtaining FDA approval for new
indications. These factors raise a substantial doubt about the Company’s ability
to continue as a going concern. The accompanying financial statements have been
prepared on a going concern basis that contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
financial statements do not include adjustments relating to the recoverability
of recorded asset amounts or the amounts or classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
 
 On March
11, 2009, in response to the Company’s current financial condition, current
business prospects, and to effect other arrangements surrounding the sale of its
Prostate Brachytherapy Product Line (See Note 3), the Company filed voluntary
petitions in the United States Bankruptcy Court for the Central District of
California (the “Bankruptcy Court”) under Chapter 11 of the U.S. Bankruptcy Code
(the “Chapter 11 Proceeding”).  See Note 11 for further information
about the Chapter 11 Proceeding.
 
 - 6
-
  Following
the filing of the Chapter 11 Proceeding, there is no assurance that the carrying
amounts of assets will be realized or that liabilities will be settled for
amounts recorded. The Company has not finalized any plans of reorganization or
restructuring, although it is anticipated that any such plans will change the
amounts reported in the accompanying condensed consolidated financial statements
and cause a material change in the carrying amount of assets and liabilities.
Future financial statements will be prepared in accordance with the AICPA’s
Statement of Position 90-7 (“SOP 90-7”) “Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code.”  SOP 90-7 requires, under
certain circumstances, that entities adopt fresh-start reporting upon emergence
from Chapter 11 reorganization. Fresh-start reporting involves allocating the
reorganization value of the entity (which generally approximates fair value) to
the entity’s assets and liabilities. SOP 90-7 also requires the debtor to
segregate pre-petition liabilities that are subject to compromise and identify
all transactions and events that are directly associated with the reorganization
of the debtor.  A portion of the liabilities recorded at January 31, 2009
are expected to be subject to compromise. Also in accordance with SOP 90-7,
after the filing date, interest will no longer be accrued on any unsecured debt.
We expect to sell our prostate brachytherapy business and our breast
brachytherapy business through Chapter 11 Proceeding and if we do so we will
have no remaining assets to continue in business. We expect all proceeds from
sale of such business to be used to pay creditors.
 
 Significant
Accounting Policies
 
 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.  Significant areas for which
management evaluates its estimates include those related to revenue recognition,
allowance for doubtful accounts, valuation of deferred income taxes, tax
contingencies, long-lived and intangible assets and share-based
compensation.  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, the age of
the customer receivable balance and customer economic data. The Company reviews
its 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 its customers.
 
 Fair
Value of Financial Instruments
 
 The
carrying amounts of cash and cash equivalents, receivables, inventories,
accounts payable, and accrued expenses approximate fair value because of their
short maturities.
 
 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:
  - 7
-
  Furniture,
      fixtures and equipment
              3-7
      yearsLeasehold
      improvements
              Lesser
      of the useful life or term of lease
 
 Long-Lived
Assets
 
 In
accordance with Statement of Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized equal to the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of are separately presented in the consolidated balance
sheet and reported at the lower of the carrying amount or fair value less costs
to sell, and are no longer depreciated.
 
 Intangible
Assets
 
 License
agreements are amortized on a straight-line basis over periods ranging up to
fifteen years. The amortization periods of patents are based on the lives of the
license agreements to which they are associated or the approximate remaining
lives of the patents, whichever is shorter. Purchased intangible assets with
finite lives are carried at cost less accumulated amortization and are amortized
on a straight-line basis over periods ranging from three to twelve
years.
 
 The
Company reviews for impairment whenever events and changes in circumstances
indicate that such assets might be impaired. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are less
than the carrying value, a write-down is recorded to reduce the related asset to
its estimated fair value.
 
 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 reclassified from liabilities to equity. See further discussion in Note 7 -
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
Statements”, provides guidance on the recognition, presentation and
disclosure of revenue in financial statements.  SAB No. 104 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
the disclosure of revenue recognition policies.  In general, the Company
recognizes revenue related to product sales when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or
determinable, and (iv) collectibility is reasonably assured.
  - 8
-
  Income
Taxes and Uncertain Tax Positions
  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 a 100% valuation allowance
against its deferred tax assets until such time that becomes more likely than
not that the Company will realize the benefits of its deferred tax assets. On
November 1, 2007, the Company implemented Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109,”
(FIN 48). See Note 2 – Income Taxes.
 
 Share-based
Compensation
 
 The
Company accounts for its share-based payments under the guidance set forth in
SFAS No. 123(R), “Share-Based
Payment”, 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 SAB No. 107
with respect to share-based payments and SFAS No. 123(R).
 
 The
Company adopted SFAS 123(R) using the modified prospective transition method as
of and for the fiscal year ended October 31, 2006.  Share-based
compensation expense recognized is based on the value of the portion of
share-based payment awards that is ultimately expected to vest. Share-based
compensation expense recognized in the Company’s Consolidated Statement of
Operations includes compensation expense for share-based payment awards granted
or modified since the beginning of the fiscal year ended October 31,
2006.
 
 In
conjunction with the adoption of SFAS 123(R), the Company elected to attribute
the value of share-based compensation to expense using the straight-line method,
which was previously used for its pro forma information required under SFAS 123
and SFAS 148.
 
 On March
16, 2006, the Company granted a total of 130,100 stock options to its employees
that contain certain market conditions (“2006 Premium Price Awards”). The 2006
Premium Price Awards are, to the extent provided by law, incentive stock options
that have an exercise price of $16.75 per share, which is equal to 159% of the
fair market value of the Company’s common stock on the grant date. The 2006
Premium Price Awards also include a condition that provides that such stock
options will only vest if the closing price of the Company's common stock is
equal to or greater than $16.75 on each day over any consecutive four month
period beginning on any date after the date of grant and ending no later than
the third anniversary of the date of grant. The 2006 Premium Price Awards were
cancelled on November 17, 2008 for failure to achieve the required market
condition.
  - 9
-
  On
February 15, 2008, the Company’s Board of Directors approved, subject to the
approval of the Company’s stockholders, a plan to reprice certain existing
employee stock options at $2.05 per share, the closing price of the Company’s
common stock on February 15, 2008. The 2006 Premium Price Awards were re-priced
to $3.25 per share, which is equal to 159% of the re-priced fair value of the
Company’s common stock. In addition, the Company’s Board of Directors also
approved, subject to the approval of the Company’s stockholders, a plan to
exchange options held by directors of the Company for a one-time stock option
grant at $2.10 per share, the closing price of the Company’s stock on February
13, 2008. The Company’s stockholders approved both the employee stock option
re-pricing plan and the director exchange plan at the annual meeting held on
April 29, 2008. (See Note 8 – Stockholders’ Equity for further discussion).
The Company recorded the re-pricing of the employee stock options and the
exchange of the directors’ stock options in accordance the guidance in SFAS
123(R), Paragraph 51 “Modifications of Awards of Equity Instruments.” Pursuant
to this guidance, the measurement date can precede the stockholders’ approval
date when stockholder approval is considered to be a formality. The Company set
the measurement date at the Board of Director’s approval date. The re-pricing
exercise of employee stock options generated $332 incremental share-based
compensation for un-vested and re-priced stock options, which is being
recognized over the vesting period of the new employee stock options. The
exchange of options held by directors of the Company generated $166 incremental
share-based compensation for un-vested and exchanged options, which is being
recognized over the three-year vesting period of the newly issued director stock
options.
 
 Share-based
compensation expense related to stock options and employee stock purchases,
including the amortized portion of the incremental share-based compensation for
the re-priced employee stock options and the exchanged director stock options
was $157 and $168 for the three months ended January 31, 2009 and 2008,
respectively, and was recorded in the financial statements as a component of
general and administrative expense. . In addition, $26 of share-based
compensation expense has been included as a component of the loss from
discontinued operations for the three months ended January 31,
2009.
 
 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. For
purposes of financial statement presentation, the estimated fair values of the
options are amortized over the options’ vesting periods.
 
 Reverse
Stock Split
 
 On April
29, 2008, the Company’s stockholders approved a 1 share for 5 share reverse
split to regain compliance with the NASDAQ minimum bid price rule. The reverse
split became effective on May 1, 2008, at which time the Company began trading
under its new stock symbol “NASM”. All share and per share information in the
consolidated financial statements and notes have been restated to reflect the
effect of the stock split for all periods presented. The reverse stock split had
no effect on the par value of the Company’s common stock or the total authorized
shares.
 
 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.
  - 10
-
  Stock
options to purchase 2,453,023 common shares and 1,156,456 common shares for the
three months ended January 31, 2009 and 2008, respectively, and warrants to
purchase 3,106,191 common shares and 3,006,854 common shares for the three
months ended January 31, 2009 and 2008, respectively, were not included in
the computation of diluted loss per share for those years because their effect
would have been anti-dilutive.
 
 Research
and Development Costs
 
 Research
and development ("R&D") expenses are comprised primarily of the following
types of costs incurred in performing R&D activities: salaries and benefits,
allocated overhead, occupancy costs, contract services and other outside costs,
and costs to acquire in-process research and development projects and
technologies which have no alternative future use. Research and development
costs are expensed as incurred.
 
 Significant
Concentrations
 
 As of
January 31, 2009, there was one customer that made up more than 10% of revenues
for the quarter, and one customer compromised more than 10% of accounts
receivable.  As of January 31, 2009, four suppliers made up more than
10% of purchases for the quarter and two suppliers that individually comprised
more than 10% of accounts payable.
 
 Diversification
of Credit Risk
 
 The
Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents and accounts receivable, which are
not collateralized. The Company's policy is to invest its cash with highly rated
financial institutions in order to limit the amount of credit exposure. As of
January 31, 2009, $2,042 of the Company’s cash balance was in excess of the
federally insured limit.
 
 The
Company extends differing levels of credit to customers, does not require
collateral, and maintains reserves for potential credit losses based upon the
collectibility of accounts receivable. The Company monitors the credit
worthiness of its customers and makes provision whenever there are indications
of potential credit losses.
 
 Fair
Value Measurement
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for consistently measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does not require any new
fair value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information.  In February 2008, the FASB deferred the effective date
of SFAS 157 by one year for certain nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  On November 1, 2008, the
Company adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and liabilities for which the effective date has been
delayed by one year.
 
 The fair
value hierarchy described by the standard is based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value and include the following:
 
 Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
 
 Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
  - 11
-
  Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
 
 The
adoption of SFAS 157 did not have a material effect on the Company’s
consolidated financial position, results of operations or cash
flows.  The book values of cash and cash equivalents, accounts
receivable and accounts payable approximate their respective fair values due to
the short-term nature of these instruments.
 
 Effective
November 1, 2008, the Company adopted Financial Staff Position No. SFAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active” (FSP SFAS 157-3), which was issued on October 10, 2008. FSP SFAS
157-3 clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for the financial asset is not
active. The adoption of FSP SFAS 157-3 did not have an impact on the Company’s
consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” SFAS 159 provides companies with an
option to report selected financial assets and liabilities at fair value. The
standard’s objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. The standard requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the company’s choice to use
fair value on its earnings. It also requires companies to display the fair value
of those assets and liabilities for which the company has chosen to use fair
value on the face of the balance sheet. The new standard does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS 157,
“Fair Value
Measurements,” and SFAS 107, “Disclosures about Fair Value of
Financial Instruments.” SFAS 159 is effective as of the start of fiscal
years beginning after November 15, 2007. Early adoption is permitted. The
Company is evaluating this standard and therefore has not yet determined the
impact that the adoption of SFAS 159 will have on its financial position,
results of operations or cash flows.
 
 Recent
Accounting Pronouncements
 
 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.
  - 12
-
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133”. The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. Entities
are required to provide enhanced disclosures about: (a) how and why an
entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. This standard is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company is currently evaluating the impact, if
any, SFAS No. 161 will have on its consolidated financial position, results
of operations or cash flows.
  In March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11, “Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards”, (“EITF Issue 06-11”).
Beginning January 1, 2008, the Company adopted EITF Issue 06-11. In
accordance with the EITF Issue, the Company records a credit to additional
paid-in capital for tax deductions resulting from a dividend payment on
non-vested share awards the Company expects to vest. The adoption of EITF Issue
06-11 did not have any impact on the Company’s consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy). SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles”. The Company currently adheres to the hierarchy of GAAP as presented
in SFAS No. 162, and does not expect its adoption will have a material impact on
its consolidated results of operations and financial condition.
 
 In June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (“EITF 03-6-1”). EITF 03-6-1 provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method in accordance with SFAS 128, Earnings per Share. EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. Upon adoption, the
Company is required to retrospectively adjust its earnings per share data to
conform with the provisions in EITF 03-6-1. Early application of EITF 03-6-1 is
prohibited. The Company is currently evaluating the impact EITF 03-6-1 will have
on its consolidated financial statements.
 
