**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, 2006**





or





o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


Commission
      File Number 0-26670








**NORTH
      AMERICAN SCIENTIFIC, INC.**


(Exact
      name of registrant as specified in its charter)





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





20200
      Sunburst Street, Chatsworth, CA 91311


(Address
      of principal executive offices)





(818)
      734-8600


(Registrant's
      telephone number, including area code)




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




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





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





The
      number of shares of Registrant's Common Stock, $.01 par value, outstanding
      as of
      February 28, 2006 was 16,988,868 shares.
















**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Index**




**Page****Part
                I - Financial
                Information****Item
                1. Financial Statements**Consolidated
                Balance Sheets as of January 31, 2006 and October 31, 2005
            3Consolidated
                Statements of Operations for the three months endedJanuary
                31, 2006 and 2005
            4Consolidated
                Statements of Cash Flows for the three months endedJanuary
                31, 2006 and 2005
            5Condensed
                Notes to the Consolidated Financial Statements
            6**Item
                2. Management’s Discussion and Analysis of Financial Condition and **Results
                of Operations****
            16**Item
                3. Quantitative and Qualitative Disclosures about Market Risk**
            23**Item
                4. Controls and Procedures**
            23




**Part
      II - Other Information**




**Item
                1A. Risk Factors**
            24**Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds**
            42**Item
                6. Exhibits**
            43**Signatures**
            44





-2-




**PART
      II - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Balance Sheets**




**January
                31,**
            
            **October
                31,****2006**
            
            **2005**(Unaudited)**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            2,005,000
            
            $
            2,630,000Marketable
                securities, held to maturity
            
            
            —
            
            
            993,000Accounts
                receivable, net of reserves
            
            
            6,100,000
            
            
            5,521,000Inventories,
                net of reserves
            
            
            3,951,000
            
            
            3,731,000Prepaid
                expenses and other current assets
            
            
            431,000
            
            
            794,000Total
                current assets
            
            
            12,487,000
            
            
            13,669,000Equipment
                and leasehold improvements
            
            
            2,649,000
            
            
            2,836,000Goodwill
            
            
            2,564,000
            
            
            2,564,000Intangible
                assets, net
            
            
            3,001,000
            
            
            3,158,000Other
                assets
            
            
            106,000
            
            
            106,000Total
                assets
            
            $
            20,807,000
            
            $
            22,333,000**Liabilities
                and Stockholders’ Equity**Current
                liabilitiesAccounts
                payable
            
            $
            2,314,000
            
            $
            2,164,000Accrued
                expenses
            
            
            3,529,000
            
            
            4,706,000Deferred
                revenue
            
            
            5,461,000
            
            
            4,662,000Line
                of credit
            
            
            1,000,000
            
            
            —Total
                current liabilities
            
            
            12,304,000
            
            
            11,532,000Commitments
                and contingenciesStockholders’
                EquityPreferred
                stock, $0.01 par value, 2,000,000 shares authorized; no
                sharesissued
            
            
            —
            
            
            —Common
                stock, $0.01 par value, 40,000,000 shares authorized, 17,096,894and
                17,056,669 shares issued; 16,988,868 and 16,948,643 shares
              outstanding
                as ofJanuary
                31, 2006 and October 31, 2005, respectively
            
            
            174,000
            
            
            173,000Additional
                paid-in capital
            
            
            121,524,000
            
            
            121,147,000Treasury
                stock, at cost - 108,026 common shares
            
            
            (129,000
            )
            
            (129,000
            )Accumulated
                deficit
            
            
            (113,066,000
            )
            
            (110,390,000
            )Total
                stockholders’ equity
            
            
            8,503,000
            
            
            10,801,000Total
                liabilities and stockholders’ equity
            
            $
            20,807,000
            
            $
            22,333,000





See
      condensed notes to the consolidated financial statements.




-3-




**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Operations**


**(Unaudited)**




**Three
                Months Ended January 31,****2006**
            
            **2005**RevenueProduct
            
            $
            5,169,000
            
            $
            5,373,000Service
            
            
            2,358,000
            
            
            2,791,000Total
                revenue
            
            
            7,527,000
            
            
            8,164,000Cost
                of revenueProduct
            
            
            3,856,000
            
            
            4,225,000Service
            
            
            820,000
            
            
            1,009,000Total
                cost of revenue
            
            
            4,676,000
            
            
            5,234,000Gross
                profit
            
            
            2,851,000
            
            
            2,930,000Operating
                expensesSelling
                expenses
            
            
            1,854,000
            
            
            2,139,000General
                and administrative expenses
            
            
            2,194,000
            
            
            2,302,000Research
                and development
            
            
            1,324,000
            
            
            1,632,000Amortization
                of intangible assets
            
            
            157,000
            
            
            575,000Total
                operating expenses
            
            
            5,529,000
            
            
            6,648,000Loss
                from operations
            
            
            (2,678,000
            )
            
            (3,718,000
            )Interest
                and other income
            
            
            3,000
            
            
            69,000Loss
                before provision for income taxes
            
            
            (2,675,000
            )
            
            (3,649,000
            )Provision
                for income taxes
            
            
            —
            
            
            —Net
                loss
            
            $
            (2,675,000
            )
            $
            (3,649,000
            )Basic
                and diluted loss per share:
            
            $
            (0.16
            )
            $
            (0.22
            )Weighted
                average number of shares outstanding
            
            
            16,854,315
            
            
            16,256,775





See
      condensed notes to the consolidated financial statements.




-4-




**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Consolidated
      Statements of Cash Flows**


**(Unaudited)**




**Three
                Months Ended January 31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,675,000
            )
            $
            (3,649,000
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            405,000
            
            
            868,000Share-based
                compensation expense
            
            
            258,000
            
            
            —Provision
                for doubtful accounts
            
            
            570,000
            
            
            —Changes
                in assets and liabilities, net of discontinued operation:Accounts
                receivable
            
            
            (1,149,000
            )
            
            1,303,000Inventories
            
            
            (220,000
            )
            
            462,000Prepaid
                and other current assets
            
            
            408,000
            
            
            13,000Accounts
                payable
            
            
            151,000
            
            
            (494,000
            )Accrued
                expenses
            
            
            (1,179,000
            )
            
            (465,000
            )Deferred
                revenue
            
            
            798,000
            
            
            (740,000
            )Net
                cash used in continuing operations
            
            
            (2,633,000
            )
            
            (2,702,000
            )Net
                cash used in discontinued operation
            
            
            —
            
            
            (454,000
            )Net
                cash used in operating activities
            
            
            (2,633,000
            )
            
            (3,156,000
            )Cash
                flows from investing activities:Proceeds
                from maturity of marketable securities
            
            
            993,000
            
            
            2,391,000Capital
                expenditures
            
            
            (55,000
            )
            
            (77,000
            )Net
                cash provided by investing activities
            
            
            938,000
            
            
            2,314,000Cash
                flow from financing activities:Proceeds
                from line of credit
            
            
            1,000,000
            
            
            —Proceeds
                from exercise of stock options and stock purchase plan
            
            
            70,000
            
            
            199,000Net
                cash provided by finance activities
            
            
            1,070,000
            
            
            199,000Net
                decrease in cash and cash equivalents
            
            
            (625,000
            )
            
            (643,000
            )Cash
                and cash equivalents at beginning of period
            
            
            2,630,000
            
            
            2,334,000Cash
                and cash equivalents at end of period
            
            $
            2,005,000
            
            $
            1,691,000





Supplemental
      disclosure:


In
      the
      three months ended January 31, 2006, the Company issued a warrant with an
      estimated fair value of $50,000 to a bank as consideration for a entering into
      an Amendment to a Loan Agreement. See Note 6 to the Financial
      Statements.





See
      condensed notes to the consolidated financial statements.




-5-




**NORTH
      AMERICAN SCIENTIFIC, INC.**





**Condensed
      Notes to Consolidated Financial Statements**


**(Unaudited)**








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





*Basis
      of Presentation*





The
      accompanying consolidated financial statements of North American Scientific,
      Inc. (the “Company”) are unaudited, other than the consolidated balance sheet at
      October 31, 2005, and reflect all material adjustments, consisting only of
      normal recurring adjustments, which management considers necessary for a fair
      statement of the Company’s financial position, results of operations and cash
      flows for the interim periods. The results of operations for the current interim
      periods are not necessarily indicative of the results to be expected for the
      entire fiscal year.





These
      consolidated financial statements have been prepared in accordance with the
      rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
      information and footnotes normally included in financial statements prepared
      in
      accordance with generally accepted accounting principles in the United States
      of
      America have been condensed or omitted pursuant to these rules and regulations.
      These consolidated financial statements should be read in conjunction with
      the
      consolidated financial statements and the notes thereto included in the
      Company’s Form 10-K, as filed with the SEC for the year ended October 31,
      2005.





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





*Management’s
      Plans*





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business. However, the Company has continued to incur
      substantial net losses and used substantial amounts of cash. As of January
      31,
      2006, the Company has an accumulated deficit of $113.1 million, cash, cash
      equivalents and marketable securities of $2.0 million and $1.0 million of
      short-term debt.





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




-6-





*Use
      of Estimates*





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





*Accounting
      for Stock-based Compensation*





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





The
      Company adopted SFAS 123(R) using the modified prospective transition method
      as
      of and for the three months ended January 31, 2006. In accordance with the
      modified prospective transition method, the Company’s financial statements for
      prior periods have not been restated to reflect, and do not include, the impact
      of SFAS 123(R). Share-based compensation expense recognized is based on the
      value of the portion of share-based payment awards that is ultimately expected
      to vest. Share-based compensation expense recognized in the Company’s Condensed
      Consolidated Statement of Operations during the three months ended January
      31,
      2006 includes compensation expense for share-based payment awards granted prior
      to, but not yet vested as of, October 31, 2005 based on the grant date fair
      value estimated in accordance with the pro forma provisions of SFAS 123. There
      were no share-based payment awards granted subsequent to October 31, 2005.





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. Share-based compensation expense related to stock options and employee
      stock purchases was $258,000 for the three months ended January 31, 2006, and
      was recorded in the financial statements as a component of general and
      administrative expense.




During
      the three months ended January 31, 2005, there was no share-based compensation
      expense related to stock options and employee stock purchases recognized under
      the intrinsic value method in accordance with APB 25. Had compensation cost
      for the Company’s stock options been recognized based upon the estimated fair
      value on the grant date under the fair value methodology prescribed by SFAS
      No.
      123, as amended by SFAS No. 148, the Company’s net loss and loss per share would
      have been as follows:




**Three
                months ended****January
                31, 2005**Net
                loss, as reported
            
            $
            (3,649,000
            )Less:
                total stock-based compensation (1)
            
            
            (430,000
            )Net
                loss, as adjusted
            
            $
            (4,079,000
            )Basic
                and diluted loss per share, as reported
            
            $
            (0.22
            )Basic
                and diluted loss per share, as adjusted
            
            $
            (0.25
            )





(1)
      As
      determined under the fair value method.




-7-





The
      Company uses the Black-Scholes option-pricing model for estimating the fair
      value of options granted. The Black-Scholes option-pricing model was developed
      for use in estimating the fair value of traded options that have no vesting
      restrictions and are fully transferable. In addition, option valuation models
      require the input of highly subjective assumptions, including the expected
      stock
      price volatility. The Company uses projected volatility rates, which are based
      upon historical volatility rates, trended into future years. Because the
      Company’s employee stock options have characteristics significantly different
      from those of traded options, and because changes in the subjective input
      assumptions can materially affect the fair value estimate, in management’s
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of the Company’s options. For purposes of pro forma
      disclosures, the estimated fair values of the options are amortized over the
      options’ vesting periods.





*Revenue
      Recognition*





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





*Product
      revenue*





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





*Software
      revenue*





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





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





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




-8-





*Service
      revenue*





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





*Recent
      Accounting Pronouncements*





In
      December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
      Payment," that addresses the accounting for share-based payment transactions
      in
      which a Company receives employee services in exchange for (a) equity
      instruments of the Company or (b) liabilities that are based on the fair value
      of the Company's equity instruments or that may be settled by the issuance
      of
      such equity instruments. SFAS No. 123R addresses all forms of share-based
      payment awards, including shares issued under employee stock purchase plans,
      stock options, restricted stock and stock appreciation rights. SFAS No. 123R
      eliminates the ability to account for share-based compensation transactions
      using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that
      was
      provided in Statement 123 as originally issued. Under SFAS No. 123R companies
      are required to record compensation expense for all share based payment award
      transactions measured at fair value. This statement is effective as of the
      beginning of the first interim or annual reporting period that begins after
      June
      15, 2005. The Company is implementing SFAS No.123R in the fiscal year beginning
      November 1, 2005. See the discussion earlier in this note under “Accounting for
      Stock-based Compensation”for the effect of the implementation on the current
      quarter.





In
      November 2004, the FASB issued SFAS No. 151 “Inventory Costs". This Statement
      amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing”, to clarify
      the accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage). In addition, this Statement requires
      that
      allocation of fixed production overhead to the costs of conversion be based
      on
      the normal capacity of the production facilities. The provisions of this
      Statement are effective for fiscal years beginning after June 15, 2005. The
      Company is implementing SFAS No.151 in the fiscal year beginning November 1,
      2005. It is not expected to have a material impact on the Company's financial
      position, results of operations or cash flows.





In
      December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets
      -
      an amendment of APB Opinion No. 29." This Statement amended APB Opinion No.
      29
      to eliminate the exception for non-monetary exchanges of similar productive
      assets and replaces it with a general exception for exchanges of non-monetary
      assets that do not have commercial substance. A non-monetary exchange has
      commercial substance if the future cash flows of the entity are expected to
      change significantly as a result of the exchange. The provisions of this
      Statement are effective for fiscal periods beginning after June 15, 2005. The
      Company implemented SFAS No.153 in our fiscal period beginning August 1, 2005.
      The implementation of SFAS No.153 did not have a material impact upon the
      Company’s financial position, results of operations or cash flows.





In
      March
      2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for
      Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that the term
      conditional asset retirement asset obligation as used in FASB Statement No.
      143,
“Accounting for Asset Retirement Obligations,” refers to a legal obligation to
      perform an asset retirement activity in which the timing and/or method of
      settlement are conditional on a future event that may or may not be within
      the
      control of the entity. The obligation to perform the asset retirement activity
      is unconditional even though uncertainty exists about the timing and/ or method
      of settlement. Uncertainty about the timing and/or method of settlement of
      a
      conditional asset retirement obligation should be factored into the measurement
      of the liability when sufficient information exists. This interpretation also
      clarifies when an entity would have sufficient information to reasonably
      estimate the fair value of an asset retirement obligation. FIN No. 47 is
      effective no later than the end of fiscal years ending after December 15, 2005
      (December 31, 2005 for calendar-year companies). Retrospective application
      of
      interim financial information is permitted but is not required. The Company
      is
      implementing FIN No. 47 in its fiscal year beginning November 1, 2005.
      Management does not expect adoption of FIN No.47 to have a material impact
      on
      the Company’s financial statements.




-9-





In
      May
      2005, the FASB issued Statement of Accounting Standards (SFAS) No. 154,
“Accounting Changes and Error Corrections”, an amendment to Accounting
      Principles Bulletin (APB) Opinion No. 20, “Accounting
      Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
      Statements”. Though SFAS No. 154 carries forward the guidance in APB No.20 and
      SFAS No.3 with respect to accounting for changes in estimates, changes in
      reporting entity, and the correction of errors, SFAS No. 154 establishes new
      standards on accounting for changes in accounting principles, whereby all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS No. 154
      is
      effective for accounting changes and error corrections made in fiscal years
      beginning after December 15, 2005, with early adoption permitted for changes
      and
      corrections made in years beginning after May 2005. The Company will implement
      SFAS No. 154 in its fiscal year beginning November 1, 2006. The Company is
      currently evaluating the impact of this new Standard, but believes that it
      will
      not have a material impact upon the Company’s financial position, results of
      operations or cash flows.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for
      Derivatives Instruments and Hedging Activities” (“SFAS 133”) and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishment
      of Liabilities” (“SFAS 140).  SFAS 155 amends SFAS 133 to narrow the scope
      exception for interest-only and principal-only strips on debt instruments to
      include only such strips representing rights to receive a specified portion
      of
      the contractual interest or principle cash flows.  SFAS 155 also amends
      SFAS 140 to allow qualifying special-purpose entities to hold a passive
      derivative financial instrument pertaining to beneficial interests that itself
      is a derivative instruments. The
      Company is currently evaluating the impact this new Standard, but believes
      that
      it will not have a material impact on the Company’s financial position, results
      of operations or cash flows.




**NOTE
      2** - **VARIABLE
      INTEREST ENTITY**




In
      October 2003, the Company entered into a Secured Loan Agreement with Prostate
      Centers of America (“PCA”).  Under the agreement, the Company was obligated
      to make periodic advances subject to PCA achieving certain milestones.  On
      January 20, 2006, the Company received notice from PCA that it had filed for
      protection under the bankruptcy law. As of January 31, 2006, the Company’s
      advances to PCA under the secured note totaling $950,000 have been written
      off.
      The Company has no equity interest in PCA.





TC2B,
      LLC, a distributor who has agreed to procure all of its brachytherapy seeds
      exclusively from the Company through October 2008, has a majority interest
      in
      PCA. On January 31, 2006, total trade receivables due from TC2B were $1.1
      million and sales to TC2B during the three months ended January 31, 2006 were
      $0.2 million. The trade receivables balance is fully reserved in the allowance
      for doubtful accounts, and the Company did not recognize the revenue from sales
      to TC2B in the three months ended January 31, 2006. Based on the terms of the
      lending and supply agreements with the above entities, the Company previously
      determined that PCA is a variable interest entity (“VIE”) and the Company is the
      primary beneficiary under FIN No. 46 because PCA does not have sufficient equity at
      risk for the entity to finance its activities.




-10-





FIN
      46
      requires that an enterprise consolidate a VIE if that enterprise has a variable
      interest that will absorb a majority of the entity’s expected losses if they
      occur. Accordingly, the Company adopted FIN No. 46 in October 2003 and
      consolidated PCA as a VIE, regardless of the Company not having an equity
      interest in PCA and its creditors having no recourse against the Company. In
      the
      fiscal year ended October 31, 2005, the Company determined that PCA was no
      longer a VIE, because: (i) during the fiscal year ended October 31, 2005, other
      outside parties provided additional funding to PCA, which resulted in the
      Company no longer being the holder of the variable interest that would hold
      the
      majority of the entity’s losses, (ii) PCA’s other creditors have no recourse
      against the Company, (iii) the Company has no equity interest in PCA, and (iv)
      PCA had informed the Company that it likely will cease operations in 2006.
      As a
      result, the Company did not consolidate PCA as a VIE in its financial statements
      for the fiscal year ended October 31, 2005.





No
      amounts related to PCA were included in the Company’s consolidated balance
      sheets at January 31, 2006, and October 31, 2005. Expenses of PCA of $18,000
      and
      none were included in the Company’s consolidated statement of operations for the
      quarter ended January 31, 2005 and January 31, 2006,
      respectively.





**NOTE
      3 - MARKETABLE SECURITIES**





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





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





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





**NOTE
      4 - ACCOUNTS RECEIVABLE**





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




-11-





Accounts
      receivable consist of the following:





**January
                31,**
            
            **October
                31,****2006**
            
            **2005**Accounts
                receivables
            
            $
            8,003,000
            
            $
            6,854,000Less:
                allowance for doubtful accounts
            
            
            (1,903,000
            )
            
            (1,333,000
            )$
            6,100,000
            
            $
            5,521,000





**NOTE
      5 - INVENTORIES**





Inventories
      are valued at the lower of cost or market as determined under the first-in,
      first-out method. Costs include materials, labor and manufacturing overhead.
      Inventories are shown net of applicable reserves and allowances. Inventories
      consist of the following:





**January
                31,**
            
            **October
                31,****2006**
            
            **2005**Rawmaterials
            
            $
            1,520,000
            
            $
            1,468,000Work
                in process
            
            
            124,000
            
            
            45,000Finished
                goods
            
            
            2,307,000
            
            
            2,218,000$
            3,951,000
            
            $
            3,731,000





**NOTE
      6 - LINE OF CREDIT**





On
      October 5, 2005, the Company entered into a Loan and Security Agreement (the
      “Loan Agreement”) **** with
      Silicon Valley Bank (the “Bank”), for a secured, revolving line of credit of up
      to $5,000,000.00. The line of credit has a term of one year and includes a
      letter of credit sub-facility. Borrowings under the line of credit are subject
      to a borrowing base formula. The Company will pay interest on the borrowings
      under the line of credit at the Bank’s prime rate or, if certain financial tests
      are not satisfied, at the Bank’s prime rate plus 1.5%. The line of credit is
      secured by all of the assets of the Company and is subject to customary
      financial and other covenants, including reporting requirements.





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





**NOTE
      7 - NET LOSS PER SHARE**





Basic
      earnings (loss) per share is computed by dividing the net income (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 unless such assumed exercises are anti-dilutive. The following table
      sets
      forth the computation of basic and diluted earnings (loss) per
      share:




-12-




**Three
                months ended January 31,****2006**
            
            **2005**Net
                loss
            
            $
            (2,675,000
            )
            $
            (3,649,000
            )Weighted
                average shares outstanding - basic
            
            
            16,854,315
            
            
            16,256,775Dilutive
                effect of stock options
            
            
            —
            
            
            —Weighted
                average shares outstanding -diluted
            
            
            16,854,315
            
            
            16,256,775Basic
                loss per share
            
            $
            (0.16
            )
            $
            (0.22
            )Diluted
                loss per share
            
            $
            (0.16
            )
            $
            (0.22
            )





Stock
      options to purchase 2,376,711 and 3,158,522 common shares for the three months
      ended January 31, 2006, and 2005, respectively, were not included in the
      computation of diluted earnings per share because their effect would have been
      anti-dilutive.




**NOTE
      8** - **INTANGIBLE
      ASSETS**





**January
              31, 2006**
            
            **October
                31, 2005****Gross**
              **Carrying**
              **Amount**
            
            **Accumulated
                Amortization**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated
                Amortization**Amortizable
                intangible assetsPurchased
                technology
            
            $
            3,129,000
            
            $
            2,648,000
            
            $
            3,129,000
            
            $
            2,622,000Existing
                customer relationships
            
            
            1,770,000
            
            
            424,000
            
            
            1,770,000
            
            
            353,000Trademark
            
            
            1,666,000
            
            
            549,000
            
            
            1,666,000
            
            
            490,000Patents
                and licenses
            
            
            98,000
            
            
            41,000
            
            
            98,000
            
            
            40,000$
            6,663,000
            
            $
            3,662,000
            
            $
            6,663,000
            
            $
            3,505,000





Amortization
      expense was $157,000 and $575,000 for the three months ended January 31,
      2006 and 2005, respectively.