 NOTE
2 – INCOME TAXES
 
 FIN48
adoption
 
 On
November 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”,
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing the recognition threshold a tax position is required to
meet before being recognized in the financial statements and also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. As a result of the adoption of
FIN 48, the Company reduced the liability for net unrecognized tax
benefits, classified in other assets and accrued liabilities, by $152 and $440,
respectively, and accounted for this as a cumulative effect of a change in
accounting principle that was recorded as an increase to retained deficit. In
implementing FIN 48, the Company has classified $120 as current income
taxes payable, and, reduced to zero, both its short-term and long-term income
tax receivable and long-term income tax payable. At January 31, 2009, the $120
current income tax reserve remained unchanged and is included in Accrued
Expenses on the accompanying condensed consolidated balance sheet.
  - 13
-
  Upon
adoption of FIN 48, the Company recognizes interest expense and penalty
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, and there was not a material change to this amount as of January
31, 2009.
  Recognition
of any portion of the unrecognized tax benefits arising from the Company’s
uncertain tax position would not have a significant effect on the Company’s
effective tax rate.
  The
Company files tax returns in the U.S on a federal basis and in a number of U.S.
state jurisdictions. The Company is subject to examination of its tax returns by
these jurisdictions, and is subject to challenges of tax liability by other
jurisdictions in which the Company currently does not file tax returns. The
Company believes it is subject to challenges by the taxing jurisdiction in which
it files for tax years from 2004 through 2008, and for other taxing
jurisdictions for any periods for which the statute of limitations has not
expired. The Company does not expect any significant changes to the amount of
its unrecognized tax benefits within the next twelve months.
  As of
October 31, 2007, the Company had generated approximately $141,367 and $116,000
of Federal and state Net Operating Loss Carry-forwards (“NOL”), respectively,
and $4,813 of Federal Research & Development Credits (“R&D Credits”)
through its recurring operating losses, and its acquisitions 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, imposed
upon a change of control, which reduce the value of the Federal NOL and R&D
Credits that can be used to offset future income under Internal Revenue Service
Code Section 382 and Section 383, collectively the “Code”. As a result of the
Company’s January 2008 PIPE transaction (See Note 8—Stockholders’ Equity) the
Company has experienced a change in ownership as defined by 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 $10,199 the combined statutory
limit on the Federal and State NOL and R&D Credits available to the Company,
as determined under the Code. Based on its effective tax rate 40%, the Company
recorded a $59,921 decrease to its deferred tax assets and its valuation
allowance at January 31, 2008 as a result of the limitation.
 
 NOTE
3 - DISCONTINUED OPERATIONS
 
 Brachytherapy
Product Lines
 
 On
February 11, 2009, the Company entered into an Asset Purchase Agreement and
Management Agreement relating to the sale of its prostate brachytherapy product
line to Best Theratronics, Ltd. (“Best”) for $5,000, collectively, the “February
11 Agreements”.  On February 26, 2009, Best terminated the February 11
Agreements in accordance with their terms.  On March 11, 2009, in
connection with the Company’s Chapter 11 Proceeding (See Notes 1 and 11), the
Company entered into a new Asset Purchase Agreement with Best for the sale its
prostate brachytherapy product line for $2,500.   The sale is
subject to the Chapter 11 Proceeding process and the approval of the Bankruptcy
Court, and currently is expected to close in April 2009. We also expect to sell
the ClearPath product line through the Chapter 11 Proceeding.  We have
received an Asset Purchase Agreement for the sale of such business from a buyer.
We expect the buyer to continue supporting such product line. The Asset Purchase
Agreement for the prostate brachytherapy product line provides for the transfer
of inventory, certain fixed assets and intellectual property with a carrying
value of approximately $1,963 to Best in return for a purchase price of $2,500,
which is to be paid $1,500 at closing and $1,000 in installments over the 12
month period following the closing.
  - 14
-
  Assets of
discontinued operations on the Company’s Condensed Consolidated Balance Sheets
related to the prostate brachytherapy product line consist of the
following:
  January 31, 2009
                        
                        
                        October 31, 2008Inventory
                        
                        $
                        705
                        
                        
                        $
                        796Installment
      receivable
                        
                        
                        46
                        
                        
                        
                        57Prepaid
      expenses
                        
                        
                        107
                        
                        
                        
                        158Accrued
      decommissioning liability
                        
                        
                        (34
                        )
                        
                        
                        (34
                        )Fixed
      assets, net of accumulated depreciation of $3,875 and 3,751,
      respectively
                        
                        
                        1,070
                        
                        
                        
                        1,114Intellectual
      property, net of accumulated amortization of $205 and $198,
      respectively
                        
                        
                        69
                        
                        
                        
                        75$
                        1,963
                        
                        
                        $
                        2,166
 
 The
assets of discontinued operations are recorded at the lesser of cost or net
realizable value. No significant changes have occurred in their valuation, and
the Company has determined that there was no impairment to their carrying value
prior to the sale.
 
 Non-Therapeutic
Product Line
 
 On August
29, 2008, the Company entered into an agreement relating to the sale of its
non-therapeutic product line to Eckert & Ziegler Isotope Products, Inc.
(“EZIP”). The sale was completed on September 5, 2008. The Company expects its
departure from the non-therapeutic business will allow it to concentrate on its
core business of brachytherapy products and to provide necessary working
capital. The agreement for the sale transferred inventory, certain fixed assets
and intellectual property with a carrying value of $605 to EZIP in return for a
purchase price of up to $6,000, which was paid $3,000 at closing and a
promissory note for $2,000, which was collected in January 2009. An additional
$1,000 may be paid to the Company in September 2009, upon the achievement of
certain sales-based milestones measured during the 12 month period beginning at
the date of the sale. Based on available evidence at January 31, 2009, EZIP has
achieved 41.8% of the target sales, and as a result, the Company has recorded
$151 as part of the $4,502 gain on disposition of its non-therapeutic product
line for the year ended October 31, 2008, and an additional $267 for the three
months ended January 31, 2009. The milestone receivable of $418, plus $5
for continued web site support in accordance with the terms of the purchase and
sale agreement are recorded as a Receivable from Sale of Assets on the Balance
Sheet at January 31, 2009. The balance owed on the promissory note due January
2009 and the milestone receivable, along with $39 arising from a transitional
arrangement for EZIP to use the Company’s facility and
computer support through October 31, 2008, are recorded as a Receivable
from Sale of Assets on the Balance Sheet at October 31, 2008. The
promissory note was paid in full in January 2009. The Company believes the
collection of the sales-based milestone receivable is probable since the sales
agreement requires payment by EZIP for percentage milestones achieved. The
breakdown of the gain on disposition is as follows:
 
 Cash
      received at closing
                          
                          $
                          3,000Promissory
      note due January 2009
                          
                          
                          2,000Milestone
      receivable due September 2009
                          
                          
                          418Purchase
      price as recorded
                          
                          $
                          5,418Less:Book
      value of assets sold
                          
                          
                          605Expenses
      incurred
                          
                          
                          44Gain
      on disposition
                          
                          $
                          4,769
  - 15
-
  The gain
on sale of disposal is recorded as an element of income (loss) from discontinued
operations, with $4,502 recognized in the year ended October 31, 2008, and
$267recognized in the three months ended January 31, 2009. The balance owed on
the promissory note due January 2009 and the milestone receivable, along with
$39 arising from a transitional arrangement for EZIP to use the Company’s
facility and computer support through October 31, 2008, are recorded as a
Receivable from Sale of Assets on the Balance Sheet at October 31, 2008. The
promissory note was paid in full in January 2009. The milesone receivable of
$418, plus $5 for continued web site support in accordance with the terms of the
purchase and sale agreement are recorded as a Receivable from Sale of Assets on
the Balance Sheet at January 31, 2009.
 
 There
were no assets held for sale at October 31, 2008 or January 31, 2009 related to
the sale of the non-therapeutic product line.
 
 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.  The Company executed a purchase
and sale agreement with Best Medical International, Inc. to purchase certain
assets and to assume certain liabilities of NOMOS, with a carrying value of $489
at September 17, 2007 for $500. The Company incurred $464 in legal and other
closing costs in connection with the sale. In connection with the divestiture of
NOMOS, the Company determined that the carrying value of the NOMOS assets held
for sale at July 31, 2007 exceeded their fair value, as determined by estimated
future cash flows, and therefore, recorded a $6,654 charge for the impairment of
its net assets. The sale was completed on September 17, 2007. These amounts were
recorded as part of the loss from discontinued operations for the year ended
October 31, 2007.
 
 At
January 31, 2009 and October 31, 2008, the Company has included in its Accounts
Payable and Accrued Liabilities on its Balance Sheet $410 and $422,
respectively, of retained obligations to its vendors, customers and former
employees of the NOMOS operation, to be paid in accordance with their
terms.
  Summarized
statement of earnings data for discontinued operations are as follows for the
three months ended (in thousands):
  January 31,2009
                                            
                                            
                                            January 31,2008Net
      revenue:Prostate
      Brachytherapy Product Line
                                            
                                            $
                                            3,161
                                            
                                            
                                            $
                                            3,466Non-Therapeutic
      Product Line
                                            
                                            
                                            7
                                            
                                            
                                            
                                            871NOMOS
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —$
                                            3,168
                                            
                                            
                                            $
                                            4,337Income
      (loss) from discontinued operations before income tax
    benefit:Gain
      (loss) on disposal:Non-Therapeutic
      Product Line
                                            
                                            $
                                            267
                                            
                                            
                                            $
                                            —Discontinued
      operations:Prostate
      Brachytherapy Product Line
                                            
                                            
                                            (671
                                            )
                                            
                                            
                                            (329
                                            )Non-Therapeutic
      Product Line
                                            
                                            
                                            (22
                                            )
                                            
                                            
                                            314NOMOS
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (63
                                            )Income
      tax benefit, net of reserve
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Loss
      from discontinued operations
                                            
                                            $
                                            (426
                                            )
                                            
                                            $
                                            (78
                                            )Loss
      from discontinued operations, per share
                                            
                                            $
                                            (0.23
                                            )
                                            
                                            $
                                            (0.01
                                            )
  - 16
-
  NOTE
4—ACCOUNTS RECEIVABLE
 
 Accounts
receivable consist of the following:
 January 31, 2009
                                
                                
                                October 31, 2008Accounts
      receivable - trade
                                
                                $
                                2,160
                                
                                
                                $
                                2,086Less:
      allowance for doubtful accounts
                                
                                
                                (108
                                )
                                
                                
                                (179
                                )$
                                2,052
                                
                                
                                $
                                1,907
 
 The
provision for doubtful accounts was $12 and $35 for the three months ended
January 31, 2009 and 2008, respectively.
 
 NOTE
5—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
  Equipment
and leasehold improvements consist of the following:
 January 31, 2009
                                      
                                      
                                      October 31, 2008Furniture,
      fixtures and equipment
                                      
                                      $
                                      1,170
                                      
                                      
                                      $
                                      1,694Leasehold
      improvements
                                      
                                      
                                      3
                                      
                                      
                                      
                                      31,173
                                      
                                      
                                      
                                      1,697Less:
      accumulated depreciation
                                      
                                      
                                      (829
                                      )
                                      
                                      
                                      (1,399
                                      )$
                                      344
                                      
                                      
                                      $
                                      298
 
 Depreciation
expense was $86 and $24 for the three months ended January 31, 2009 and
2008, respectively.
 
 NOTE
6- ACCRUED EXPENSES
 
 Accrued
expenses consist of the following (in thousands):
 January 31,2009
                              
                              
                              October 31,2008Payroll
                              
                              $
                              143
                              
                              
                              $
                              277Bonus
                              
                              
                              —
                              
                              
                              
                              223Severance
                              
                              
                              483
                              
                              
                              
                              523Vacation
                              
                              
                              395
                              
                              
                              
                              390Commission
                              
                              
                              68
                              
                              
                              
                              80Customer
      Deposits
                              
                              
                              290
                              
                              
                              
                              319Vendor
      Payments
                              
                              
                              388
                              
                              
                              
                              570Site
      Decommissioning Costs
                              
                              
                              180
                              
                              
                              
                              252Professional
      Fees
                              
                              
                              144
                              
                              
                              
                              294Income
      Taxes
                              
                              
                              120
                              
                              
                              
                              120Other
                              
                              
                              105
                              
                              
                              
                              70$
                              2,316
                              
                              
                              $
                              3,118
  - 17
-
  On March
19, 2008 (the “Effective Date”), the Company reached agreement with its former
Vice-President of New Product Development (“VP”) to sever his employment.
Pursuant to the terms of the severance agreement, the Company will continue to
pay $168 annual salary in bi-weekly installments for 18 months, beginning on the
Effective Date. In further consideration, the Company agreed to pay medical,
dental and vision benefits during the same period. The Company will continue to
cover legal costs relating to certain ongoing litigation for the VP as
previously determined under his employment agreement.
 
 In
addition, the Company reached agreement with its former Chief Technology Officer
(“CTO”) to sever his employment, effective May 31, 2008. Pursuant to the terms
of its employment agreement with the CTO, the Company will pay 36 equal monthly
installments of $28 in salary continuation beginning June 1, 2008. Also, in May
2008, the Company reached agreement with its former Vice-President of Technical
Development to sever his employment. Pursuant to the terms of the severance
agreement, the Company paid $57 as salary continuation, plus medical benefits
during the first quarter of 2009.
 
 Relating
to these agreements, the Company incurred $1,411 included as severance expense
on the Consolidated Statement of Operations for the year ended October 31, 2008,
and has accrued the remaining costs relating to this agreement and the amount is
included in Accrued Expenses and Long-Term Severance on the Consolidated Balance
Sheets at January 31, 2009 and October 31, 2008.
 
 NOTE
7 – BORROWINGS
 
 The
borrowings were $2,419, net of discount at January 31, 2009, and $1,364, net of
discount at October 31, 2008, consisting of a loan and a line of credit with a
bank. Borrowing activities for the three months ended January 31, 2009 are as
follows:
 
 October 31,
                  
                  
                  
                  
                  
                  
                  
                  
                  January 31,2008
                  
                  
                  Borrowings
                  
                  
                  Repayments
                  
                  
                  2009Silicon Valley Bank -Line
      of credit
                  
                  $
                  —
                  
                  
                  $
                  3,988
                  
                  
                  $
                  (2,908
                  )
                  
                  $
                  1,080Short-term
      portion of long-term debt
                  
                  
                  455
                  
                  
                  
                  1,044
                  
                  
                  
                  (45
                  )
                  
                  
                  1,454Total
      borrowings
                  
                  
                  455
                  
                  
                  
                  5,032
                  
                  
                  
                  (2,953
                  )
                  
                  
                  2,534Less
      Unamortized loan discount fees
                  
                  
                  (79
                  )
                  
                  
                  (57
                  )
                  
                  
                  21
                  
                  
                  
                  (115
                  )Total
      short-term borrowings
                  
                  $
                  376
                  
                  
                  $
                  4,975
                  
                  
                  $
                  (2,932
                  )
                  
                  $
                  2,419Long-Term
      Borrowings:Growth
      Capital Loan
                  
                  
                  1,045
                  
                  
                  
                  —
                  
                  
                  
                  (1,045
                  )
                  
                  
                  —Less
      Unamortized loan discount fees
                  
                  
                  (57
                  )
                  
                  
                  —
                  
                  
                  
                  57
                  
                  
                  
                  —Total
      long-term borrowings
                  
                  $
                  988
                  
                  
                  $
                  —
                  
                  
                  
                  (988
                  )
                  
                  $
                  —
 
 - 18
-
  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”). On January 12,
2006, the Company entered into a First Amendment to Loan and Security Agreement
(the “First Amendment”) with the Bank and as consideration granted the Bank a
warrant to purchase 7,936 shares of the Company’s common stock at an exercise
price of $9.45 per share.  The warrant will expire in five years unless
previously exercised. The fair value of the warrant on the date of grant was $51
and was amortized to interest expense.
  Stock
      price
                    
                    $
                    1.89Dividend
      yield
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    63
                    %Risk-free
      interest rate
                    
                    
                    4.9
                    %Expected
      life
                    
                    5
      years
  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.  On August 24, 2007, the Company entered
into a Third Amendment to the Loan Agreement (the “Third Amendment”) with the
Bank. The Third Amendment added a Bridge Loan Sub-limit to the Loan Agreement of
up to $1.5 million at an interest rate of prime plus 4.0%, subject to a
borrowing base formula, and decreased the minimum tangible net worth that must
be maintained by the Company from $5.0 million to $2.0 million. The maturity
date of the Bridge Loan Sub-limit was the earlier of October 3, 2007 or the date
the Company closed a private investment public equity transaction. Concurrent
with the Third Amendment, the Company issued the Bank a warrant for 60,000
shares of the Company’s common stock at an exercise price of $4.90, the closing
price of the Company’s common stock on August 24, 2007. The Company calculated
the fair value of the warrant on the date of grant to be $175 using the
Black-Scholes model incorporating the following assumptions:
  Dividend
      yield
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    67
                    %Risk-free
      interest rate
                    
                    
                    4.4
                    %Expected
      life
                    
                    5
      years
 
 The value
of the warrant has been amortized over the term of the line of credit, and is
included in Interest and Other Expense on the Income Statement for the 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 with Agility Capital LLC. In connection
with the Fourth Amendment, the Bank consented to the divestiture of NOMOS and
released its lien on the NOMOS assets.
  - 19
-
  On
October 3, 2007, the Company entered into a Fifth Amendment and Forbearance to
the Loan Agreement (the “Fifth Amendment”) with the Bank. The Fifth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 9, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 9, 2007 or the date the Company closes a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to an increase in
the Company’s subordinated debt facility with Agility Capital LLC from $750 to
up to $1,000.
  On
October 29, 2007, the Company entered into a Sixth Amendment and Forbearance to
the Loan Agreement (the “Sixth Amendment”) with the Bank. The Sixth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 20, 2007 or the date the Company closes a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to the Company’s
issuing up to $500 in unsecured subordinated debt to Mr. John Friede, or an
entity owned or controlled by Mr. Friede. At the time, Mr. Friede was a
significant stockholder of the Company, and was a director of the Company at the
date of the agreement.
  On
November 20, 2007, the Company entered into a Seventh Amendment and Forbearance
to its Loan Agreement (the “Seventh Amendment”) with the Bank. The Seventh
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to December 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of December 20, 2007 or the date the Company closes a
private investment public equity transaction, and (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007. In connection with the Seventh
Amendment, the Company granted a warrant to the Bank to purchase 18,181 shares
of the Company’s common stock, at a warrant price of $2.75 per share, which is
equal to the closing price of the Company’s common stock on November 20, 2007,
the date the Company’s Board of Directors approved the issuance of this warrant.
The number of shares is subject to adjustment as provided by the terms of the
warrant. The warrant will expire in five years unless previously exercised. The
Company calculated the fair value of the warrant on the date of grant to be $31
using the Black-Scholes model incorporating the following
assumptions:
  Dividend
      yield
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    71
                    %Risk-free
      interest rate
                    
                    
                    3.5
                    %Expected
      life
                    
                    5
      years
  The value
of the warrant has been amortized over the term of the line of credit, and is
included in Interest and Other Expense on the Income Statement for the three
months ended January 31, 2008.
  - 20
-
  On
December 18, 2007, the Company entered into an Eighth Amendment and Forbearance
to the Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to the earlier of February 1, 2008 or the date the Company completes its private
placement, (ii) a forbearance by the Bank from exercising its rights and
remedies against the Company, until such time as the Bank determines in its
discretion to cease such forbearance, due to the defaults under the Loan
Agreement resulting from the Company failing to comply with the tangible net
worth covenant in the Loan Agreement as of July 31, 2007, August 31, 2007,
September 30, 2007 and October 31, 2007 and (iii) a consent from the Bank to
allow the Company to repay its outstanding loan from Mr. John A. Friede in the
amount of $250. In connection with the Eighth Amendment, the Company granted a
warrant to the Bank to purchase 38,461 shares of the Company’s common stock as
determined by dividing the warrant price of $50 by the $1.30 warrant price per
share, which is equal to the closing price of the Company’s common stock on
December 18, 2007, the date the Company’s Board of Directors approved the
issuance of this warrant. The number of shares are subject to adjustment as
provided by the terms of the warrant. The warrant will expire in five years
unless previously exercised. The Company calculated the fair value of the
warrant on the date of grant to be $33 using the Black-Scholes model
incorporating the following assumptions:
  Dividend
      yield
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    82
                    %Risk-free
      interest rate
                    
                    
                    3.5
                    %Expected
      life
                    
                    5
      years
 
 The value
of the warrant has been amortized over the term of the line of credit, and is
included in Interest and Other Expense on the Income Statement for the three
months ended January 31, 2008.
 
 The
Company paid the $1,275 and $755 outstanding balance of the Line of Credit and
the Bridge Sub-Limit, including accrued interest on January 23, 2008. The Bridge
Sub-Limit agreement was terminated in accordance with its terms upon payment of
the outstanding balance.
 
 On May
28, 2008, the Company entered into a Ninth Amendment to the Loan Agreement (the
“Ninth Amendment”) with the Bank. The Ninth Amendment renews the revolving
credit facility under which the Company may borrow an additional $3,000 based
upon eligible receivables. The revolving credit facility is payable monthly and
carries interest at prime plus 0.50%, and is subject to certain financial
covenants. The revolving credit facility expires 24 months from the date of
execution of the Ninth Amendment.
 
 The Ninth
Amendment also includes a $3,000 Growth Capital Loan which provides for an
advance period during which $1,500 was advanced to the Company on June 7, 2008,
and $1,500 may be advanced to the Company no later than September 30, 2008 (see
Eleventh Amendment below). The Growth Capital Loan provides for interest only
payments through the advance period at prime plus 2.25%, and 36 month repayment
including principal and interest.
 
 In
connection with the Ninth Amendment, the Company granted a warrant to the Bank
to purchase 99,337 shares of the Company’s common stock as determined by
dividing the warrant price of $150 by the $1.51 warrant price per share, which
is equal to the closing price of the Company’s common stock on May 19, 2008, the
date the Company’s Board of Directors approved the issuance of this warrant. The
number of shares is subject to adjustment as provided by the terms of the
warrant. The warrant will expire in five years unless previously exercised. The
Company calculated the fair value of the warrant on the date of grant to be $118
using the Black-Scholes model incorporating the following
assumptions:
 
 Dividend
      yield
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      89
                      %Risk-free
      interest rate
                      
                      
                      3.3
                      %Expected
      life
                      
                      5
      years
  - 21
-
  The total
debt discount of $118 is recorded as net to the total borrowings in the Ninth
Amendment. The debt discount of $56 related to the revolving line of credit
facility is amortized over the life of the facility. The remaining debt discount
related to the Growth Capital Loan is determined through allocation based on the
relative fair value of the loan and the relative fair value of the warrant. The
amount allocated to the warrant, accounted for as debt discount, is amortized
over the life of the Growth Capital Loan using the effective interest
method.
  On
September 11, 2008, the Company and the Bank executed the Tenth Amendment to the
Loan Agreement (the “Tenth Amendment”) which provides a waiver to the Company
for its non-compliance with the Minimum Tangible Net Worth Covenant at July 31,
2008.
 
 On
October 10, 2008, the Company and the Bank executed an Eleventh Amendment to the
Loan Agreement (the “Eleventh Amendment”) to modify the definition of eligible
accounts and to modify the disbursement and repayment of the Growth Capital
Loan.  Under the Eleventh Amendment, the final $1,500 of the Growth
Capital Loan is to be disbursed prior to March 31, 2009 subject to certain
conditions, as defined.  Additionally, the outstanding principal
balance of the Growth Capital Loan will be repaid in thirty-three (33) equal
monthly payments commencing on January 1, 2009.
 
 The Loan
Agreement is collateralized by the substantially all the assets of the
Company.
 
 At
January 31, 2009, the Company was not in compliance with the Minimum Tangible
Net Worth covenant on the Loan Agreement, and as a result, in February 2009, the
Bank withdrew the ability of the Company to draw the second installment on the
Growth Capital Line of $1,500 which was to be drawn by March 31, 2009, and has
withdrawn access to any further borrowings on the revolving line of
credit.  Also, in accordance with the terms of the Loan Agreement, the
Company was required to surrender its cash receipts from accounts receivable to
pay back the amounts outstanding on the revolving line of credit. See Note 11
Subsequent Events for further information.
 
 NOTE
8—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
 
 2007
PIPE
 
 Pursuant
to the terms of the Securities Purchase Agreement dated December 12, 2007 (the
“2007 Securities Purchase Agreement”), the Company completed a private placement
(the “2007 Private Placement”) of 12,601,628 shares of the Company’s common
stock on January 18, 2008 with Three Arch Partners IV, L.P. and affiliated funds
(“Three Arch Partners”), SF Capital Partners Ltd. (“SF Capital”) and CHL Medical
Partners III, L.P. and an affiliated fund (“CHL,” and together with Three Arch
Partners and SF Capital, the “Investors”) at a purchase price of $1.23 per share
as well as warrants to purchase an additional 630,081 shares of the Company’s
common stock (the “Warrants”) at an exercise price of $1.23 per share for an
aggregate consideration of approximately $15,500 (before cash commissions and
expenses of approximately $1,500). 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:
  - 22
-
  Investor
                    
                    Shares
                    
                    Warrants
                      (Shares issuable
                      upon exercise)Three Arch
      Partners
                    
                    
                    8,130,084
                    
                    406,504SF
      Capital
                    
                    
                    2,032,520
                    
                    101,626CHL
                    
                    
                    2,439,024
                    
                    121,951
  Prior to
the closing of the transaction, Three Arch Partners owned 1,024,327 shares of
common stock of the Company. After the transaction was consummated, Three Arch
Partners’ percentage ownership of the outstanding common stock increased from
approximately 17.3% to 49.5% (and 43.9% of the common stock on a fully diluted
basis).
 
 The
Warrants are exercisable beginning 180 days after the date of closing until 7
years after the date of closing. The values of the Warrants and common stock in
excess of par value have been classified as stockholders’ equity in additional
paid-in capital in the accompanying consolidated balance sheets. The Warrants
were evaluated under SFAS 133 and EITF 00-19, and the Company determined that
the Warrants have been correctly classified as equity.
 
 The terms
of the 2007 Private Placement were approved by a committee of the Company’s
Board of Directors consisting only of disinterested directors. The Company
received approval of a majority of the Company’s stockholders on January 17,
2008 of the 2007 Private Placement and amendment of its Certificate of
Incorporation to increase the number of shares of common stock it is authorized
to issue to 150,000,000 shares.
 