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





**For
                the Years Ended January 31,**2007
            
            
            632,0002008
            
            
            632,0002009
            
            
            632,0002010
            
            
            632,0002011
            
            
            473,000$
            3,001,000





-13-




**NOTE
      9 - DISCONTINUED OPERATION**




In
      September 2004, the Company shut-down its Theseus operation. Effective with
      the
      fourth quarter of 2004, this segment is reflected as a discontinued operation.
      All prior period results have been restated accordingly, including the
      reallocation of fixed overhead charges to other business segments.





There
      were no revenues or expenses from the discontinued operation in the three months
      ended January 31, 2006 and 2005.





Assets
      and liabilities of the discontinued operations were as follows:




**January
                31,**
            
            **October
                31,****2006**
            
            **2005**Cash
            
            $
            —
            
            $
            —Other
                assets
            
            
            16,000
            
            
            16,000Accounts
                payable
            
            
            (3,000
            )
            
            (3,000
            )Accrued
                expenses
            
            
            (350,000
            )
            
            (350,000
            )Net
                assets (liabilities) of discontinued operation
            
            $
            (337,000
            )
            $
            (337,000
            )





**NOTE
      10 - SEGMENT INFORMATION**





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





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





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




-14-




**Three
                months ended January 31,****2006**
            
            **2005****Revenues**IMRT/IGRT
            
            $
            4,675,000
            
            $
            5,336,000Radiation
                Sources
            
            
            2,852,000
            
            
            2,828,000$
            7,527,000
            
            $
            8,164,000**Loss
                from Operations**IMRT/IGRT
            
            $
            (1,451,000
            )
            $
            (2,637,000
            )Radiation
                Sources
            
            
            (1,227,000
            )
            
            (1,081,000
            )$
            (2,678,000
            )
            $
            (3,718,000
            )





**January
                31,**
            
            **October
                31,****2006**
            
            **2005****Goodwill**IMRT/IGRT
            
            $
            2,564,000
            
            $
            2,564,000Radiation
                Sources
            
            
            —
            
            
            —Discontinued
                operation
            
            
            —
            
            
            —$
            2,564,000
            
            $
            2,564,000**Total
                assets**IMRT/IGRT
            
            $
            14,100,000
            
            $
            14,899,000Radiation
                Sources
            
            
            6,691,000
            
            
            7,418,000Discontinued
                operation
            
            
            16,000
            
            
            16,000$
            20,807,000
            
            $
            22,333,000




-15-





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





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





**Overview**





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





IMRT/IGRT
      develops and markets intensity modulated radiation therapy (“IMRT”) and image
      guided radiation therapy (“IGRT”) products used in external beam radiation
      therapy for the treatment of disease. Radiation Sources develops and markets
      radioisotopic products including brachytherapy seeds, accessories and
      calibration sources used in the treatment of disease and used in medical,
      environmental, research and industrial applications. In May 2004, we acquired
      NOMOS Corporation (“NOMOS”). NOMOS was a privately held developer, manufacturer,
      and marketer of IMRT and IGRT products and services. We manage this business
      as
      our IMRT/IGRT operating segment.





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




-16-





**Results
      of Operations**





**Three
      Months Ended January 31, 2006 Compared to Three Months Ended January 31,
      2005**





**Revenue** .
      Revenue
      decreased $0.7 million, or 8%, to $7.5 million for the three months ended
      January 31, 2006, from $8.2 million for the three months ended January 31,
      2005.
      The decrease in revenue during the quarter ended January 31, 2006, is due to
      declines in IMRT/IGRT product revenue ($0.2 million) and IMRT/IGRT service
      revenue ($0.5 million).





Product
      revenue decreased $0.2 million, or 4%, to $5.2 million for the three months
      ended January 31, 2006, from $5.4 million for the three months ended January
      31,
      2005. The decrease in product revenue during the quarter ended January 31,
      2006,
      is largely due to a decline in unit sales of IGRT products. Product revenue
      in
      Radiation Sources remained consistent with the prior year.





Service
      revenue decreased $0.5 million, or 16%, to $2.3 million for the three months
      ended January 31, 2006, from $2.8 million for the three months ended January
      31,
      2005 due to a decline in the number of maintenance agreements for IMRT/IGRT
      products.





**Gross
      profit** .
      Gross
      profit decreased $0.1 million, or 3%, to $2.8 million for the three months
      ended
      January 31, 2006, from $2.9 million for the three months ended January 31,
      2005.
      The decrease in gross profit is attributed to declines in revenue in our
      IMRT/IGRT business. Gross profit as a percentage of revenues increased from
      36%
      to 38% during this period.





Gross
      profit for the three months ended January 31, 2006 consists of $2.1 million,
      or
      45% of revenue from our IMRT/IGRT business, and $0.8 million, or 26% of revenue
      from our Radiation Sources business.





The
      increase in gross profit as a percentage of revenue is attributed to a change
      in
      product mix in our IMRT/IGRT product revenue and a reduction in overhead costs,
      which resulted in gross profit as a percentage of product revenue increasing
      from 15% to 25%. Gross profit as a percentage of service revenue in our
      IMRT/IGRT segment increased from 64% to 65% primarily due to a reduction in
      overhead costs. Gross profit as a percentage of revenue in our Radiation Sources
      segment decreased from 27% to 26% primarily due to increased material
      costs.





**Selling
      Expenses** .
      Selling
      expenses include salaries, commissions and other related costs associated with
      our sales and marketing personnel and advertising, trade shows and other
      promotional programs. Selling expenses decreased $0.3 million, or 13%, to $1.8
      million for the three months ended January 31, 2006, from $2.1 million for
      the
      three months ended January 31, 2005. The decrease in selling expenses is
      primarily attributed to staffing reductions and a reduction in the level of
      marketing costs associated with our IMRT/IGRT business.





**General
      and administrative expenses** .
      General
      and administrative (“G&A”) expenses include salaries and other related costs
      associated with finance, executive, human resources and information technology
      personnel and other administrative costs. G&A expenses decreased $0.1
      million, or 4%, to $2.2 million for the three months ended January 31, 2006,
      from $2.3 million for the three months ended January 31, 2005. The decrease
      is
      primarily attributed to reductions in staffing and professional fees ($0.4
      million) offset by $0.3 million in stock compensation expense as a result of
      the
      implementation of SFAS 123R, which requires the expensing of stock options,
      starting this fiscal quarter.




-17-




**Research
      and development** .
      Research and development (“R&D”) expenses include salaries and other related
      costs associated with product development, third party development costs,
      overhead costs and material used in development of prototypes. Our R&D costs
      decreased $0.3 million, or 19%, to $1.3 million for the three months ended
      January 31, 2006, from $1.6 million for the three months ended January 31,
      2005.
      The decrease is primarily attributed to staffing reductions and reduced project
      expenditures in our IMRT/IGRT business.





**Amortization
      of intangible assets** .
      Amortization of intangible assets decreased $0.4 million, or 73%, to $0.2
      million for the three months ended January 31, 2006 from $0.6 million for the
      three months ended January 31, 2005. The decrease is attributed to the writedown
      of certain intangible assets in the fourth quarter of 2005.





**Interest
      and other income, net.** Interest
      and other income decreased $66,000, or 96%, to $3,000 for the three months
      ended
      January 31, 2006, from $69,000 for the three months ended January 31, 2005.
      The
      decrease is attributed to a smaller portfolio of marketable securities and
      the
      inclusion of interest on short-term debt and amortization of warrants in
      2006.





**Liquidity
      and Capital Resources**





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





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business. However, the Company has continued to incur
      substantial net losses and used substantial amounts of cash. As of January
      31,
      2006, the Company has an accumulated deficit of $113.1 million, cash, cash
      equivalents and marketable securities of $2.0 million and $1.0 million of
      short-term debt.





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





At
      January 31, 2006, we had cash, and cash equivalents, and investments in
      marketable securities aggregating approximately $2.0 million, a decrease of
      approximately $1.6 million from $3.6 million at October 31, 2005. The decrease
      was primarily attributed to $2.6 million used in continuing operations and
      $0.1
      million used for capital expenditures, partially offset by a $1.0 million
      drawdown on the line of credit and $0.1 million in cash received from the
      exercise of stock options and the employee stock purchase plan.




-18-





Cash
      flows used in operating activities decreased $0.6 million, or 17%, to $2.6
      million for the three months ended January 31, 2006 from $3.2 million for the
      three months ended January 31, 2005. The decrease in cash used in operating
      activities reflects a reduction of cash used in our discontinued operation
      ($0.5
      million) offset by payment of accounts payable and accrued expenses. We expect
      that cash used in operating activities may fluctuate in future periods as a
      result of a number of factors, including fluctuations in our operating results,
      accounts receivable collections, inventory management, research and development
      expenses, and the timing of payments.





Cash
      flows provided by investing activities decreased $1.4 million, or 59%, to $0.9
      million for the three months ended January 31, 2006, from $2.3 million for
      the
      three months ended January 31, 2005. The decrease reflects a reduction in need
      to draw down our balance of marketable securities to fund operations.





Cash
      provided by financing activities increased $0.9 million, or 443%, to $1.1
      million for the three months ended January 31, 2006, from $0.2 million for
      the
      three months ended January 31, 2005. The increase reflects the drawdown on
      the
      line of credit ($1.0 million) offset by a reduction in the proceeds from
      exercise of employee stock options.





We
      have
      $3.7 million in operating lease obligations for facilities and equipment under
      non-cancelable operating lease agreements. We have also entered into purchase
      commitments to suppliers under blanket purchase orders in the amount of $0.4
      million.





**Critical
      Accounting Policies**





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make judgments, assumptions and estimates that affect
      the
      amounts reported in the Consolidated Financial Statements included in the
      Company’s Form 10-K for the year ended October 31, 2005, and accompanying notes.
      Note 1 to the Consolidated Financial Statements describes the significant
      accounting policies and methods used in the preparation of the Consolidated
      Financial Statements. Estimates are used for, but not limited to, the accounting
      for revenue recognition, allowance for doubtful accounts, goodwill and
      long-lived asset impairments, loss contingencies, and taxes. Estimates and
      assumptions about future events and their effects cannot be determined with
      certainty. We base our estimates on historical experience and on various other
      assumptions believed to be applicable and reasonable under the circumstances.
      These estimates may change as new events occur, as additional information is
      obtained and as our operating environment changes. These changes have
      historically been minor and have been included in the consolidated financial
      statements as soon as they became known. The following critical accounting
      policies are impacted significantly by judgments, assumptions and estimates
      used
      in the preparation of the Consolidated Financial Statements and actual results
      could differ materially from the amounts reported based on these
      policies.





*Revenue
      Recognition*





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




-19-





*Product
      revenue*





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





*Software
      revenue*





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





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





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





*Service
      revenue*





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




*Allowance
      for Doubtful Accounts and Sales Returns*





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




-20-


A
        reserve
        for sales returns is established based on historical trends in product return
        rates and is recorded as a reduction of our accounts receivable. If the actual
        future returns were to deviate from the historical data on which the reserve
        had
        been established, our revenue could be adversely affected. To date, product
        returns have not been considered material to our results of
        operations.
 