 Holders
of the shares of common stock sold to the Investors (the “Shares”) and the
shares of common stock issuable upon the exercise of the Warrants (the “Warrant
Shares” and collectively, with the Shares, the “Registrable Securities”) are
entitled to certain registration rights as set forth in the 2007 Securities
Purchase Agreement. In accordance with the 2007 Securities Purchase Agreement,
the Company filed a registration statement on Form S-3 to register the resale of
the Registrable Securities on July 16, 2008, which was declared effective by the
SEC on July 24, 2008.
 
 Under the
2007 Securities Purchase Agreement, Three Arch Partners has the right to name
one member to the Board so long as Three Arch Partners beneficially owns greater
than 1,000,000 shares of common stock of the Company (including shares of common
stock issuable upon exercise of the Warrants, and as appropriately adjusted for
stock splits, stock dividends and recapitalizations). Two of the current members
of the Board, Dr. Wilfred E. Jaeger and Roderick A. Young, have been designated
by Three Arch Partners.
 
 In
connection with the issuance of the Warrants and upon closing of the
transaction, the Company entered into warrant agreements with its transfer agent
relating to the Warrants. The warrant agreement relating to the Warrants issued
to SF Capital contains a non-waivable provision that provides that the number of
shares issuable upon exercise of the Warrants granted to SF Capital pursuant to
the 2007 Private Placement will be limited to the extent necessary to assure
that, following such exercise, the total number of shares of common stock of the
Company then beneficially owned by such holder and its affiliates does not
exceed 14.9% of the total number of issued and outstanding shares of common
stock of the Company (including for such purpose the shares of common stock
issuable upon such exercise of Warrants). The warrant agreement relating to the
Warrants issued to the other Investors does not contain this provision.
  - 23
-
  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, 2009, options underlying 68,519 shares of
common stock were outstanding under the 1996 Plan.
 
 On May 3,
2006, the Company’s stockholders approved the North American Scientific, Inc.
2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
340,000 shares, plus any shares from the 1996 Plan that are subsequently
terminated, expire unexercised or forfeited, to employees of the Company through
incentive stock options, non-qualified options, stock appreciation rights,
restricted stock and restricted stock units. Since its inception, 490,717 shares
have been transferred into the 2006 Plan from the 1996 Plan. On April 29, 2008,
the Company’s stockholders approved the adoption of Amendment No. 1 to the 2006
Plan (the “Amendment”) to (i) increase by 2,000,000 shares the number of shares
available to be issued under the 2006 Plan, (ii) increase by 35,000 the maximum
number of shares under the Plan that may be granted in any one fiscal year to an
individual participant from 60,000 to 95,000 and (iii) increase by 35,000 the
maximum number of shares under the Plan, in connection with a participant’s
initial service, such participant may be granted from 60,000 to 95,000 that will
not count against the limit set forth in (ii) above. The exercise price of an
option is equal to the fair market value of the Company’s stock on the date of
the grant. As of January 31, 2009, options underlying 1,404,168 shares of common
stock were available for grant in the 2006 Plan.
 
 On April
23, 2007, the Company granted stock options with respect to 360,000 shares of
its common stock in connection with the employment by the Company of its new
CEO, John B. Rush. Options with respect to 150,000 shares of the Company’s
common stock were issued under the 2006 Plan. Options with respect to the
remaining 240,000 shares of the Company’s common stock were issued as a
stand-alone grant outside the 2006 Plan and approved by the written consent of a
majority of stockholders on April 20, 2007. The stock options have an exercise
price of $5.80, which is equal to the fair market value per share of the
Company’s common stock on the grant date. All of the options have a term of ten
years and vest monthly over a four-year period. The options remain exercisable
until the earlier of the expiration of the term of the option or (i) three
months following Mr. Rush’s date of termination in the case of termination for
reasons other than cause, death or disability (as such terms are defined in his
employment agreement) or (ii) 12 months following Mr. Rush’s date of termination
in the case of termination on account of death or disability. In the event that
Mr. Rush is terminated for cause, all outstanding options, whether vested or
not, will immediately lapse. Pursuant to his employment agreement, stock options
issued to Mr. Rush were subject to an anti-dilution clause, triggered in the
event the Company issued additional equity securities within the twenty-four
months immediately following March 22, 2007, the date of his employment, such
that the number of options granted to Mr. Rush under the employment agreement
remains equivalent to 3% of the outstanding common stock of the Company. At its
January 15, 2008 meeting, the Board of Directors, agreed to make an additional
award to Mr. Rush as part of his employment. As a result of the 2007 Private
Placement, the Company issued 190,000 and 376,094 options underlying common
stock from the 2006 Plan and outside the 2006 Plan, respectively, to Mr. Rush at
an exercise price of $1.40 per share, the closing price of the Company’s common
stock on January 15, 2008, the date the option grant was approved by the Board
of Directors. The stock options vest 25% upon the first anniversary of the grant
date, and then evenly over the remaining (36) thirty-six months, such that all
options are vested after four years, and have a term of ten years.
 
 In
addition, three members of the executive management team were granted
anti-dilution guarantees by the Board of Directors as consideration of their
employment. The Company issued 440,369 stock options to these executives from
the 2006 Plan, at an exercise price of $1.40 per share, the closing price of the
Company’s on January 15, 2008, the date the option grant was approved by the
Board of Directors. Also at the January 15, 2008 meeting, the Board of Directors
granted, from the 2006 Plan, stock options underlying 156,000 shares of the
Company’s common stock to certain management employees, at a $1.40 exercise
price. The stock options vest 25% after a one year cliff, and then evenly over
the remaining (36) thirty-six months, such that all options are vested after
four years, and have a term of ten years.
  - 24
-
  On
February 15, 2008, the Company’s Board of Directors approved, subject to the
approval of the Company’s stockholders, a plan to re-price all existing employee
stock options at $2.05 per share, the closing price of the Company’s common
stock on February 15, 2008, except for the 2006 Premium Price Awards, which were
re-priced to $3.25 per share, which is equal to 159% of the re-priced fair value
of the Company’s common stock. The re-pricing applies to all stock options
outstanding as of February 15, 2008 held by all persons who are currently
employed or actively engaged by the Company, including its executive officers,
and to certain other persons for which the Board determined that re-pricing was
appropriate (collectively, the “Eligible Participants”). The number of shares
subject to the new stock options was determined based on a Black-Scholes
valuation of the existing stock option such that the Black-Scholes value of the
new stock option will approximately equal the Black-Scholes value of the
existing stock option, using the following variables.
 
 Dividend
      yield
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      72
                      %Risk-free
      interest rate
                      
                      
                      3.4
                      %Expected
      life
                      
                      5
      Years
 
 All new
stock options continue to vest in accordance with the vesting terms of the
existing stock options. All new stock options, to the extent such option are
vested, will be exercisable for a period of seven years. The Company’s
stockholders approved the re-pricing at their annual meeting on April 29, 2008.
As a result of the re-pricing exercise, options underlying 691,852 shares of
common stock, with an exercise price ranging from $4.65 to $83.75, were replaced
by options underlying 535,257 shares of common stock, with and exercise price of
$2.05 or $3.25 for the 2006 Premium Awards.
 
 The
following table summarizes the re-pricing activity approved by the Board of
Directors and stockholders as of January 31, 2009:
 
 Employee Options Cancelled and Re-priced
                                                
                                                Re-priced Options GrantedPlan
                                                
                                                Shares
                                                
                                                Range of Exercise Price
                                                
                                                Shares
                                                
                                                Weighted
                                                  Avg.
                                                  Exercise
                                                  Price1996 Plan
                                                
                                                179,060
                                                
                                                $
                                                11.15
                                                
                                                —
                                                
                                                $
                                                83.75
                                                
                                                41,595
                                                
                                                $
                                                2.05Premium Price
                                                
                                                49,900
                                                
                                                
                                                16.75
                                                
                                                —
                                                
                                                
                                                16.75
                                                
                                                22,658
                                                
                                                
                                                3.252006
      Plan
                                                
                                                222,892
                                                
                                                
                                                4.65
                                                
                                                —
                                                
                                                
                                                5.80
                                                
                                                231,004
                                                
                                                
                                                2.05CEO
      Options
                                                
                                                240,000
                                                
                                                
                                                5.80
                                                
                                                —
                                                
                                                
                                                5.80
                                                
                                                240,000
                                                
                                                
                                                2.05691,852
                                                
                                                $
                                                4.65
                                                
                                                
                                                
                                                $
                                                83.75
                                                
                                                535,257
                                                
                                                $
                                                2.05
 
 On April
29, 2008, the Company’s stockholders approved the 2008 Non-Employee Directors’
Equity Compensation Plan (the “2008 Director Plan”). The 2008 Directors Plan
supersedes the 2003 Non-Employee Directors' Equity Compensation Plan. Under the
2008 Director Plan, the Company may issue up to 1,500,000 shares to eligible
non-employee directors of the Company through non-qualified options and/or
restricted stock. The exercise price of an option is equal to the fair market
value of the Company's stock on the date of grant. Options and restricted stock
vest in accordance with the terms set forth at the time of the grant, and will
become exercisable provided that the holder is a non-employee director of the
Company on any such vesting date. The options expire ten years from the date of
grant. Pursuant to the terms of the 2008 Director Plan, the Board of Directors
and the stockholders approved a one-time non-statutory stock option grant to
each non-employee director, to purchase 30,000 shares of the Company’s common
stock, and to the Chairman of the Board, a non-statutory stock option grant to
purchase 45,000 shares of the Company’s common stock, in exchange for all of
such director’s and the Chairman’s outstanding stock options. As a result, the
Company cancelled 68,000 stock options, with a range of exercise price between
$6.15 and $44.00 from the 2003 Non-Employee Director Equity Compensation Plan,
and issued 195,000 stock options, from the 2008 Director Plan, at an exercise
price of $2.10 per share, the closing price of the Company’s common stock on the
NASDAQ Capital Market on February 13, 2008, which is the date the Company’s
Compensation Committee approved the exchange. The Company’s stockholders
approved the exchange on April 29, 2008.
  - 25
-
  In
addition, under the terms of the 2008 Director Plan, each non-employee director
elected to serve on the Board at the annual meeting is granted a non-statutory
stock option to purchase 10,000 shares of the Company’s common stock. On the
date of such meeting, the non-employee director elected or appointed Chairman of
the Board shall be granted an additional 10,000 stock options. Each individual
who is first elected or appointed as a non-employee director shall be granted,
on the date of such initial election or appointment, a stock option to purchase
30,000 shares of common stock. Pursuant to these terms, and subsequent to its
annual meeting on April 29, 2008, the Company issued 100,000 stock options at a
$1.65 exercise price, the closing price of the Company’s common stock on April
29, 2008 to its non-employee Directors appointed at the annual meeting. The
options vest one year from the date of grant and have a seven-year term from the
date of grant.
 
 At
January 31, 2009, a total of 2,698,871 shares of the Company’s common stock were
reserved for issuance. The following table summarizes stock option activity for
both plans:
 
 Options OutstandingOptions
                        Available
                        for Grant
                      
                      Number
                        Outstanding
                      
                      Exercise PriceBalance at October 31, 2006
                      
                      
                      357,000
                      
                      687,661
                      
                      $
                      0.15 - $122.70Granted
                      
                      
                      (492,894
                      )
                      492,894
                      
                      $
                      4.65 - $6.15Forfeited and expired
                      
                      
                      296,255
                      
                      (279,132
                      )
                      $
                      3.50 - $122.70Exercised
                      
                      
                      —
                      
                      —
                      
                      
                      —Additional shares reserved
                      
                      
                      240,000
                      
                      —
                      
                      
                      —Balance at October 31, 2007
                      
                      
                      400,361
                      
                      901,423
                      
                      $
                      0.15 - $117.50Granted
                      
                      
                      (1,957,480
                      )
                      1,957,480
                      
                      $
                      0.30 - $2.10Forfeited and expired
                      
                      
                      262,797
                      
                      (373,397
                      )
                      $
                      1.40 -$117.50Exercised
                      
                      
                      —
                      
                      —
                      
                      
                      —Additional shares reserved
                      
                      
                      3,921,868
                      
                      —
                      
                      
                      —Shares cancelled for re-pricing
                      
                      
                      691,852
                      
                      (691,852
                      )
                      $
                      4.65 – $83.75Shares cancelled for exchange
                      
                      
                      68,000
                      
                      (68,000
                      )
                      $
                      6.15 – $44.00Shares issued for re-pricing
                      
                      
                      (535,257
                      )
                      535,257
                      
                      $
                      2.05 – $3.25Shares issued in exchange
                      
                      
                      (195,000
                      )
                      195,000
                      
                      $
                      2.10Balance at October 31, 2008
                      
                      
                      2,657,141
                      
                      2,455,911
                      
                      $
                      0.15 - $83.75Granted
                      
                      
                      (20,000
                      )
                      20,000
                      
                      $
                      0.27Forfeited and expired
                      
                      
                      61,730
                      
                      (61,730
                      )
                      $
                      1.40
      - $16.75Exercised
                      
                      
                      —
                      
                      —
                      
                      
                      —Balance at January
      31, 2009
                      
                      
                      2,698,871
                      
                      2,414,181
                      
                      $
                      0.15
      - $83.75
 
 There were 618,321,
333,969, options, 333,904 options and 375,733 
options  exercisable with weighted average exercise prices of
$13.78, $13.78, $34.70 and $42.85 at January 31, 2009, October 31, 2008, October
31, 2007 and 2006, respectively.
  - 26
-
  The
following table summarizes options outstanding at January 31, 2009 and the
related weighted average exercise price and remaining contractual life
information:
 
 Employee Options Outstanding
                                          
                                          Employee Options ExercisableRange of
                                            Exercise Prices
                                          
                                          Shares
                                          
                                          Weighted Avg.
                                            Remaining
                                            Contractual
                                            Life (Years)
                                          
                                          Weighted
                                            Avg.
                                            Exercise
                                            Price
                                          
                                          Shares
                                          
                                          Weighted
                                            Avg.
                                            Exercise
                                            Price$0.15 - $1.35
                                          
                                          
                                          528,413
                                          
                                          7.93
                                          
                                          $
                                          0.79
                                          
                                          26,816
                                          
                                          $
                                          0.97$1.40
      - $1.40
                                          
                                          
                                          926,530
                                          
                                          8.96
                                          
                                          $
                                          1.40
                                          
                                          231,630
                                          
                                          $
                                          1.40$1.60
      - $2.05
                                          
                                          
                                          665,445
                                          
                                          7.67
                                          
                                          $
                                          1.87
                                          
                                          215,832
                                          
                                          $
                                          1.97$2.10-
      $44.00
                                          
                                          
                                          273,913
                                          
                                          2.73
                                          
                                          $
                                          10.56
                                          
                                          124,163
                                          
                                          $
                                          20.61$83.75
      - $83.75
                                          
                                          
                                          19,880
                                          
                                          1.32
                                          
                                          $
                                          83.75
                                          
                                          19,880
                                          
                                          $
                                          83.752,414,181
                                          
                                          
                                          
                                          
                                          
                                          
                                          618,321
 
 The
average fair value for accounting purposes of options granted was $0.85 and
$3.14 for the years ended October 31, 2008 and 2007, respectively, and $0.20 for
the three months ended January 31, 2009.
 
 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, 2009 and October 31,
2008:
 
 Number of
                            Shares
                          
                          Weighted
                            Average
                            Exercise Price
                          
                          Weighted Avg.
                            Remaining
                            Contractual
                            Life (Years)
                          
                          Intrinsic Value
                            (in whole $)As of October 31,
      2008:Employee
      Options Outstanding
                          
                          2,455,911
                          
                          $
                          3.12
                          
                          7.77
                          
                          $
                          140Employee
      Options Expected to Vest
                          
                          2,121,942
                          
                          $
                          10.46
                          
                          6.61
                          
                          $
                          —Employee
      Options Exercisable
                          
                          333,969
                          
                          $
                          13.78
                          
                          6.22
                          
                          $
                          140As of January 31,
      2009:Employee
      Options Outstanding
                          
                          2,414,181
                          
                          $
                          3.12
                          
                          7.61
                          
                          $
                          140Employee
      Options Expected to Vest
                          
                          1,795,860
                          
                          $
                          5.51
                          
                          7.61
                          
                          $
                          —Employee
      Options Exercisable
                          
                          618,321
                          
                          $
                          8.08
                          
                          7.11
                          
                          $
                          140
 
 As of
January 31, 2009, there was $1,893 of unrecognized compensation expense related
to non-vested share-based compensation arrangements granted under share-based
compensation plans using the fair value method of SFAS 123 (R).  As of
January 31, 2009, the cost was expected to be recognized over a weighted average
period of 4 years, using the straight line method.
 
 - 27
-
 
 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:
 
 ThreeMonthsEndedJanuary 31,
                            
                            
                            Year EndedOctober 31,2009
                            
                            
                            2008
                            
                            
                            2007Dividend
      yield
                            
                            
                            0
                            %
                            
                            
                            0
                            %
                            
                            
                            0
                            %Expected
      volatility
                            
                            
                            99
                            %
                            
                            
                            72
                            %
                            
                            
                            61
                            %Risk-free
      interest rate
                            
                            
                            1.8
                            %
                            
                            
                            3.4
                            %
                            
                            
                            4.8
                            %Expected
      life
                            
                            5
      years
                            
                            
                            5
      years
                            
                            
                            5
      years
 
 Stockholders' Rights
Plan
 
 In
October 1998, the Board of Directors of the Company implemented a rights
agreement 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 expired pursuant to their terms in October
2008.
 
 Employee
Stock Purchase Plan
 
 In March
2000, the Board of Directors authorized an Employee Stock Purchase Plan (the
“ESPP") under which 60,000 shares of the Company's common stock are reserved for
issuance. Eligible employees may authorize payroll deductions of up to 15% of
their salary to purchase shares of the Company's common stock at a discount of
up to 15% of the market value at certain plan-defined dates. For the years ended
October 31, 2008, 2007 and 2006, the shares issued under the ESPP were 21,455,
30,816 and 19,296 shares, respectively. There were no shares issued under the
ESPP for the three months ended January 31, 2009.  At January 31,
2009, October 31, 2008 and 2007, 21,527, 21,257 and 43,951 shares were available
for issuance under the ESPP, respectively.
 
 Common
Stock Repurchase Program
 
 In
October 2001, the Board of Directors authorized a stock repurchase program
to acquire up to $10,000 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, 2009
and October 31, 2008, a cumulative total of 23,399 shares had been
repurchased by the Company at a cost of $227, and are reflected as Treasury
Stock on the Balance Sheet at the respective dates.
 
 NOTE  9—COMMITMENTS
AND CONTINGENCIES
 
 Contract
Commitments
 
 As of
January 31, 2009, the Company has entered into purchase commitments of $52 to
suppliers under blanket purchase orders. The blanket purchase orders expire when
the designated quantities have been purchased.
  - 28
-
  Lease
Commitments
 
 The
Company leases facilities and equipment under non-cancelable operating lease
agreements. Future minimum lease payments are subject to annual adjustment for
increases in the Consumer Price Index. Total rent expense for the three months
ended January 31, 2009 and 2008 was $111 and $93, respectively.
 
 Related
Parties and License Agreements
 
 On
February 17, 2006 the Company entered an exclusive license agreement with
IdeaMatrix, Inc. (a company wholly owned by our former Vice President of New
Product Development (Brachytherapy), Richard Terwilliger) for certain
brachytherapy technology pertaining to needles and strands, used in the
brachytherapy manufacturing process.  This technology is critical to
our SurTRAK line of products, sold in connection with our brachytherapy
seeds.  Under this exclusive license agreement, the Company paid $125
upon execution of the license agreement on February 17, 2006, and is required to
pay $125 per year over five years. There is no annual renewal fee or royalty
arising out of this license.  The term of this license expires upon
the last expiring patent included in the license. As part of this license
agreement, the Company has agreed to indemnify Mr. Terwilliger and IdeaMatrix,
Inc. for claims arising from the licensed property, including the claim raised
in the Worldwide Medical Technology lawsuit against Mr. Terwilliger and
IdeaMatrix, Inc.
 
 $375
remains payable through 2011 under the IdeaMatrix license
agreement.
  Outsourcing
  On April
20, 2008, the Company entered into an administrative management agreement with
third-party administrator (the “Administrator”). Under the terms of the
agreement, all of the Company’s employees became employees of the Administrator,
and the Administrator assumed the cost all employee-related health benefit
costs, workers’ compensation insurance and the payroll and human resource
functions of the Company. The Company pays a monthly fee to the Administrator
equal to the monthly payroll for its former employees, plus a fixed fee as a
percentage of the payroll costs, to cover the costs of the employee’s
participation in the Administrator’s benefit plans, net of employee
contributions, workers’ compensation costs, and the payroll and human resource
management costs.
  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.
  - 29
-
  Litigation
 
 In
November 2005, we were 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 we fraudulently obtained WWMT’s confidential
information during negotiations to purchase WWMT in 2004 and that once we
acquired that information, we allegedly learned that Richard Terwilliger, (our
former Vice President of New Product Development) owned certain patent rights
and that we began trying to inappropriately gain property rights by hiring him
away from WWMT. We were 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. We have agreed to defend Mr. Terwilliger. We have moved the state
court claim against Mr. Terwilliger to federal court and the cases have
been consolidated. The defendants have answered both complaints and
discovery has commenced in each matter. In April 2006, WWMT had its hearing for
a preliminary injunction against Mr. Terwilliger heard in U.S. District
Court. Plaintiffs abandoned that portion of their application for
preliminary injunction that was based on an alleged misappropriation of trade
secrets shortly before the hearing. On August 30, 2006, Magistrate Judge
Donna Martinez issued a ruling ordering that what remained of plaintiffs'
motion be denied.  Specifically, the Magistrate Judge found that
plaintiffs do not have a reasonable likelihood of success on the merits of their
claim for declaratory judgment that some or all of plaintiffs are the sole
owners of the intellectual property at issues, and she further found that
there do not exist sufficiently serious questions going to the merits of that
claim to make them a fair ground for litigation.  On March 12, 2007, the
Court administratively dismissed the action. On or about April 30, 2007, the
parties filed a Joint Motion to Reopen the Case after Administrative Dismissal,
which the court subsequently denied without prejudice. The parties re-filed the
Joint Motion to Reopen the Case, and the Court issued an order reopening the
case on July 3, 2008. On August 22, 2008, the Court set a scheduling order in
this matter. On September 24, 2008, plaintiffs filed a Motion for an Extension
of Time to File a Motion For Leave to Amend.  Subsequently, on
September 29, 2008, plaintiffs filed a Motion for Leave to Amend the Complaint,
seeking to add additional claims to the action and remove other
claims.  On December 5, 2008, the Court denied both of plaintiffs’
motions, and ordered plaintiffs to file a request to dismiss any claims they
intend to withdraw voluntarily by December 22, 2008. On December 19, 2008, the
plaintiffs filed a Motion to Withdraw and Narrow claims, seeking to withdraw
their claims for misappropriation of trade secrets against the defendants for
certain time periods without prejudice. On January 12, 2009, the defendants
filed an opposition to that motion asserting that the misappropriation of trade
secret claim against the defendants should be dismissed with prejudice. On March
3, 2009, the defendants filed a motion for summary judgment on all claims
pending in the motion. On March 11, 2009, the Company filed for protection under
Chapter 11 of the U. S. Bankruptcy laws, and on March 20, 2009 the Court Stayed
the Case for ninety days and denied all pending motions without prejudice to
refiling at the Conclusion of the Stay. We deny liability and intend to
vigorously defend this litigation as it progresses.
  In
October 2007, we were 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 us 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. In September 2008, AnazaoHealth
filed an Amended Arbitration Demand to which we filed an
Objection.  On or about October 7, 2008, the parties agreed to toll
the issues in the Amended Arbitration Demand and the matter was taken off
calendar.  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
infringe their patent rights. We deny liability and intend to vigorously defend
this arbitration should it recommence.
  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 our former CORVUS and BAT products. The plaintiff dismissed
this complaint with prejudice on October 28, 2008.
  - 30
-
  In
November 2008, Denise M. Black and Lon Black, filed a complaint in the State of
New York, Supreme Court, County of Ontario against Clifton Springs Hospital
& Clinic, Charles H. Albrecht Radiation Oncology, Dana P. Hansen, M.D.,
Charles H. Albrecht, M.D., Matthew Pacella, MS, DABR, Dustin A. Gress, MS,
Upstate Medical Physics, Inc., Sandy K.S. Perry, M.D., Finger Lakes Women’s
Health LLC, NOMOS Corporation, n/k/a Best Nomos and North American Scientific,
Inc. alleging the defendants caused Mrs. Black to sustain personal injuries,
increased pain and suffering and additional medical expense due to negligence
and deviation from accepted medical practice.  We deny liability and
intend to vigorously defend this litigation as it progresses.  No
trial date has yet been set.
 
 On
February 13, 2009, the Company was served a lawsuit by Core Oncology, Inc., a
Washington corporation, alleging that the Company breached the terms of a supply
agreement. On February 27, 2009, Plaintiff filed a motion for a preliminary
injunction seeking to enjoin the proposed transaction with Best Theratronics,
Ltd. The deadline to respond to the complaint and oppose the motion for a
preliminary injunction was March 16, 2009. The Chapter 11 Proceeding has
effected an automatic Stay in the Proceeding. The Company intends to vigorously
defend itself with respect to this matter.
  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
10—NASDAQ LISTING


On March
23, 2009, the Company’s stock was
suspended from trading on NASDAQ. See Note 11 for further
information.





NOTE
11—SUBSEQUENT EVENTS





Chapter
11 Voluntary Bankruptcy Filing





On March
11, 2009, in response to the Company’s current financial condition, the reduced
borrowing capabilities under its Loan Agreement (See Note 7), current business
prospects, and to effect other arrangements surrounding the sale of its Prostate
Brachytherapy Product Line (See Note 3), the Company filed the Chapter 11
Proceeding.  It is anticipated that the Chapter 11 Proceeding will
result in the Bankruptcy Court’s approval of the sale of the Prostate
Brachtherapy Product Line and the potential sale of the assets of the ClearPath
breast brachytherapy product line.