 *Inventory
        Reserves*
 
 Inventories
        are valued at the lower of cost or market as determined under the first-in,
        first-out method. Costs include materials, labor and manufacturing
        overhead.
 
 The
        Company's Radiation Sources products are subject to shelf-life expiration
        periods, which are carefully monitored by the Company. Provision is made
        for
        inventory items which may not be sold because of expiring dates. The Company
        routinely reviews other inventories for evidence of impairment of value and
        makes provision as such impairments are identified.
 
 *Goodwill
        and Other Intangible Assets*
 
 SFAS
        142,
        Goodwill and Other Intangible Assets, requires that goodwill be tested for
        impairment at the reporting unit level (operating segment or one level below
        an
        operating segment) on an annual basis (September 30) and between annual tests
        if
        an event occurs or circumstances change that would more likely than not reduce
        the fair value of a reporting unit below its carrying value. These events
        or
        circumstances could include a significant change in the business climate,
        legal
        factors, operating performance indicators, competition, sale or disposition
        of a
        significant portion of a reporting unit. Application of the goodwill impairment
        test requires judgment, including the identification of reporting units,
        assignment of assets and liabilities to reporting units, assignment of goodwill
        to reporting units, and determination of the fair value of each reporting
        unit.
        The fair value of each reporting unit is estimated using a discounted cash
        flow
        methodology. This requires significant judgments including estimation of
        future
        cash flows, which is dependent on internal forecasts, estimation of the
        long-term rate of growth for our business, the useful life over which cash
        flows
        will occur, and determination of our weighted average cost of capital. Changes
        in these estimates and assumptions could materially affect the determination
        of
        fair value and/or goodwill impairment for each reporting unit.
  *Research
        and Development Costs*
 
 We
        account for research and development costs in accordance with several accounting
        pronouncements, including SFAS 2, Accounting for Research and Development
        Costs,
        and SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased,
        or Otherwise Marketed. SFAS 86 specifies that costs incurred internally in
        researching and developing a computer software product should be charged
        to
        expense until technological feasibility has been established for the product.
        Once technological feasibility is established, all software costs should
        be
        capitalized until the product is available for general release to customers.
        Judgment is required in determining when technological feasibility of a product
        is established. We have determined that technological feasibility for our
        software products is reached shortly before the products are released to
        manufacturing. Costs incurred after technological feasibility is established
        are
        not material, and accordingly, we expense all research and development costs
        when incurred.
 
 *Loss
        Contingencies*
 
 We
        record
        liabilities related to pending litigation when an unfavorable outcome is
        probable and we can reasonably estimate the amount of the loss. We are subject
        to various legal proceedings and claims, either asserted or unasserted, that
        arise in the ordinary course of business. We evaluate, among other factors,
        the
        degree of probability of an unfavorable outcome and an estimate of the amount
        of
        the loss. Significant judgment is required in both the determination of the
        probability and as to whether an exposure can be reasonably estimated. When
        we
        determine that it is probable that a loss has been incurred, the effect is
        recorded promptly in the consolidated financial statements. Although the
        outcome
        of these claims cannot be predicted with certainty, we do not believe that
        any
        of our existing legal matters will have a material adverse effect on our
        financial condition or results of operations.
  -21-
 
 *Income
        Taxes*
 
 We
        account for income taxes using the liability method. Deferred taxes are
        determined based on the differences between the financial statement and tax
        bases of assets and liabilities, using enacted tax rates in effect for the
        year
        in which the differences are expected to reverse. Valuation allowances are
        established when necessary to reduce deferred tax assets to the amounts expected
        to be realized. In addition, we are subject to examination of our income
        tax
        returns by the Internal Revenue Service and other tax authorities. We regularly
        assess the likelihood of adverse outcomes resulting from these
        examinations.
 
 **Recent
        Accounting Pronouncements**
 
 In
        December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
        Payment," that addresses the accounting for share-based payment transactions
        in
        which a Company receives employee services in exchange for (a) equity
        instruments of the Company or (b) liabilities that are based on the fair
        value
        of the Company's equity instruments or that may be settled by the issuance
        of
        such equity instruments. SFAS No. 123R addresses all forms of share-based
        payment awards, including shares issued under employee stock purchase plans,
        stock options, restricted stock and stock appreciation rights. SFAS No. 123R
        eliminates the ability to account for share-based compensation transactions
        using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that
        was
        provided in Statement 123 as originally issued. Under SFAS No. 123R companies
        are required to record compensation expense for all share based payment award
        transactions measured at fair value. This statement is effective as of the
        beginning of the first interim or annual reporting period that begins after
        June
        15, 2005. We are implementing SFAS No.123R in the fiscal year beginning November
        1, 2005.
 
 In
        November 2004, the FASB issued SFAS No. 151 “Inventory Costs". This Statement
        amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing”, to clarify
        the accounting for abnormal amounts of idle facility expense, freight, handling
        costs, and wasted material (spoilage). In addition, this Statement requires
        that
        allocation of fixed production overhead to the costs of conversion be based
        on
        the normal capacity of the production facilities. The provisions of this
        Statement are effective for fiscal years beginning after June 15, 2005. We
        are
        implementing SFAS No.151 in the fiscal year beginning November 1, 2005. It
        is
        not expected to have a material impact on our financial position, results
        of
        operations or cash flows.
 
 In
        December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets
        -
        an amendment of APB Opinion No. 29." This Statement amended APB Opinion No.
        29
        to eliminate the exception for non-monetary exchanges of similar productive
        assets and replaces it with a general exception for exchanges of non-monetary
        assets that do not have commercial substance. A non-monetary exchange has
        commercial substance if the future cash flows of the entity are expected
        to
        change significantly as a result of the exchange. The provisions of this
        Statement are effective for fiscal periods beginning after June 15, 2005.
        We
        implemented SFAS No.153 in our fiscal period beginning August 1, 2005. The
        implementation of SFAS No.153 did not have a material impact upon the Company’s
        financial position, results of operations or cash flows.
 
 In
        March
        2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for
        Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that the term
        conditional asset retirement asset obligation as used in FASB Statement No.
        143,
“Accounting for Asset Retirement Obligations,” refers to a legal obligation to
        perform an asset retirement activity in which the timing and/or method of
        settlement are conditional on a future event that may or may not be within
        the
        control of the entity. The obligation to perform the asset retirement activity
        is unconditional even though uncertainty exists about the timing and/ or
        method
        of settlement. Uncertainty about the timing and/or method of settlement of
        a
        conditional asset retirement obligation should be factored into the measurement
        of the liability when sufficient information exists. This interpretation
        also
        clarifies when an entity would have sufficient information to reasonably
        estimate the fair value of an asset retirement obligation. FIN No. 47 is
        effective no later than the end of fiscal years ending after December 15,
        2005
        (December 31, 2005 for calendar-year companies). Retrospective application
        of
        interim financial information is permitted but is not required. We are
        implementing FIN No. 47 in our fiscal year beginning November 1, 2005. We
        do not
        expect adoption of FIN No.47 to have a material impact on the Company’s
        financial statements.
  -22-
 
 In
        May
        2005, the FASB issued Statement of Accounting Standards (SFAS) No. 154,
“Accounting Changes and Error Corrections”, an amendment to Accounting
        Principles Bulletin (APB) Opinion No. 20, “Accounting
        Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
        Statements”. Though SFAS No. 154 carries forward the guidance in APB No.20 and
        SFAS No.3 with respect to accounting for changes in estimates, changes in
        reporting entity, and the correction of errors, SFAS No. 154 establishes
        new
        standards on accounting for changes in accounting principles, whereby all
        such
        changes must be accounted for by retrospective application to the financial
        statements of prior periods unless it is impracticable to do so. SFAS No.
        154 is
        effective for accounting changes and error corrections made in fiscal years
        beginning after December 15, 2005, with early adoption permitted for changes
        and
        corrections made in years beginning after May 2005. We will implement SFAS
        No.
        154 in our fiscal year beginning November 1, 2006. We are currently evaluating
        the impact of this new standard, but believe that it will not have a material
        impact upon our financial position, results of operations or cash
        flows.
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for
        Derivatives Instruments and Hedging Activities” (“SFAS 133”) and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishment
        of Liabilities” (“SFAS 140).  SFAS 155 amends SFAS 133 to narrow the scope
        exception for interest-only and principal-only strips on debt instruments
        to
        include only such strips representing rights to receive a specified portion
        of
        the contractual interest or principle cash flows.  SFAS 155 also amends
        SFAS 140 to allow qualifying special-purpose entities to hold a passive
        derivative financial instrument pertaining to beneficial interests that itself
        is a derivative instruments. We
        are
        currently evaluating the impact this new Standard, but believe that it will
        not
        have a material impact on our financial position, results of operations or
        cash
        flows.
 
 **Item
        3.**  **Quantitative
        and Qualitative Disclosures about Market Risk**
  Information
        about market risks for the three months ended January 31, 2006, does not
        differ
        materially from that discussed under Item 7A of the registrant's Annual Report
        on Form 10-K for the fiscal year ended October 31, 2005.
  **Item
        4.**  **Controls
        and Procedures**
  (a)
        Evaluation of Disclosure Controls and Procedures
 
 As
        required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”), we have carried out an evaluation, under the supervision and
        with the participation of our management, including our Chief Executive Officer
        (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the
        end of the fiscal quarter covered by this report, of the design and operation
        of
        our “disclosure controls and procedures” as defined in Rule 13a-15(e)
        promulgated by the SEC under the Exchange Act. Based upon that evaluation,
        our
        CEO and our CFO concluded that our disclosure controls and procedures, as
        of the
        end of such fiscal quarter, were adequate and effective to ensure that
        information required to be disclosed by us in the reports that we file or
        submit
        under the Exchange Act is recorded, processed, summarized and reported within
        the time periods specified in the Commission’s rules and forms and that such
        information is accumulated and communicated to our management, including
        our CEO
        and CFO, as appropriate to all timely decisions regarding required disclosure.
  -23-
 
 (b)
        Changes in Internal Controls
 
 There
        has
        been no change in our internal control over financial reporting during the
        quarter ended January 31, 2006, that has materially affected or is reasonably
        like to materially affect our internal control over financial reporting.
 
 **PART
        II - OTHER INFORMATION**
 
 The
        Company was not required to report the information pursuant to Items 1 through
        6
        of Part II of Form 10-Q except as follows:
 
 *We
        operate in a rapidly changing environment that involves a number of risks,
        some
        of which are beyond our control. In addition to other information in this
        Form
        10-Q, you should carefully consider the risks described below before investing
        in our securities. This discussion highlights some of the risks that may
        affect
        future operating results. The risks described below are not the only ones
        facing
        us. Additional risks and uncertainties not presently known to us, which we
        currently deem immaterial or which are similar to those faced by other companies
        in our industry or business in general, may also impair our business operations.
        If any of the following risks or uncertainties actually occurs, our business,
        financial condition and operating results would likely suffer.*
 
 **Item
        1A. Risk Factors**
 
 **We
        have experienced significant losses and may continue to incur such losses
        in the
        future. As a result, the amount of our cash, cash equivalents, and investments
        in marketable securities has materially declined. If we continue to incur
        significant losses and are unable to access sufficient working capital from
        our
        operations or through external financings, we will be unable to fund future
        operations and operate as a going concern.**
 
 We
        have
        incurred substantial net losses in each of the last six fiscal years, and
        in the
        three months ended January 31, 2006. As reflected in our financial statements
        in
        our SEC Form 10-K, we have experienced net losses of $55.5 million, $36.3
        million, and $9.4 million in our fiscal years ended October 31, 2005, 2004
        and
        2003, respectively, and a net loss of $2.7 million in the three months ended
        January 31, 2006. As a result, the amount of our cash, cash equivalents,
        and
        investments in marketable securities has significantly declined from
        approximately $49.1 million at October 31, 2003 to $2.0 million at January
        31,
        2006. The decrease over the past two year period ended October 31, 2005,
        was
        primarily attributed to net cash payments of $26.3 million used in continuing
        operating activities, $13.2 million related to our acquisition of NOMOS,
        $9.0
        million used in the discontinued Theseus operations, and $1.6 million used
        for
        capital expenditures, partially offset by $4.6 million in cash received from
        the
        exercise of stock options and our employee stock purchase plan. The decrease
        in
        the thee months ended January 31, 2006 was primarily due to $2.6 million
        of cash
        used in operating activities, partially offset by a $1.0 million drawdown
        on our
        bank line of credit.
  -24-
 
 The
        negative cash flow we have sustained has materially reduced our working capital,
        which in turn, could materially and negatively impact our ability to fund
        future
        operations and continue to operate as a going concern. Management has and
        continues to take actions to improve our results. These actions include reducing
        cash operating expenses, developing new technologies and products, improving
        existing technologies and products, and expanding into new geographical
        markets. **** The
        availability of necessary working capital, however, is subject to many factors
        beyond our control, including, our ability to obtain favorable financing,
        economic cycles, market acceptance of our products, competitors’ responses to
        our products, the intensity of competition in our markets, the level of demand
        for our products etc.
 
 The
        amount of working capital that we will need in the future will also depend
        on
        our efforts and many factors, including:
 
 •
              Our
                  ability to successfully market and sell our
                  products;
 •
              Continued
                  scientific progress in our discovery and research
                  programs;
 •
              Levels
                  of sales and marketing that will be required to launch future products
                  and
                  achieve and maintain a competitive position in the marketplace
                  for both
                  existing and new products;
 •
              Levels
                  of inventory and accounts receivable that we
                  maintain;
 •
              Level
                  of capital expenditures;
 •
              Acquisition
                  or development of other businesses, technologies or
                  products;
 •
              The
                  time and costs involved in obtaining regulatory approvals;
 •
              The
                  costs involved in preparing, filing, prosecuting, maintaining,
                  defending,
                  and enforcing patent claims; and
 •
              The
                  potential need to develop, acquire or license new technologies
                  and
                  products.
 
 If
        we are
        unsuccessful in these efforts or if any or some of these factors negatively
        impact us, we will need to raise additional capital, reduce operations or
        take
        other steps to achieve positive cash flow. Although we cannot assure you
        that we
        will be successful in these efforts or that any or some of these factors
        will
        not negatively impact us, we believe that we will have sufficient cash to
        sustain us at least through the fiscal year ending October 31, 2006.
 
 **We
        may be unable to obtain capital on favorable terms or at all.**
 
 Continued
        operating losses would materially reduce our remaining cash, cash equivalents
        and investments in marketable securities. We have had to restructure our
        $5
        Million credit line financing arrangement with Silicon Valley Bank into an
        asset
        based loan arrangement with warrants. Should we need to secure additional
        debt
        or equity financing and are
        unable to obtain it on acceptable terms or at all, we
        may be
        required to further reduce expenses or to take other steps which could have
        a
        material adverse effect on our future performance, including but not limited
        to,
        the premature sale of some or all of our assets or product lines on undesirable
        terms, merger with or acquisition by another company on unsatisfactory terms,
        or
        the cessation of operations.
 
 **Future
        financing transactions will have a dilutive effect on our existing shareholders.**
 
 The
        Company is currently considering certain financing arrangements that include
        a
        significant number of warrants, which will result in dilution of the Company’s
        current shareholders. In the future, the Company anticipates issuing equity,
        debt or convertible securities to raise capital. If the Company does so,
        the
        percentage ownership of the Company held by existing shareholders would be
        further reduced, and existing shareholders would experience significant
        dilution. In addition, new investors in the Company may demand rights,
        preferences or privileges that differ from, or are senior to, those of our
        existing shareholders, such as warrants in addition to the securities purchased
        and other protections against future dilutive transactions. In addition,
        any
        capital we may be able to raise could result in increased debt on our balance
        sheet, additional interest and financing expense and/or decreased operating
        income.
  -25-
 
 **We
        may be required to record additional goodwill impairment in the
        future.**
  Under
        SFAS 142 and SFAS 144, goodwill and intangible assets having an indefinite
        life
        are not amortized but are subject to testing at least annually, or more often
        if
        an event occurs or circumstances indicate that the carrying values for goodwill
        and/or intangible assets may be impaired, using a fair value based approach.
        Accounting for impairment contains uncertainty because management must use
        judgment in determining appropriate assumptions to be used in the measurement
        of
        fair value. The Company engaged an appraisal firm to perform an analysis
        of the
        goodwill and intangible assets acquired from NOMOS, to determine the fair
        value
        thereof under the applicable standards as of the Company’s annual test date of
        September 30, 2005. As a result of this testing, in the fourth quarter of
        2005,
        the Company recorded impairments of goodwill and intangible assets of NOMOS
        in
        the amount of $39,884,000, and impairments of goodwill and intangible assets
        of
        Radiation Therapy Products (“RTP”) in the amount of $329,000, in each case due
        to negative operating performance indications including declining sales and
        continued operating losses of the respective business segments.
  The
        Company will continue to monitor impairment indicators in any of our reporting
        segments. If our future financial performance or other events indicate that
        the
        value of our recorded goodwill or intangible assets is further impaired,
        we may
        record additional impairment charges that could have a material adverse effect
        on our reported results.
  **All
        of our product lines are subject to intense competition. Our most significant
        competitors have greater resources than we do. As a result, we cannot be
        certain
        that our competitors will not develop superior technologies or otherwise
        be able
        to compete against us more effectively. If we fail to maintain our competitive
        position in key product areas, we may lose significant sources of
        revenue.**
  We
        expect
        that our intensity-modulated radiation therapy, or IMRT, and image-guided
        radiation therapy, or IGRT, product lines, including CORVUS, PEACOCK and
        BAT,
        will generate a substantial part of our revenues for the foreseeable future.
        We
        will need to continue to develop enhancements to these products and improvements
        on our core technologies in order to compete effectively. Rapid change and
        technological innovation characterize the marketplace for medical products,
        and
        our competitors could develop technologies that are superior to our products
        or
        that render such products obsolete. We anticipate that expenditures for research
        and development will continue to be significant. The domestic and foreign
        markets for radiation therapy equipment are highly competitive. Many of our
        competitors and potential competitors have substantial installed bases of
        products and significantly greater financial, research and development,
        marketing and other resources than we do. Competition may increase as emerging
        and established companies enter the field. In addition, the marketplace could
        conclude that the tasks our products were designed to perform are no longer
        elements of a generally accepted treatment regimen. This could result in
        us
        having to reduce production volumes or discontinue production of one or more
        IMRT/IGRT products.
  Our
        single largest competitor in the IMRT/IGRT market is Varian Medical
        Systems, Inc. (“Varian”). Varian is the largest worldwide manufacturer, in
        terms of market share, of linear accelerators. Linear accelerators are the
        machines that generate the radiation energy beams used in both IMRT and
        conventional radiation treatment. Varian also markets its own line of IMRT
        products, including several models of multileaf collimators and an IMRT inverse
        planning software package, which it often includes with its linear accelerators.
        Varian is also one of the principal providers of record and verification
        systems, which are systems that keep track of all critical information in
        the
        treatment of radiation therapy patients and which allow the planning system
        to
        communicate with the linear accelerator. Varian recently acquired
        Zmed, Inc., one of our principal competitors for BAT. Varian expects the
        acquisition to enhance its 3-D ultrasound imaging capabilities and offer
        radiation oncology departments a new line of stereotactic positioning
        accessories and planning software, allowing Varian to directly compete against
        BAT.
  -26-
  We
        also
        compete with Siemens and Elekta, each of which manufactures one or more
        multileaf collimators that compete with MIMiC and, therefore, with our
        integrated system, PEACOCK. There are several other companies that currently
        offer or plan to offer IMRT modules, which typically add IMRT functionality
        to
        conventional radiation treatment planning products.
  Finally,
        we compete with all manufacturers of conventional radiation therapy products
        many of which are devoting substantial resources to promoting their products.
  Our
        brachytherapy business is also subject to intense competition. Our primary
        competitors in the brachytherapy seed business include: Nycomed Amersham
        PLC
        (through its control of Oncura) and C.R Bard, Inc., both of whom
        manufacture and sell Iodine-125 brachytherapy seeds, as well as distribute
        Palladium-103 seeds manufactured by a third party (in the case of Oncura,
        we
        currently manufacture a portion of its Palladium-103 seed requirements pursuant
        to a distribution agreement reached in July, 2005); Mentor, which manufactures
        and sells Iodine-125 brachytherapy seeds and currently distributes third
        party
        manufactured Palladium-103 brachytherapy seeds; and Theragenics Corporation,
        which manufacturers Palladium-103 seeds and sells Palladium-103 and Iodine-125
        brachytherapy seeds directly and its Palladium-103 brachytherapy seeds through
        marketing relationships with third parties. Several additional companies
        currently sell brachytherapy seeds as well. Recent market changes have also
        provided additional competition for brachytherapy-related services, such
        as
        pre-loading needles with seeds and placing seeds in so-called “strands.”
 
 Our
        radiation reference source business also is subject to intense competition.
        Competitors in this industry include AEA Technology PLC and Eckert &
Ziegler AG. We believe that these companies have a dominant position in the
        market for radiation reference source products.
 
 Because
        we are a relatively small company, there is a risk that potential customers
        will
        purchase products from larger manufacturers, even if our products are
        technically superior, based on the perception that a larger, more established
        manufacturer may offer greater certainty of continued product improvements,
        support and service, which could cause our revenues to decline. In addition, many
        of
        our competitors are substantially larger and have greater sales, marketing
        and
        financial resources than we do. Developments by any of these or other companies
        or advances by medical researchers at universities, government facilities
        or
        private laboratories could render our products obsolete. Moreover, companies
        with substantially greater financial resources, as well as more extensive
        experience in research and development, the regulatory approval process,
        manufacturing and marketing, may be in a better position to seize market
        opportunities created by technological advances in our industry.
 
 **We
        are highly dependent on our direct sales organization, which is small compared
        to many of our competitors and which has relatively limited marketing and
        sales
        experience in brachytherapy and IMRT/IGRT products. We have also experienced
        a
        high degree of turnover in our sales organization. Any failure to build ,
        manage
        and maintain our direct sales organization could negatively affect our revenues.**
  Our
        current domestic direct sales force is small relative to many of our
        competitors. There is intense competition for skilled sales and marketing
        employees, particularly for people who have experience in the radiation oncology
        market. Accordingly, we could find it difficult to hire or retain skilled
        individuals to sell our products. Any failure to build our direct sales force
        could adversely affect our growth and our ability to meet our revenue goals.
  -27-
  In
        addition, we have experienced higher than anticipated turnover in our domestic
        direct sales force following our acquisition of NOMOS Corporation, which
        has
        resulted in a relative lack of experience in selling IMRT/IGRT products.
 