- 31
-




Part of
the Chapter 11 Proceeding is an agreement with the Company’s Bank (See Note 7)
to allow the use of cash collateral on an interim basis.  Because the
Company was in default of its loan covenants at January 31, 2009, in February
2009, the Bank exercised its rights under the Loan Agreement to require the
Company to surrender its cash receipts from accounts receivable collections to
repay outstanding amounts under the Loan Agreement. Commencing with the March
11, 2009 bankruptcy petition, the Bank has agreed to allow the Company to retain
its accounts receivable collections as a source of working capital to be used
for defined purposes in the operation of its affairs.  When the sale
of the Company’s Prostate Brachytherapy Product Line closes (see Note 3), $1,400
of the $1,500 payment at closing will be used to repay amounts outstanding under
the Loan Agreement.  Thereafter, monthly payments of $83 will be made
to the Bank until the debt is fully satisfied.





Debtor
In Possession Loan





Also on
March 11, 2009, as part of the Chapter 11 Proceeding, the Company and Portola
Medical, a portfolio company of Three Arch Partners, a related party to the
Company, agreed to a $1,000 Debtor In Possession (“DIP”) loan to allow the
Company a short-term source of working capital as it conducts its ongoing
operations, proceeds with the sale of its business units and completes its
Chapter 11 Proceeding.  The DIP loan carries an interest rate of 12%
per annum, with interest payable monthly.





NASDAQ
Delisting Notice





On March
12, 2009, the Company received a notice from NASDAQ indicating that due to the
filing of Chapter 11 Proceeding on March 11, 2009, NASDAQ had determined
that, in accordance with the discretionary authority of the staff of NASDAQ
pursuant to Marketplace Rule 4300 and IM-4300, the Company’s securities will
be suspended from trading on NASDAQ at the opening of business on
March 23, 2009.  The Company expects its securities to be delisted
from NASDAQ on or about April 16, 2009.





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. All amounts are in thousands except share and per share
data.




- 32
-




Overview





We
manufacture, market and sell products for the radiation oncology community,
including Prospera® brachytherapy seeds and SurTRAKTM needles and strands used
primarily in the treatment of prostate cancer. We also develop and market
brachytherapy accessories used in the treatment of disease and calibration
sources used in medical, environmental, research and industrial
applications.





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




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





We have
received 510(k) approval from the United States Food and Drug Administration for
both ClearPath-CRTM to enable a low-dose rate, or continuous release treatment
utilizing our Prospera® brachytherapy seeds, and for ClearPath-HDRTM to enable a
high-dose rate treatment. Throughout 2007 and 2008, we have been gaining
clinical experience with the first generation ClearPath-HDR , and we intend to
launch the second generation devices in 2009, to be followed by the general
commercial release of our ClearPath-CR.





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




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





On March
11, 2009, in response to our current financial condition, current business
prospects, and to effect other arrangements surrounding the sale of our Prostate
Brachytherapy Product Line and Breast Brachytherapy Product Line(See Note 3 of
Notes to the Condensed Consolidated Financial Statements), we filed the Chapter
11 Proceeding.  See Note 11 of Notes to the Condensed Consolidated
Financial Statements for further information about the Chapter 11 Proceeding and
our new Debtor In Possession financing.




- 33
-




Results
of Operations




Three
Months Ended January 31, 2009 Compared to Three Months Ended January 31,
2008





Selling
and marketing expenses


Three Months Ended January 31,2009
                    
                    
                    2008
                    
                    
                    % ChangeSelling
      and marketing expenses
                    
                    $
                    231
                    
                    
                    $
                    142
                    
                    
                    
                    63
                    %





Selling
and marketing expenses, comprised primarily of salaries, commissions, and
marketing costs, increased $89, or 63%, to $231 for the three months ended
January 31, 2009, from $142 for the three months ended January 31, 2008. The
increase in selling and marketing expenses is primarily attributed to a $143
increase in payroll expenses and a $12 increase in market research expenses,
partially offset by a $24 decrease in reimbursement
consulting expenses and professional fees, a $31 decrease in trade show
expenses and a $11 decrease in all other expenses.





General
and administrative expenses ("G&A")


Three Months Ended January 31,2009
                    
                    
                    2008
                    
                    
                    % ChangeGeneral
      and administrative expenses
                    
                    $
                    1,161
                    
                    
                    $
                    1,882
                    
                    
                    
                    (38
                    )%




G&A
decreased $721, or 38%, to $1,161 for the three months ended January 31,
2009, from $1,882 for the three months ended January 31, 2008. The decrease
in G&A is primarily attributed to a $379 decrease in professional fees for
accounting related work, a $354 decrease in personnel costs, a $36 decrease in
travel expenses and a $23 decrease in all other expense categories, partially
offset by a $72 increase in legal fees.





Research
and development (“R&D”)


Three
      Months Ended January 31,2009
                    
                    
                    2008
                    
                    
                    %
      ChangeResearch
      and development expenses
                    
                    $
                    784
                    
                    
                    $
                    850
                    
                    
                    
                    (8
                    )%




R&D
decreased $66 or 8%, to $784 for the three months ended January 31, 2009,
from $850 for the three months ended January 31, 2008. The decrease in
R&D spending is primarily due to the timing of project spending on
ClearPath.





Interest
expense- Interest expense was $76 for the three months ended January 31, 2009,
compared to $1,132 for the three months ended January 31, 2008. The interest
expense in both periods resulted from the interest on short-term and long-term
debt and amortization of warrants. The decrease was attributable to bridge loan
activity in 2007 which was not present in later periods.





Interest
income and other income (expense), net — Interest income and other income
(expense) increased by $10 to $10 for the three months ended January 31, 2009
due to an increase in our borrowing activities in the first quarter of 2008 and
the last half of 2007.


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-




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, lines of credit, public offerings and from private placements of our
common stock.




As more
fully described in Note 7 of the Notes to the Condensed Consolidated Financial
Statements, we were not in compliance with certain covenants under our
pre-petition credit facility.  As previously discussed, we filed a
voluntary petition for reorganization relief under Chapter 11 of the U.S.
Bankruptcy Code, which also triggered a default under our pre-petition credit
facility.  However, under Section 362 of the U.S. Bankruptcy Code, the
filing of a bankruptcy petition automatically stays most actions against a
debtor, including most actions to collect pre-petition indebtedness or to
exercise control over the property of the debtor’s estate.  Absent an
order of the Bankruptcy Court, substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization.




As a
result of our Chapter 11 Proceeding filing on March 11, 2009 and the
associated agreements (See Notes 1, 3, 7 and 11 of Notes to the Condensed
Consolidated Financial Statements for further information), we believe that our
current cash balances, DIP loan facility, the use of the cash collateral under
our Loan Agreement, will provide the time for the completion of the sale of the
Prostate Brachytherapy Product Line and Breast Brachytherapy Product Line. If
events and circumstances occur such that we do not meet our current operating
plans, or satisfactorily satisfy all the conditions of our Chapter 11
Proceeding, we may be required to further reduce expenses or take other steps
which could have a material adverse effect on our effort to sale our product
lines that we now intend to sale. It is our expectation that the buyers of these
product lines will continue to support and operate such businesses, however, if
we are unable to meet all the conditions of the Chapter 11 Proceeding it may be
difficult to keep such businesses in operation prior to the sale. Following the
sale of our two brachytherapy product lines we will have no operating assets.
The proceeds from the sale of the two product lines may not be sufficient to
satisfy all of our liabilities.




Our
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business.  We have incurred net losses of $2,668, $10,945,
$20,998 and $17,130 for the three months ended January 31, 2009 and for the
years ended October 31, 2008, 2007 and 2006, respectively, and have used cash in
operations of $1,014, $12,015, $12,318 and $15,921 for the three months ended
January 31, 2009 and for the years ended October 31, 2008, 2007 and 2006,
respectively.  As of January 31, 2009, we had an accumulated deficit of
$161,539 cash and cash equivalents of $2,142, working capital of $435 and $2,534
of interest-bearing debt.





The
following sections discuss the effects of changes in our balance sheets, cash
flows, and commitments on our liquidity and capital resources.




Balance
Sheet and Cash Flows




Cash and cash
equivalents.  At January 31, 2009, we had cash and cash equivalents
aggregating approximately $2,142, a decrease of $114 from $2,256 at October 31,
2008. The decrease was primarily attributed to cash used in continuing
operations of $1,014 and capital expenditures of $135, partially offset by
additional bank borrowings on our line of credit of $1,080.





We expect
that cash used in operating activities may fluctuate in future periods as a
result of a number of factors, including fluctuations in our operating results,
accounts receivable collections, inventory management, research and development
expenses, and the timing of payments.




Equipment and leasehold
improvements.  Equipment and leasehold improvements (“Fixed Assets”)
increased approximately $46 to $344 at January 31, 2009, from $298 at October
31, 2008.  The increase in Fixed Assets reflects capital expenditures of
$135 offset by depreciation expense.


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-




Accounts payable and accrued
expenses.  Accounts payable and accrued expenses decreased
approximately $793 to $4,057 as of January 31, 2009, from $4,850 at October 31,
2008, as we settled accounts with suppliers and vendors with cash raised from
the sale of the non-therapeutic product line in September 2008 and the
collection of the $2,000 receivable in January 2009 related to the sale of
assets.





Liquidity
and Capital Resource Requirements





Bank debt.  The
bank debt with Silicon Valley Bank consists of a $3,000 revolving credit
facility with an interest rate of prime plus 0.5% and a $3,000 Growth Capital
Loan with an interest rate of prime plus 2.25%.  The outstanding
balance at January 31, 2009 is $1,080 for the revolving credit facility and
$1,454 on the Growth Capital Loan.  We do not have any available
borrowing capabilities on the revolving credit facility or the Growth Capital
Loan.  See Note 11 of Notes to the Condensed Consolidated Financial
Statements for the Company’s plans to repay this bank debt in connection with
its Chapter 11 voluntary bankruptcy filing on March 11, 2009.





DIP loan.Our
Debtor-in-Possession loan from Portola Medical, an affiliate of Three Arch
Partners, a related party to the Company, consists of a $1,000 loan with an
interest rate of 12% per annum.  We plan to access this DIP loan as a
short-term source of working capital during our Chapter 11
Proceeding.




Operating leases. We lease
our facilities under noncancelable operating leases which expire in mid 2009.
Under each lease, we are required to pay for insurance, taxes, utilities and
building maintenance, commonly known as a “triple net” lease. Future minimum
lease payments are subject to annual adjustment for increases in the Consumer
Price Index.   We also lease some equipment under non-cancelable
operating leases.





License fees.We
license some of the technologies used in our products from third
parties.





Purchase
commitments.We also have purchase commitments to a supplier
under blanket purchase orders.





Severance
liabilities.We have committed to severance payments to
several employees whose employment was terminated in 2008.  We will be
making those payments over specified terms, and at January 31, 2009, $472 of
those payments are in long-term liabilities and $483 is included in accrued
expenses.





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 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.


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-





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 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.





Fair
Value of Financial Instruments





The
carrying amounts of cash and cash equivalents, receivables, inventories,
accounts payable, and accrued expenses approximate fair value because of their
short maturities.





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




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.


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-


Long-Lived
Assets





In
accordance with Statement of Financial Accounting Standards (“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.





Derivative
Liabilities





We issued
warrants in connection with our borrowing activities in 2007 that included an
uncertain purchase price for a period of time. We evaluated these 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. We 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 7
and Note 8 to the condensed consolidated financial statements.





Income
Taxes and Uncertain Tax Positions





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. We have recorded a 100% valuation allowance against our
deferred tax assets until such time that it becomes more likely than not that we
will realize the benefits of the deferred tax assets. On November 1, 2007, we
implemented Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”.





Revenue
Recognition





We sell
products for radiation therapy treatment, primarily brachytherapy seeds used in
the treatment of cancer. We apply the provisions of SEC Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue Recognition” for the
sale of non-software products.  SAB No. 104, which supersedes SAB No. 101,
“Revenue Recognition in
Financial Statements,” provides guidance on the recognition, presentation
and disclosure of revenue in financial statements.  SAB No. 104 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for the disclosure of revenue recognition policies.  In general, we
recognize revenue related to product sales when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or
determinable, and (iv) collectibility is reasonably assured.





Research
and Development Costs





Research
and development ("R&D") expenses are comprised primarily of the following
types of costs incurred in performing R&D activities: salaries and benefits,
allocated overhead, occupancy costs, contract services and other outside costs,
and costs to acquire in-process research and development projects and
technologies which have no alternative future use. Research and development
costs are expensed as incurred.


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-


Share-based
Compensation





We
account for our share-based payments under the guidance set forth in SFAS
No. 123(R), Share-Based
Payment, 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 SABNo. 107 (“SAB
107”) with respect to share-based payments and SFAS No. 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, and a 46%
forfeiture rate for the 2006 Premium Price Awards, under the straight-line
method based on historic and estimated future forfeitures.




We use
the Black-Scholes option-pricing model for estimating the fair value of options
granted. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. We use projected volatility rates, which are based primarily upon
historical volatility rates. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate. For purposes of financial statement presentation, 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”,
which defines fair value, establishes a framework for consistently measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does not require any new
fair value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information.  In February 2008, the FASB deferred the effective date
of SFAS 157 by one year for certain nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  On November 1, 2008, the
Company adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and liabilities for which the effective date has been
delayed by one year.