 As
        a
        result of our relatively small sales force and the lack of continuity in
        our
        sales force, there can be no assurance that our direct sales and marketing
        efforts will be successful. If we are not successful in our direct sales
        and
        marketing, our sales revenue and results of operations are likely to be
        materially adversely affected.
  **We
        depend partially on our relationships with distributors and other industry
        participants to market some of our products, and if these relationships are
        discontinued or if we are unable to develop new relationships, our revenues
        could decline.**
  We
        currently rely, and will continue to rely, upon collaborative relationships
        with
        agents and distributors and other industry participants to maintain IMRT/IGRT
        market access to potential customers, particularly in Asia and Europe, and
        our
        business strategy includes entering into more of these relationships in the
        future. Some of the entities with whom we have relationships to help market
        and
        distribute our products also produce or distribute products that directly
        compete with our IMRT/IGRT products.
  We
        cannot
        assure you that we will be able to maintain or develop these relationships
        with
        agents and distributors and other industry participants or that these
        relationships will continue to be successful. If any of these relationships
        is
        terminated, not renewed or otherwise unsuccessful, or if we are unable to
        develop additional relationships, our product sales could decline, and our
        ability to grow our IMRT/IGRT business could be adversely affected. This
        is
        particularly the case with respect to foreign sales of our IMRT/IGRT products,
        where we currently rely, and we will continue to rely, on our distributors'
        expertise regarding foreign regulatory matters and their access to actual
        and
        potential customers.
  In
        addition, our 2005 agreement with Oncura for distribution of our Palladium-103
        brachytherapy seeds may be an important component of that business.
  We
        do not
        have a direct sales force for our non-therapeutic radiation source products,
        and
        rely entirely on the efforts of agents and distributors for sales of those
        non-brachytherapy products. We cannot assure you that we will be able to
        maintain our existing relationships with our agents and distributors for
        the
        sale of our non-therapeutic radiation source products.
  **One
        of our primary markets in our IMRT product line is the market for upgrading
        linear accelerators that do not have IMRT capabilities to provide them with
        IMRT
        capabilities. This market will shrink over time, thereby limiting our potential
        revenues from the upgrading of linear accelerators.**
  To
        date,
        a majority of our revenues from the sale of our IMRT products has been derived
        from the sale of these products to customers who decide to upgrade linear
        accelerators that do not have IMRT capabilities to enable them to deliver
        IMRT
        treatments. Most of these linear accelerators are older models. Selling CORVUS
        to customers with newer multileaf collimator-equipped linear accelerators
        can be
        difficult because these linear accelerators may be offered with IMRT planning
        software at little or no additional cost. Accordingly, to make a sale, we
        often
        must convince these potential customers that CORVUS is sufficiently superior
        to
        the IMRT or conventional radiation treatment planning software products offered
        by the manufacturer to justify the additional costs of purchase. Selling
        PEACOCK
        and MIMiC to potential customers with newer multileaf collimator-equipped
        linear
        accelerators is even more difficult because, in addition to the incremental
        costs of purchase, these potential customers may be reluctant to incur the
        additional effort required to retrofit the factory installed multileaf
        collimator with MIMiC. Over time, if more institutions purchase new linear
        accelerators that are IMRT-equipped or upgrade their older accelerators with
        technology from us or our competitors, the market for upgrading linear
        accelerators that do not have IMRT capabilities will shrink and may become
        saturated, which could adversely affect our sales and limit our potential
        revenues from our products.
  -28-
 
 **We
        may be unable to successfully integrate NOMOS' operations with our
        operations.**
 
 The
        acquisition of NOMOS in May 2004 has required the integration of NOMOS with
        our
        Company. This integration has taken longer and demanded more financial and
        other
        resources that we had originally anticipated. Though virtually all of the
        infrastructure-related integration tasks have been completed, integration
        in
        other areas, such as sales and marketing and certain operational areas remain
        ongoing. As the integration continues, it remains a complex, costly and
        time-consuming process. The challenges of combining the two companies'
        operations have included and may continue to involve, among other
        things:
 
 •
              Requiring
                  the diversion of management resources to facilitate the
                  integration;
 •
              Implementing
                  compatible information communication systems, common operating
                  procedures,
                  compatible financial controls and comparable human resources practices;
 •
              Coordinating
                  sales and marketing functions;
 •
              Preserving
                  our research and development, collaboration, distribution, marketing,
                  promotion and other important relationships and those of
                  NOMOS;
 •
              The
                  necessity of coordinating geographically disparate organizations,
                  systems
                  and facilities;
 •
              Integrating
                  personnel with diverse business
                  backgrounds;
 •
              Consolidating
                  corporate and administrative functions;
                  and
 •
              Retaining
                  key employees.
 
 The
        process of continued integration of NOMOS and the historic Company operations
        could cause an interruption of, or loss of momentum in, the activities of
        our
        business and the loss of key personnel. The diversion of management's attention
        and any delays or difficulties encountered in connection with the integration
        of
        the two companies' operations could harm our business, results of operations,
        financial condition or future prospects.
  **If
        we are unable to complete current developments or to develop new enhancements
        and new generations of IMRT/IGRT and/or brachytherapy products, we may be
        unable
        to retain our existing customers or attract new customers.**
  Rapid
        and
        significant technological change, evolving industry standards and new product
        introductions characterize the market for our products. Many of our products
        are
        technologically innovative and require significant planning, design, development
        and testing. These activities require significant capital commitments and
        investment. If we are unable to raise needed capital on favorable terms or
        at
        all, we may be unable to maintain our competitive advantage in the marketplace.
  New
        product developments in the healthcare industry are inherently risky and
        unpredictable. These risks include:
  •
              failure
                  to prove feasibility;
 •
              time
                  required from proof of feasibility to routine production;
 •
              timing
                  and cost of regulatory approvals and clearances;
 •
              competitors'
                  response to new product developments;
 •
              manufacturing,
                  installation, warranty and maintenance cost overruns;
 •
              failure
                  to obtain customer acceptance and payment;
 •
              customer
                  demands for retrofits of both old and new products; and
 •
              excess
                  inventory caused by phase-in of new products and phase-out of old
                  products.
  -29-
  The
        high
        cost of technological innovation is coupled with rapid and significant change
        in
        the regulations governing the products that compete in our market, by industry
        standards that could change on short notice, and by the introduction of new
        products and technologies that could render existing products and technologies
        uncompetitive. We cannot be sure that we will be able to successfully develop
        new products or enhancements to our existing products. Without successful
        new
        product introductions, our revenues will likely suffer. Even if customers
        accept
        new or enhanced products, the costs associated with making these products
        available to customers, as well as our ability to obtain capital to finance
        such
        costs, could reduce or prevent us from increasing our operating margins.
        We are
        currently awaiting FDA 510(k) clearance for our nomosSTAT product, which
        represents the next generation of our currently marketed PEACOCK product.
        The
        successful introduction of nomosSTAT is critical to our ability to achieve
        our
        sales targets for fiscal 2006. Any unforeseen delay in 510(k) clearance from
        the
        FDA, or lack of acceptance in the market following such clearance, may result
        in
        a materially adverse impact on our financial results.
  In
        addition, although we have received FDA 510(k) clearance for our PEREGRINE
        dose
        calculation software product, and it may now be used clinically to treat
        patients for one linear accelerator beam modifier combination,, we are still
        in
        the process of finalizing the development of PEREGRINE in order to allow
        it to
        be used with a broader range of linear accelerators, energy levels with those
        linear accelerators, and treatment planning systems without the need for
        extensive commissioning and testing. An inability to complete these developments
        on a timely basis could adversely affect our relationship with the early
        purchasers of PEREGRINE, and could adversely impact our ability to sell
        PEREGRINE to new customers. Any failure to successfully complete these
        developments could also hurt our reputation and, therefore, adversely impact
        sales of other our products.
  **We
        might not be able to make our IMRT products compatible with some existing
        linear
        accelerators and other radiation therapy products. In addition, any future
        changes in the configuration of the most common linear accelerators could
        require costly and time-consuming modifications to our products that could
        harm
        our business.**
  Our
        IMRT
        products are designed to be used in conjunction with most linear accelerators
        currently in use. Our products are not currently compatible with all linear
        accelerators. However, when manufacturers modify the design or functionality
        of
        their machines, we are often required to modify our products to ensure
        compatibility. Future changes cannot be predicted and, in the case of changes
        initiated by linear accelerator manufacturers who are our competitors, could
        be
        made or timed to place us at a competitive disadvantage. Responding to these
        changes can be costly and time-consuming. In addition, we could be required
        to
        obtain additional regulatory clearances for any modifications of our products.
        It is also possible that, despite our best efforts, we might be unable to
        make
        our products compatible with new or modified versions of linear accelerators
        or
        might only be able to do so at a prohibitive expense.
  Our
        PEREGRINE product is not currently fully compatible with the majority of
        the
        linear accelerators in the United States and worldwide markets. We cannot
        assure
        you that we will be successful in making PEREGRINE compatible with additional
        linear accelerators, and any future changes in the design of any linear
        accelerators could require us to redesign the functionality of PEREGRINE.
        We may
        not be successful at any such effort.
  **If
        alternative technologies prove to be superior to IMRT/IGRT or brachytherapy,
        physician adoption of our products could substantially decrease.**
  -30-
  Our
        IMRT/IGRT products face competition from companies that sell conventional
        radiation therapy products as well as from companies that are developing,
        marketing and manufacturing alternative therapies to radiation for the treatment
        of solid tumor cancers. It is possible that advances in the pharmaceutical,
        bio-medical or gene-therapy fields could render some or all radiation therapies,
        whether conventional or based on IMRT/IGRT and brachytherapy, obsolete. Even
        incremental advances in competing technologies could result in the rejection
        of
        our products as a part of a generally accepted diagnostic or treatment regimen.
        If alternative therapies are proven or perceived to offer treatment options
        that
        are superior or more cost effective than the treatments our products provide,
        physician adoption of our products could be negatively affected and our revenues
        from our products could decline.
  **There
        is currently a lack of long-term data regarding the safety and effectiveness
        of
        IMRT products and negative data or the continued lack of adequate supporting
        data could adversely affect market acceptance of our IMRT products.**
  Although
        we estimate that our IMRT products have been used to treat thousands of patients
        worldwide, this is still a statistically small number, and these treatments
        have
        primarily involved tumors of the prostate, head, neck and spinal cord. Much
        of
        the data produced in current studies using IMRT and our products have involved
        small patient sample sizes, and any positive results of these studies may
        not be
        representative of the results that will be achieved in studies involving
        larger
        patient sample sizes. If we are unable to obtain additional and more
        comprehensive clinical studies, or if long-term clinical studies fail to
        confirm
        the effectiveness of IMRT or our products, our sales could fail to increase
        or
        could decrease.
  Some
        theoretical and non-clinical studies, meaning studies that are not based
        on
        significant empirical evidence, have suggested that the use of IMRT and
        potentially our products may cause serious negative side effects, such as
        a risk
        of induced cancer, as a result of the increased radiation delivered to the
        patient. At present, not enough time has passed to determine conclusively
        the
        long-term side effects. If future clinical studies confirm that these negative
        side effects occur as a result of IMRT treatments, our sales could fail to
        grow
        or could decline. In addition, if it is shown that our products cause harmful
        side effects, the U.S. Food and Drug Administration, or FDA, could require
        us to
        change our product labeling to describe these potential side effects or could
        even rescind the clearances for our products and potentially require a recall
        of
        our products.
  IMRT,
        whether using our products or those of our competitors, requires a substantial
        departure from customary quality assurance practices. The complexity and
        dynamic
        nature of IMRT deliveries make new demands on patient plan and dose
        verification. These difficulties and departures from customary practices
        may
        impede market acceptance of IMRT in general and our products in particular,
        which could adversely affect our ability to increase sales of our products
        and
        achieve our desired growth rate.
  **IMRT
        treatments expose patients to increased radiation leakage, which could
        potentially cause long-term deleterious side effects, including induced cancer.**
  In
        both
        IMRT and conventional radiation therapy, there is radiation leakage, which
        means
        radiation that escapes from the linear accelerator and is absorbed by the
        patient outside the area of the patient's body being treated. Linear
        accelerators are the machines that generate the radiation energy beams used
        in
        both IMRT and conventional radiation treatment. Leakage occurs at all times
        when
        the linear accelerator is producing radiation. In IMRT treatments, the linear
        accelerator is required to produce radiation for a longer period of time
        overall
        as compared to conventional radiation treatments. Also, in IMRT treatments
        there
        is additional leakage that is transmitted through or between the leaves of
        the
        multileaf collimator itself. As a result, there is an increase in the overall
        radiation leakage to which the patient is exposed due to the longer periods
        of
        radiation delivery.
  -31-
  The
        increased radiation leakage associated with IMRT treatments could require
        additional room shielding to protect clinic personnel. In addition, concerns
        have been raised by some researchers that the increase in overall radiation
        leakage to which IMRT patients are exposed may have deleterious long-term
        effects, including the potential for inducing cancer.
  These
        same studies suggest that an increase in the long-term risk of induced cancers
        from IMRT may be possible. The risk, or perceived risk, of induced cancers
        could
        slow or prevent expanded use of IMRT to treat additional types of cancers
        and
        could even result in decreased usage of IMRT to treat cancers currently treated
        with IMRT if the increased risk is shown or believed to be significant, which
        could cause our revenues from our products to decline and our business to
        suffer.
  **Our
        IMRT/IGRT products are used in connection with the delivery of intense
        radiation. Defects in, or misuse of, our products, or any detrimental side
        effects that result from the use of our products, could result in serious
        injury
        or death and could require costly recalls or subject us to costly and
        time-consuming product liability claims. This could harm future sales and
        require us to pay substantial damages.**
  Our
        IMRT/IGRT products are used in connection with the delivery of high-powered
        external beam radiation to cancer patients. One or more of our IMRT/IGRT
        products could malfunction or be misused and cause serious injury or death
        to a
        patient. In addition, our IMRT/IGRT products might otherwise be determined
        to
        cause serious injury or other detrimental side effects. There is an inherent
        risk in our industry that we could be sued if one of our products results
        in, or
        is alleged to result in, a personal injury. Although we believe that we
        currently have adequate insurance to address anticipated potential liabilities
        associated with product liability, any unforeseen product liability, exposure
        in
        excess of, or outside the scope of, such insurance coverage could adversely
        affect our operating results. Any such claim brought against us, with or
        without
        merit, could result in significant damage to our business.
  The
        FDA's
        medical device reporting regulations require us to report any incident in
        which
        our products may have caused or contributed to a death or serious injury,
        or in
        which our products malfunctioned in a way that would be likely to cause or
        contribute to a death or serious injury if the malfunction recurred. Any
        required filing could result in an investigation of our products and possibly
        subsequent regulatory action against us if it is found that one of our products
        caused the death or serious injury of a patient.
  Because
        of the nature of our IMRT/IGRT products and their use, the tolerance for
        error
        in the design, manufacture or use of our IMRT/IGRT products may be small
        or
        nonexistent. If a product designed or manufactured by us is defective, whether
        due to design or manufacturing defects, or improper assembly, use or servicing
        of the product or other reasons, the product may need to be recalled, possibly
        at our expense. Furthermore, the adverse effect of a product recall might
        not be
        limited to the cost of the recall. For example, a product recall could cause
        applicable regulatory authorities to investigate us as well as cause our
        customers to review and potentially terminate their relationships with us.
        Recalls, especially if accompanied by unfavorable publicity or termination
        of
        customer contracts, could cause us to suffer substantial costs, lost revenues
        and a loss of reputation, each of which could harm our business. Products
        as
        complex as our planning and dose calculation software systems may also contain
        undetected software errors or defects when they are first introduced or as
        new
        versions are released. Our products may not be free from errors or defects
        even
        after they have been tested, which could result in the rejection of our products
        by our customers and damage to our reputation, as well as lost revenue, diverted
        development resources and increased support costs. We may also be subject
        to
        claims for damages related to any errors in our products.
  -32-
  We
        currently maintain product liability insurance, which has deductible amounts
        and
        per claim and aggregate limits. However, we cannot assure you that this
        insurance will continue to be available on terms acceptable to us or in
        sufficient amounts if at all, or that it will provide adequate coverage in
        the
        event that any product liability is actually incurred.
  **Currently,
        our products are predominantly used in the treatment of tumors of the prostate,
        head, neck and spinal cord. If we do not obtain wider acceptance of our products
        to treat other types of cancer, our sales could fail to increase and we could
        fail to achieve our desired growth rate.**
  Currently,
        our IMRT/IGRT products are predominantly used in the treatment of tumors
        of the
        prostate, head, neck and spinal cord, while our brachytherapy products are
        used
        almost exclusively for the treatment of prostate cancer. Further research,
        clinical data and years of experience will likely be required before there
        can
        be broad acceptance for the use of both our IMRT/IGRT as well as our
        brachytherapy products for additional types of cancer. In particular, some
        recognized members of the radiation oncology community have expressed skepticism
        as to the relative benefits of IMRT treatments other than for limited types
        of
        cancer such as prostate cancer, where mortality is closely linked to recurrence
        of the local tumor. They point out that in many types of cancer, such as
        breast
        cancer, mortality is usually a result of metastasis, meaning the expansion
        of
        the cancer to other parts of the patient's body, and that eliminating or
        controlling the growth of the local tumor, which is the goal of IMRT treatments,
        does little to prevent this from occurring. If our products do not become
        more
        widely accepted in treating other types of cancer, our sales could fail to
        increase or could decrease.
  **We
        rely on several sole source suppliers and a limited number of other suppliers
        to
        provide raw materials and significant components used in our products. A
        material interruption in supply could prevent or limit our ability to accept
        and
        fill orders for our products.**
  Although
        we perform final product assembly of our IMRT/IGRT products, we purchase
        all
        major components for those products from third-party suppliers. We currently
        rely on a single source of supply for several key materials and components,
        the
        most important of which are the tungsten leaves used in our MIMiC multi-leaf
        collimator and all major components used in our BAT targeting system. We
        also
        obtain various other components for our IMRT/IGRT products from a limited
        number
        of sources. We cannot produce IMRT/IGRT products without these components.
        In
        the event of any extended or recurring interruption in supply, or if any
        of the
        significant components to our IMRT/IGRT products become obsolete or are no
        longer manufactured, we could be required to redesign our products or seek
        alternative supply sources, which could significantly impair our ability
        to sell
        these products. In some cases, we expect that it would take several months,
        or
        longer, for a new supplier to begin providing components to specification.
        In
        addition, we could be required to make a new or supplemental filing with
        the FDA
        and other applicable regulatory authorities and might have to obtain clearance
        or other regulatory approvals prior to marketing a product containing new
        components. We may be unable to obtain the necessary regulatory clearances
        or
        approvals on a timely basis, if at all, which could cause our revenues to
        decline and our business to suffer.
 