The fair
value hierarchy described by the standard is based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value and include the following:





Level 1 –
Quoted prices in active markets for identical assets or
liabilities.





Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.





Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.





The
adoption of SFAS 157 did not have a material effect on the Company’s
consolidated financial position, results of operations or cash
flows.  The book values of cash and cash equivalents, accounts
receivable and accounts payable approximate their respective fair values due to
the short-term nature of these instruments.


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-


Effective
November 1, 2008, the Company adopted Financial Staff Position No. SFAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active” (FSP SFAS 157-3), which was issued on October 10, 2008. FSP SFAS
157-3 clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for the financial asset is not
active. The adoption of FSP SFAS 157-3 did not have an impact on the Company’s
consolidated financial statements.





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 March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards, (“EITF Issue 06-11”).
Beginning January 1, 2008, we adopted EITF Issue 06-11. In accordance with
EITF Issue 06-11, we record a credit to additional paid-in capital for tax
deductions resulting from a dividend payment on non-vested share awards we
expect to vest. The adoption of EITF Issue 06-11 did not have any impact on our
consolidated financial statements.





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.





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.


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-





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





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





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





Item
      3.
            Quantitative
      and Qualitative Disclosures about Market
Risk




Information
about market risks for the three months ended January 31, 2009, does not differ
materially from that discussed under Item 7A of our Annual Report on Form 10-K
for the fiscal year ended October 31, 2008.





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 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.


- 41
-


Changes
in Internal Controls





There
has been no change in our internal control over financial reporting during the
quarter ended January 31, 2009, that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.





PART
II – OTHER INFORMATION





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





Item
1. Legal Proceedings





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




Item
1A. Risk Factors
 
 We
operate in a rapidly changing environment that involves a number of risks, some
of which are beyond our control.  In addition to other information in
this Form 10-Q, you should carefully consider the risks described below before
investing in our securities.  This discussion highlights some of the
risks that may affect future operating results.  The risks described
below are not the only ones facing us.  Additional risks and
uncertainties not presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our industry or business
in general, may also impair our business operations.  If any of the
following risks or uncertainties actually occurs, our business, financial
condition and operating results would likely suffer.
  Our
wholly-owned subsidiary and sole operating company, North American Scientific,
Inc. a California corporation (the “Operating Company”), filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on March 11, 2009,
We are subject to the risks and uncertainties associated with a Chapter 11
Proceeding.
 
 For the
duration of our Chapter 11 Proceeding, our operations, including our ability to
execute our business plan, are subject to the risks and uncertainties associated
with bankruptcy. Risks and uncertainties associated with our Chapter 11
Proceeding include the following:
 
 ·
              the
      actions and decisions of our creditors and other third parties who have
      interests in our Chapter 11 Proceeding that may be inconsistent with our
      plans;
 ·
              our
      ability to obtain court approval with respect to motions in the Chapter 11
      Proceeding prosecuted from time to
time;
 ·
              our
      ability to develop, prosecute, confirm and consummate a plan of
      reorganization with respect to the Chapter 11
  Proceeding;
 ·
              our
      ability to obtain and maintain normal terms with vendors and service
      providers;
 ·
              our
      ability to maintain contracts that are critical to our
      operations;
 ·
              our
      ability to retain and motivate key personnel through the process of
      reorganization, or to attract new employees;
and
 ·
              risks
      associated with third parties seeking and obtaining court approval to
      terminate or shorten the exclusivity period for us to propose and confirm
      a plan of reorganization, to appoint a Chapter 11 trustee or to convert
      the proceedings to Chapter 7
Proceeding.
  - 42
-
 
 In
addition, the uncertainty regarding the eventual outcome of our restructuring
which involves the sale of both of our product lines, and the effect of other
unknown adverse factors, could prevent us from selling such product lines as
going concerns which, may cause the proceeds from the sale of such product lines
to be insufficient to fully pay all of our creditors.  Continuing as a
going concern is dependent upon, among other factors, the success and Bankruptcy
Court approval of a reorganization plan, maintaining the support of key
suppliers and customers, and retaining key personnel, along with financial,
business and other factors, many of which are beyond our control.
 
 Under the
priority scheme of the U.S. Bankruptcy Code, unless creditors agree otherwise,
pre-petition liabilities and post-petition liabilities must be satisfied in full
before shareholders may be entitled to receive any distribution or retain any
property under a plan of reorganization.  The recovery to creditors
and/or shareholders, if any, will not be ultimately determined until a plan of
reorganization is confirmed.  No assurance can be given as to what
values, if any, will be ascribed to each of these constituencies, or what types
or amounts of distributions, if any, such constituencies will receive, in the
Chapter 11 Proceeding.  A plan of reorganization could result in
holders of our capital stock receiving no distribution on account of their
interests and cancellation of their existing stock.  Under the U.S.
Bankruptcy Code, if certain requirements are met, a plan of reorganization can
be confirmed notwithstanding the rejection of such plan by the holders of our
equity securities and notwithstanding the fact that, under the plan, such equity
security holders do not receive or retain any property on account of their
equity interests.  We consider the value of our common stock to be
highly speculative and we strongly caution our equity holders that our stock may
ultimately be determined to have no value.  Accordingly, we urge that
appropriate caution be exercised with respect to existing and future investments
in our common stock or other equity securities, or any claims relating to
pre-petition liabilities.
  Our
Operating Company intends to sell its brachytherapy business and its Clearpath
product development as the essential part of its plan of
reorganization.
 
 Out
Operating Company must develop a plan of reorganization by March 31, 2009 to
effectively emerge from its Chapter 11 Proceeding. As a part of that
reorganization plan, we have reached agreement with Best Theratronics, Ltd, a
Canadian company, to purchase substantially all the assets and assume certain
liabilities of our Prostate Brachytherapy business for $2.5 million subject to
adjustment for operating results prior to the closing date. The sale of the
Prostate Brachytherapy business will leave us with no established source of
future revenue.
 
 In
addition, the Operating Company executed a Debtor In Possession (“DIP”)
Financing arrangement with Portola Capital, a company wholly owned by our
largest shareholder for $1.0 million. Our DIP lender intends to file a motion
with the Bankruptcy Court to acquire exclusive rights to our Clearpath product
development for an undetermined price.
 
 Both
sales are subject to a bidding process that may be joined by parties not yet
known to us. The bidding process may result in a purchase price that differs
substantially from that which was submitted to the Bankruptcy
Court.
 
 We
consider the value of our common stock to be highly speculative and we strongly
caution our equity holders that our stock may ultimately be determined to have
no value.  Accordingly, we urge that appropriate caution be exercised
with respect to existing and future investments in our common stock or other
equity securities, or any claims relating to pre-petition
liabilities.
  If our
Operating Company is successful in selling the Prostate Brachtherapy business
and the Clearpath product development, we will have no operating activities
remaining and no source of income.  The risk factors which follow are
principally based on the risks inherent in operating and financing our business
in a manner which includes our current operations.  The presentation
of these risk factors is not meant to suggest that we expect to own and operate
any of our current, or any other, operating business in the future.
 
 
 - 43
-
  Future
financing transactions will likely have dilutive and other negative effects on
our existing stockholders.
 
 In
January 2008, we completed a private placement of 12,601,628 shares of our
common stock that also included 630,081 shares of common stock issuable upon
exercise of warrants. This financing resulted in significant dilution of our
current stockholders, such that the three participants in the private placement
transaction now control in excess of 70% of our outstanding common stock. If we
raise additional equity financing in the future, the percentage ownership held
by existing stockholders would be further reduced, and existing stockholders may
experience further significant dilution. In addition, new investors may demand
rights, preferences or privileges that differ from, or are senior to, those of
our existing shareholders, such as warrants in addition to the securities
purchased and other protections against future dilutive
transactions.  We expect no further equity financings.
 
 Recent
turmoil in the credit markets and the financial services industry may negatively
impact our business, results of operations, financial condition or
liquidity.
 
 Recently,
the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented
level of intervention from the United States federal government. These
conditions not only limit our access to capital but also make it extremely
difficult for our customers, our vendors and us to accurately forecast and plan
future business activities, and they could cause U.S. and foreign
businesses to slow spending on our products and services, which would delay and
lengthen sales cycles.  Furthermore, during challenging economic times
our customers may face issues gaining timely access to sufficient credit, which
could result in an impairment of their ability to make timely payments to
us.  In addition, the recent economic crisis could also adversely
impact our suppliers’ ability to provide us with materials and components,
either of which may negatively impact our business, financial condition and
results of operations.
 
 Although
we maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments and such losses have
historically been within our expectations and the provisions established, we may
not continue to experience the same loss rates that we have in the past,
especially given the current turmoil of the worldwide economy.
 
 Our
common stock was suspended by the NASDAQ Capital Market at the opening of
business on March 23, 2009. Our ability to publicly or privately sell equity
securities and the liquidity of our common stock could be adversely affected by
the delisting from the NASDAQ Capital Market.
 
 On March
12, 2009, we received a notice from NASDAQ indicating that due to the filing of
Chapter 11 Bankruptcy on March 11, 2009, NASDAQ had determined that, in
accordance with the discretionary authority of the staff of NASDAQ pursuant to
Marketplace Rule 4300 and IM-4300, our securities were suspended from trading on
NASDAQ at the opening of business on March 23, 2009.  We expect our
securities to be delisted from NASDAQ on or about April 16, 2009.  We
do not plan to appeal this determination.
 
 Our
common stock may be eligible to trade on 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.
 
 - 44
-
  In
addition, delisting from NASDAQ could adversely affect our ability to raise
additional financing through the public or private sale of equity securities. We
expect to raise no additional funds through equity
financings.  Delisting from NASDAQ also would make trading our common
stock more difficult for investors, potentially leading to further declines in
our share price.
 
 ClearPath
breast brachytherapy device.
 
 
 We now
believe that our Operating Company will sell the rights to the ClearPath product
line through the Chapter 11 Proceeding.  We expect such business to be
supported by the buyer of such business.
 
 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 may not 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.
 
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
  We
are subject to intense competition. Our 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.
  - 45
-
 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.
 
 Because
we are a small company with limited resources, there is a risk that potential
customers will purchase products from larger manufacturers, even if our products
are technically superior, based on the perception that a larger, more
established manufacturer may offer greater certainty of continued product
improvements, support and service, which could cause our revenues to decline. In
addition, many of our competitors are substantially larger and have greater
sales, marketing and financial resources than we do. Developments by any of
these or other companies or advances by medical researchers at universities,
government facilities or private laboratories could render our products
obsolete. Moreover, companies with substantially greater financial resources, as
well as more extensive experience in research and development, the regulatory
approval process, manufacturing and marketing, may be in a better position to
seize market opportunities created by technological advances in our
industry.
 
 We
are highly dependent on our direct sales organization, which is small compared
to many of our competitors. Also, we may 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. In addition, our Chapter 11 Proceeding creates uncertainty regarding our
ability to continue as a going concern. 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, our direct sales and marketing
efforts may not 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 expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 - 46
-
 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. As described in Note 9 to the Condensed Consolidated Financial
Statements, Core Oncology, Inc. has served us with a lawsuit alleging breach of
our 2007 agreement with Core Oncology, Inc., and has ceased compliance with the
terms of that agreement. Accordingly, Core Oncology, Inc. is not currently
distributing our Palladium-103 brachytherapy seeds. If we are not able to
maintain our existing relationships with our other agents and distributors for
the sale of our Palladium-103 brachytherapy seeds or these third parties do not
successfully distribute our products, our revenues will be adversely impacted.
 
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 We depend partially on our relationship with a large customer
that comprises more than 10% of our revenue. If this relationship is
discontinued or if we are unable to develop new relationships, our revenues
could decline.
  Our sales
to Core Oncology, Inc. comprised more than 10% of our revenue for fiscal
2008.  As disclosed in Note 9 to the Condensed Consolidated Financial
Statements we were served a lawsuit by Core Oncology, Inc., on February 13, 2009
alleging that the Company breached the terms of a supply
agreement.  In addition to its lawsuit, Core Oncology, Inc. has ceased
purchasing products from us.
  We cannot
assure you that we will be able to develop new relationships or maintain our
existing relationships with our other large customers for the sale of our
Palladium-103 brachytherapy seeds.
 
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 The
cost of defending lawsuits for product-related liabilities could be prohibitive
to us.
 
 The
testing, marketing and sale of human healthcare products entail an inherent
exposure to product liability claims. Third parties may successfully assert
product liability claims against us. Although we currently have insurance
covering claims against our products, we may not be able to maintain this
insurance at acceptable cost in the future, if at all. In addition, our
insurance may not be sufficient to cover particularly large claims. Significant
product liability claims could result in large and unexpected expenses as well
as a costly distraction of management resources and potential negative publicity
and reduced demand for our products.
 
 Currently,
our revenues are primarily derived from products predominantly used in the
treatment of tumors of the prostate. If we do not obtain wider acceptance of our
products to treat other types of cancer, our sales could fail to increase and we
could fail to achieve our desired growth rate possibly causing us to cease
operations.
  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 possibly causing us to cease
operations.
 
 - 47
-
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
  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. The Chapter 11 Proceeding of our Operating
Comapny creates uncertainty regarding our ability to continue as a going
concern, which could adversely affect our ability to obtain isotope supplies in
sufficient quantity to meet our needs.  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.
 
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
  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 and Brett L. Scott, our Senior Vice President and Chief
Financial Officer. Our future business and financial results could be adversely
affected if the services of Messrs. Rush, Scott or other key employees cease to
be available. To our knowledge, none of our key employees have any plans to
retire or leave in the near future.
  Our
future success and ability to grow our business will depend in part on the
continued service of our skilled personnel and our ability to identify, hire and
retain additional qualified personnel. The Chapter 11 Proceeding of our
Operating Company creates uncertainty regarding our ability to continue as a
going concern, which could adversely affect our ability to hire and retain key
employees and 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.
  - 48
-
 
 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.
 
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 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.
  - 49
-
 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. Due to
our limited resources, the costs of such litigation may exceed our ability to
pay and we may not be able to adequately enforce our intellectual property
rights or defend our patents.
  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.
  We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
  We use radioactive materials which are subject to stringent
regulation and which may subject us to liability if accidents
occur.
 
 We
manufacture and process radioactive materials which are subject to stringent
regulation. We operate under licenses issued by the California Department of
Health which are renewable every eight years. We received a renewal of our
licenses for our North Hollywood and Chatsworth facilities in 2007. California
is one of the "Agreement States," which are so named because the Nuclear
Regulatory Commission, or NRC, has granted such states regulatory authority over
radioactive materials, provided such states have regulatory standards meeting or
exceeding the standards imposed by the NRC. Most users of our products must
obtain licenses issued by the state in which they reside (if they are Agreement
States) or the NRC. Use licenses are also required by some of the foreign
jurisdictions in which we may seek to market our products.
  Although
we believe that our safety procedures for handling and disposing of these
radioactive materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result. We believe we carry reasonably adequate
insurance to cover us in the event of any damages resulting from the use of
hazardous materials.
 
 As part
of the sale of our Non-Therapeutic Product Line in September 2008, we
closed our North Hollywood facility and have agreed
to decommission the site at our expense. We were not able to
complete the decommissioning process prior to commencing the Chapter 11
proceeding, and we did not obtain certification of the premises from the State
of California. The ultimate resolution of the decommissioning is not certain. We
may be required under our license by the State of California to complete the
decommissioning process prior to emerging from Chapter11. We estimate the
remaining cost to complete the decommissioning project to be up to $150,000, but
actual costs could be well above this estimate.
  - 50
-
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 Healthcare
reforms, changes in health-care policies and unfavorable changes to third-party
reimbursements for use of our products could cause declines in the revenues of
our products, and could hamper the introduction of new products.
  Hospitals
and freestanding clinics may be less likely to purchase our products if they
cannot be assured of receiving favorable reimbursement for treatments using our
products from third-party payors, such as Medicare, Medicaid and private health
insurance plans. Generally speaking, Medicare pays hospitals, freestanding
clinics and physicians a fixed amount for services using our products,
regardless of the costs incurred by those providers in furnishing the services.
Such providers may perceive the set reimbursement amounts as inadequate to
compensate for the costs incurred and thus may be reluctant to furnish the
services for which our products are designed. Moreover, third-party payors are
increasingly challenging the pricing of medical procedures or limiting or
prohibiting reimbursement for some services or devices, and we cannot be sure
that they will reimburse our customers at levels sufficient to enable us to
achieve or maintain sales and price levels for our products. There is no uniform
policy on reimbursement among third-party payors, and we can provide no
assurance that procedures using our products will qualify for reimbursement from
third-party payors or that reimbursement rates will not be reduced or
eliminated. A reduction in or elimination of third-party payor reimbursement for
treatments using our products would likely have a material adverse effect on our
revenues.
 
 Furthermore,
any federal and state efforts to reform government and private healthcare
insurance programs could significantly affect the purchase of healthcare
services and products in general and demand for our products in particular. We
are unable to predict whether potential reforms will be enacted, whether other
healthcare legislation or regulation affecting the business may be proposed or
enacted in the future or what effect any such legislation or regulation would
have on our business, financial condition or results of operations.
  The
federal Medicare program currently reimburses hospitals and freestanding clinics
for brachytherapy treatments. Medicare reimbursement amounts typically are
reviewed and adjusted at least annually. Medicare reimbursement policies are
reviewed and revised on an ad hoc basis. Adjustments could be made to these
reimbursement policies or amounts, which could result in reduced or no
reimbursement for brachytherapy services. Changes in Medicare reimbursement
policies or amounts affecting hospitals and freestanding clinics could
negatively affect market demand for our products.
 
 Medicare
reimbursement amounts for seeding are currently significantly less than for 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.
  - 51
-
 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 may not obtain third-party reimbursement
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 FDA 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 FDA and state and local regulatory agencies, such as
the State of California, to ensure such devices are safe and effective. Such
regulations, which include the U.S. Food, Drug and Cosmetic Act, or the FDC Act,
and regulations promulgated by the FDA, govern the design, development, testing,
manufacturing, packaging, labeling, distribution, import/export, possession,
marketing, disposal, clinical investigations involving humans, sale and
marketing of medical devices, post-market surveillance, repairs, replacements,
recalls and other matters relating to medical devices, radiation producing
devices and devices utilizing radioactive by-product material. State regulations
are extensive and vary from state to state. Our brachytherapy seeds constitute
medical devices subject to these regulations. Future products in any of our
business segments may constitute medical devices and be subject to regulation as
such. These laws require that manufacturers adhere to certain standards designed
to ensure that the medical devices are safe and effective. Under the FDC Act,
each medical device manufacturer must comply with requirements applicable to
manufacturing practices.
  In the
United States, medical devices are classified into three different categories,
over which the FDA applies increasing levels of regulation: Class I,
Class II and Class III. The FDA has classified all of our
brachytherapy products as Class I devices. Before a new device can be introduced
into the United States market, the manufacturer must obtain FDA clearance or
approval through either a 510(k) premarket notification or a premarket approval,
unless the product is otherwise exempt from the requirements. Class I
devices are statutorily exempt from the 510(k) process, unless the device is
intended for a use which is of substantial importance in preventing impairment
of human health or it presents a potential unreasonable risk of illness or
injury.
   - 52
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 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.
 
 - 53
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 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.
  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:
 
 
              Operating
      Company may not be able to manage the business at a consistent level
      through the Chapter 11 proceedings due to the uncertainty of its ability
      to fulfill its sales obligations, produce and ship product and other
      factors;
              Our
      net sales may grow at a slower rate than necessary to achieve
      profitability 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;   - 54
-
  
              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
  We
expect to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 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 $0.05
and $3.75 per share in the fifty-two week period ended October 31, 2008, and
between $0.09 and $0.39 per share in the three months ended January 31, 2009.
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 have filed resale registration statements covering an
aggregate of up to 12,601,628 shares of common stock and 630,081
shares of common stock issuable upon exercise of warrants for the benefit of the
selling security holders. The actual or anticipated resale by such investors
under these registration statements may depress the market price of our common
stock. Bulk sales of shares of our common stock in a short period of time could
also cause the market price for our shares to decline.
 
 - 55
-
 We expect
to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 Trading
volume in our stock has been limited, so investors may not be able to sell as
much stock as they want at prevailing prices.
 
 The
average daily trading volume in our common stock for fiscal year 2008 was
approximately 16,000 shares and the average daily number of transactions was
approximately 40 for the same period. If limited trading in our stock continues,
it may be difficult for investors to sell their shares in the public market at
any given time at prevailing prices. Moreover, the market price for shares of
our common stock is made more volatile because of the relatively low volume of
trading in our common stock. When trading volume is low, significant price
movement can be caused by the trading in a relatively small number of shares.
Volatility in our common stock could cause stockholders to incur substantial
losses.
  We
expect to sell our Prostate Brachytherapy Product Line and our ClearPath product
development through the Chapter 11 Proceeding.  If we are successful
in selling such product lines we will have no operating assets.  In
addition, we may not be able to raise adequate proceeds from the sale of such
product lines to pay all of our creditors.  We do not expect to
continue as a going concern.
 
 Our directors, officers and principal
stockholders have significant voting power and may take actions that may not be
in the best interests of our other stockholders.
 
 As of
January 31, 2009, our officers, directors and principal stockholders,
collectively beneficially own approximately 79% of our common stock in the
aggregate. As a result, these stockholders, if they act together, will be able
to control the management and affairs of our company and most matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control and might adversely affect
the market price of our common stock.
 
 Some
provisions of our charter documents may make takeover attempts difficult, which
could depress the price of our stock and inhibit your ability to receive a
premium price for your shares.
 
 Provisions
of our amended and restated certificate of incorporation could make it more
difficult for a third party to acquire control of our business, even if such
change in control would be beneficial to our stockholders. Our amended and
restated certificate of incorporation allows our board of directors to issue
shares of preferred stock and to fix the rights and preferences of such shares
without stockholder approval. Any such issuance could make it more difficult for
a third party to acquire our business and may adversely affect the rights of our
stockholders. These provisions may delay, deter or prevent a change in control
of us, adversely affecting the market price of our common stock.
  We
do not anticipate declaring any cash dividends on our common stock.
 
 We have
never declared or paid cash dividends on our common stock and do not plan to pay
any cash dividends in the near future. Our current policy is to retain all funds
and any earnings for use in the operation and expansion of our business. The
payment of cash dividends by us is restricted by our credit facility with
Silicon Valley Bank. If we do not pay dividends, our stock may be less valuable
to you because a return on your investment will only occur if our stock price
appreciates.
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Item
      6.
            Exhibits





(a) Exhibits.





Exhibits No.
            
            Title2.1
            
            Asset
      Purchase Agreement, dated February 11, 2009, by and among the Company,
      North American Scientific, Inc., a California corporation, and Best
      Theratronics, Ltd., incorporated by reference to Exhibit 2.1 to the
      Company’s Current Report on Form 8-K, filed on February 17,
      2009.2.2
            
            Asset
      Purchase Agreement, dated March 11, 2009, by and among the Company, North
      American Scientific, Inc., a California corporation, and Best
      Theratronics, Ltd., incorporated by reference to Exhibit 2.1 to the
      Company’s Current Report on Form 8-K, filed on March 17,
    2009.3.1
            
            Amended
      and Restated Certificate of Incorporation of the Company, as amended on
      April 30, 2008 by the Certificate of Amendment of Amended an Certificate
      of Incorporation, incorporated by reference to Exhibit 3.1 to the
      Company’s Quarterly Report on Form 10-Q, filed on June 16,
      2008.3.2
            
            Bylaws
      of the Company, (as amended December 5, 2007), incorporated by reference
      to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
      December 11, 2007.10.1
            
            Amendment
      to the Employment Agreement, dated as of December 31, 2008, between the
      Company and John Rush, incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K, filed on December 31,
      2008.10.2
            
            Amendment
      to the Offer Letter, dated as of December 31, 2008, between the Company
      and Brett Scott, incorporated by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K, filed on December 31,
      2008.10.3
            
            Management
      Agreement, dated February 11, 2009, by and among North American
      Scientific, Inc., a California corporation, and Best Theratronics, Ltd.,
      incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K, filed on February 17, 2009.31.1
            
            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




- 57
-





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 23, 2009
                By:
                /s/ John B. RushName:
                John B. RushTitle:
                President andChief Executive Officer(Principal Executive Officer)March 23, 2009
                By:
                /s/ Brett L. ScottName:
                Brett L. ScottTitle:
                Senior Vice President andChief Financial Officer(Principal Financial Officer)




- 58
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Exhibit
Index


Exhibit
      No.2.1
            Asset
      Purchase Agreement, dated February 11, 2009, by and among the Company,
      North American Scientific, Inc., a California corporation, and Best
      Theratronics, Ltd., incorporated by reference to Exhibit 2.1 to the
      Company’s Current Report on Form 8-K, filed on February 17,
      20092.2
            Asset
      Purchase Agreement, dated March 11, 2009, by and among the Company, North
      American Scientific, Inc., a California corporation, and Best
      Theratronics, Ltd., incorporated by reference to Exhibit 2.1 to the
      Company’s Current Report on Form 8-K, filed on March 17,
    20093.1
            Amended
      and Restated Certificate of Incorporation of the Company, as amended on
      April 30, 2008 by the Certificate of Amendment of Amended an Certificate
      of Incorporation, incorporated by reference to Exhibit 3.1 to the
      Company’s Quarterly Report on Form 10-Q, filed on June 16,
      2008.3.2
            Bylaws
      of the Company, (as amended December 5, 2007), incorporated by reference
      to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
      December 11, 2007.10.1
            Amendment
      to the Employment Agreement, dated as of December 31, 2008, between the
      Company and John Rush, incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K, filed on December 31,
      2008.10.2
            Amendment
      to the Offer Letter, dated as of December 31, 2008, between the Company
      and Brett Scott, incorporated by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K, filed on December 31,
      2008.10.3
            Management
      Agreement, dated February 11, 2009, by and among North American
      Scientific, Inc., a California corporation, and Best Theratronics, Ltd.,
      incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K, filed on February 17, 2009.31.1
            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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