 We
        also
        depend upon a limited number of outside unaffiliated suppliers for our
        radioisotopes. Our principal suppliers are Nordion International, Inc. and
        a company in Russia. We also utilize other commercial isotope manufacturers
        located in the United States and overseas. To date, we have been able to
        obtain
        the required radioisotopes for our products without any significant delays
        or
        interruptions. Currently, we rely exclusively upon Nordion International
        for our
        supply of the Palladium-103 isotope; if Nordion International ceases to supply
        isotopes in sufficient quantity to meet our needs, there may not be adequate
        alternative sources of supply. If we lose any of these suppliers (including
        any
        single-source supplier), we would be required to find and enter into supply
        arrangements with one or more replacement suppliers. Obtaining alternative
        sources of supply could involve significant delays and other costs and these
        supply sources may not be available to us on reasonable terms or at all.
        Any
        disruption of supplies could delay delivery of our products that use
        radioisotopes, which could adversely affect our business and financial results
        and could result in lost or deferred sales.
  -33-
  **If
        we are unable to attract and retain qualified employees, we may be unable
        to
        meet our growth and revenue needs.**
  Our
        success is materially dependent on a limited number of key employees, and,
        in
        particular, the continued services of L. Michael Cutrer, our president and
        chief
        executive officer, and James W. Klingler, our chief financial officer. We
        carry
        key employee insurance for Mr. Cutrer in the amount of $2.5 million.
        Our future business and financial results could be adversely affected if
        the
        services of Messrs Cutrer or Klingler or other key employees cease to be
        available. To our knowledge, none of our key employees have any plans to
        retire
        or leave in the near future.
  Our
        future success and ability to grow our business will depend in part on the
        continued service of our skilled personnel and our ability to identify, hire
        and
        retain additional qualified personnel. Although some employees are bound
        by a
        limited non-competition agreement that they sign upon employment, few of
        our
        employees are bound by employment contracts, and it is difficult to find
        qualified personnel, particularly medical physicists and customer service
        personnel, who are willing to travel extensively. We compete for qualified
        personnel with medical equipment manufacturers, universities and research
        institutions. Because the competition for these personnel is intense, costs
        related to compensation may increase significantly.
  Even
        when
        we are able to hire a qualified medical physicist, engineer or other technical
        person, there is a significant training period of up to several months before
        that person is fully capable of performing the functions we need. This could
        limit our ability to expand our business.
  **The
        medical device industry is characterized by competing intellectual property,
        and
        we could be sued for violating the intellectual property rights of others.**
  The
        medical device industry is characterized by a substantial amount of litigation
        over patent and other intellectual property rights. Our competitors, like
        companies in many high technology businesses, continually review other
        companies' products for possible conflicts with their own intellectual property
        rights. Determining whether a product infringes a patent involves complex
        legal
        and factual issues, and the outcome of patent litigation actions is often
        uncertain. Our competitors could assert that our products and the methods
        we
        employ in the use of our products are covered by United States or foreign
        patent
        rights held by them. In addition, because patent applications can take many
        years to issue, there could be applications now pending of which we are unaware,
        which could later result in issued patents that our products infringe. There
        could also be existing patents that one or more of our products could
        inadvertently be infringing of which we are unaware.
  While
        we
        do not believe that any of our products, services or technologies infringe
        any
        valid intellectual property rights of third parties, we may be unaware of
        third-party intellectual property rights that relate to our products, services
        or technologies. As the number of competitors in the radiation oncology market
        grows, and as the number of patents issued in this area grows, the possibility
        of a patent infringement claim against us going forward increases. We could
        incur substantial costs and diversion of management resources if we have
        to
        assert our patent rights against others. An unfavorable outcome to any
        litigation could harm us. In addition, we may not be able to detect infringement
        or may lose competitive position in the market before we do so.
  To
        address patent infringement or other intellectual property claims, we may
        have
        to enter into license agreements and technology cross-licenses or agree to
        pay
        royalties at a substantial cost to us. We may be unable to obtain necessary
        licenses. A valid claim against us and our failure to obtain a license for
        the
        technology at issue could prevent us from selling our products and materially
        adversely affect our business, financial results and future prospects.
  -34-
  **If
        we fail to protect our intellectual property rights or if our intellectual
        property rights do not adequately cover the technologies we employ, or if
        such
        rights are declared to be invalid, other companies may take advantage of
        our
        technology ideas and more effectively compete directly against us, or we
        might
        be forced to discontinue selling certain products.**
  Our
        success depends in part on our ability to obtain and enforce patent protections
        for our products and operate without infringing on the proprietary rights
        of
        third parties. We rely on U.S. and foreign patents to protect our intellectual
        property. We also rely significantly on trade secrets and know-how that we
        seek
        to protect. We attempt to protect our intellectual property rights by filing
        patent applications for new features and products we develop. We enter into
        confidentiality or license agreements with our employees, consultants,
        independent contractors and corporate partners, and we seek to control access
        to
        our intellectual property and the distribution of our products, documentation
        and other proprietary information. We plan to continue these methods to protect
        our intellectual property and our products. These measures may afford only
        limited protection. In addition, the laws of some foreign countries may not
        protect our intellectual property rights to the same extent as do the laws
        of
        the United States.
  If
        a
        competitor infringes upon our patent or other intellectual property rights,
        enforcing those rights could be difficult, expensive and time-consuming,
        making
        the outcome uncertain. Competitors could also bring actions or counterclaims
        attempting to invalidate our patents. Even if we are successful, litigation
        to
        enforce our intellectual property rights or to defend our patents against
        challenge could be costly and could divert our management's attention.
  In
        1998
        (prior to our acquisition of NOMOS Corporation), NOMOS became involved in
        a
        lawsuit, which NOMOS initiated, involving a NOMOS patent relating to the
        ultrasound localization techniques that is used in BAT. In January 2003,
        the district court entered judgment against NOMOS on its infringement claims.
        NOMOS appealed this judgment to the United States Court of Appeals for the
        Federal Circuit. In February 2004, the circuit court upheld the district
        court's
        judgment and we filed a petition for rehearing, which was denied on
        March 11, 2004. We cannot predict what the adverse effect the result of
        this litigation will have on our future sales of related products.
  Even
        if
        we are able to effectively enforce our existing proprietary rights to the
        fullest extent permitted by law, this would not protect us from competition.
        We
        do not have any patents on IMRT delivery or planning generally, and we have
        competitors that currently market and sell IMRT planning and delivery products
        including inverse planning systems similar to our CORVUS product. In addition,
        our competitors could design around our patents or develop products that
        provide
        comparable or superior outcomes without infringing on our patents or other
        proprietary rights. The confidentiality agreements with our employees,
        consultants and other third parties may not be enforceable or may not provide
        meaningful protection for our trade secrets or other proprietary information
        in
        the event of unauthorized use or disclosure.
  In
        2006,
        we licensed intellectual property which is currently the subject of litigation
        brought by WorldWide Medical Technologies in U.S. District Court against
        both
        the Company as well as their former employee, Richard Terwilliger, who is
        currently our Vice-President of New Product Development. This intellectual
        property relates to the Company’s brachytherapy business, specifically, certain
        needle-loading and stranding technologies. While the Company does not believe
        that it has any liability in this matter, and is vigorously defending itself
        in
        the litigation, we cannot predict what effect an adverse result from this
        litigation would have on our future sales of the products at issue.
  **We
        use radioactive materials which are subject to stringent regulation and which
        may subject us to liability if accidents occur** .
 
 We
        manufacture and process radioactive materials which are subject to stringent
        regulation. We operate under licenses issued by the California Department
        of
        Health which are renewable every eight years. We received a renewal of our
        license for our North Hollywood facility in 1998 and we were issued a license
        for our Chatsworth facility in March 1999. California is one of the
        "Agreement States," which are so named because the Nuclear Regulatory
        Commission, or NRC, has granted such states regulatory authority over
        radioactive materials, provided such states have regulatory standards meeting
        or
        exceeding the standards imposed by the NRC. Most users of our products must
        obtain licenses issued by the state in which they reside (if they are Agreement
        States) or the NRC. Use licenses are also required by some of the foreign
        jurisdictions in which we may seek to market our products.
  -35-
 
 Although
        we believe that our safety procedures for handling and disposing of these
        radioactive materials comply with the standards prescribed by state and federal
        regulations, the risk of accidental contamination or injury from these materials
        cannot be completely eliminated. In the event of such an accident, we could
        be
        held liable for any damages that result. We believe we carry reasonably adequate
        insurance to cover us in the event of any damages resulting from the use
        of
        hazardous materials.
  **Healthcare
        reforms, changes in health-care policies and unfavorable changes to third-party
        reimbursements for use of our products, could cause declines in the revenues
        of
        our products.**
  Hospitals
        and freestanding clinics may be less likely to purchase our products if they
        cannot be assured of receiving favorable reimbursement for treatments using
        our
        products from third-party payors, such as Medicare, Medicaid and private
        health
        insurance plans. Generally speaking, Medicare pays hospitals, freestanding
        clinics and physicians a fixed amount for services using our products,
        regardless of the costs incurred by those providers in furnishing the services.
        Such providers may perceive the set reimbursement amounts as inadequate to
        compensate for the costs incurred and thus may be reluctant to furnish the
        services for which our products are designed. Moreover, third-party payors
        are
        increasingly challenging the pricing of medical procedures or limiting or
        prohibiting reimbursement for some services or devices, and we cannot be
        sure
        that they will reimburse our customers at levels sufficient to enable us
        to
        achieve or maintain sales and price levels for our products. There is no
        uniform
        policy on reimbursement among third-party payors, and we can provide no
        assurance that procedures using our products will qualify for reimbursement
        from
        third-party payors or that reimbursement rates will not be reduced or
        eliminated. For example, we have previously been informed that some private
        third-party payors regard IMRT as investigational or experimental and do
        not
        provide reimbursement for these services at this time. A reduction in or
        elimination of third-party payor reimbursement for treatments using our products
        would likely have a material adverse effect on our revenues.
  Our
        results from operations arising out of our relationship with Prostate Centers
        of
        America (PCA) has been negatively impacted by administrative difficulties
        in
        reimbursement of our brachytherapy products in ambulatory surgical centers,
        despite recent changes in reimbursement for brachytherapy products in
        non-hospital settings. Our ability to receive payment for purchases already
        made
        by customers of PCA’s has been significantly impacted by these administrative
        difficulties, and we cannot be sure that full payment, or any payment, will
        be
        made on these past sales of brachytherapy seeds.
  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.
  -36-
  The
        federal Medicare program currently reimburses hospitals and freestanding
        clinics
        for both IMRT/IGRT and brachytherapy treatments. Medicare reimbursement amounts
        typically are reviewed and adjusted at least annually. Medicare reimbursement
        policies are reviewed and revised on an ad hoc basis. Adjustments could be
        made
        to these reimbursement policies or amounts, which could result in reduced
        or no
        reimbursement for IMRT/IGRT and brachytherapy services. Changes in Medicare
        reimbursement policies or amounts affecting hospitals and freestanding clinics
        could negatively affect market demand for our products.
  With
        respect to brachytherapy in particular, Medicare reimbursement amounts for
        seeding are currently significantly less than for radical prostatectomy,
        or RP.
        Although seeding generally requires less physician time than RP, lower
        reimbursement amounts, when combined with physician familiarity with RP,
        may
        create disincentives for urologists to perform seeding.
  Private
        third-party payors often adopt Medicare reimbursement policies and payment
        amounts. As such, Medicare reimbursement policy and payment amount changes
        concerning our products also could be extended to private third-party payor
        reimbursement policies and amounts and could affect demand for our products
        in
        those markets as well.
  Acceptance
        of our products in foreign markets could be affected by the availability
        of
        adequate reimbursement or funding, as the case may be, within prevailing
        healthcare payment systems. Reimbursement, funding and healthcare payment
        systems vary significantly by country and include both government-sponsored
        healthcare and private insurance. We can provide no assurance that third-party
        reimbursement will be made available with respect to treatments using our
        products under any foreign reimbursement system.
  Problems
        with any of these reimbursement systems that adversely affect demand for
        our
        products could cause our revenues from our products to decline and our business
        to suffer.
  Also,
        we,
        our distributors and healthcare providers performing radiation therapy
        procedures are subject to state and federal fraud and abuse laws prohibiting
        kickbacks and, in the case of physicians, patient self-referrals. We may
        be
        subjected to civil and criminal penalties if we or our agents violate any
        of
        these prohibitions.
 
 **We
        are subject to extensive government regulation applicable to the manufacture
        and
        distribution of our products. Complying with the Food And Drug Administration
        and other domestic and foreign regulatory bodies is an expensive and
        time-consuming process, whose outcome can be difficult to predict. If we
        fail or
        are delayed in obtaining regulatory approvals or fail to comply with applicable
        regulations, we may be unable to market and distribute our products or may
        be
        subject to civil or criminal penalties.**
 
 We
        and
        some of our suppliers and distributors are subject to extensive and rigorous
        government regulation of the manufacture and distribution of our products,
        both
        in the United States and in foreign countries. Compliance with these laws
        and
        regulations is expensive and time-consuming, and changes to or failure to
        comply
        with these laws and regulations, or adoption of new laws and regulations,
        could
        adversely affect our business.
 
 In
        the
        United States, as a manufacturer and seller of medical devices and devices
        utilizing radioactive by-product material, we and some of our suppliers and
        distributors are subject to extensive regulation by federal governmental
        authorities, such as the United States Food and Drug Administration, or FDA,
        and
        state and local regulatory agencies, such as the State of California, State
        of
        Pennsylvania and the State of Washington **** to
        ensure
        such devices are safe and effective. Such regulations, which include the
        U.S.
        Food, Drug and Cosmetic Act, or the FDC Act, and regulations promulgated
        by the
        FDA, govern the design, development, testing, manufacturing, packaging,
        labeling, distribution, import/export, possession, marketing, disposal, clinical
        investigations involving humans, sale and marketing of medical devices,
        post-market surveillance, repairs, replacements, recalls and other matters
        relating to medical devices, radiation producing devices and devices utilizing
        radioactive by-product material. State regulations are extensive and vary
        from
        state to state. Our brachytherapy seeds and IMRT/IGRT products constitute
        medical devices subject to these regulations. Future products in any of our
        business segments may constitute medical devices and be subject to regulation
        as
        such. These laws require that manufacturers adhere to certain standards designed
        to ensure that the medical devices are safe and effective. Under the FDC
        Act,
        each medical device manufacturer must comply with requirements applicable
        to
        manufacturing practices.
  -37-
  In
        the
        United States, medical devices are classified into three different categories,
        over which the FDA applies increasing levels of regulation: Class I,
        Class II, and Class III. The FDA has classified all of our IMRT/IGRT
        products to date as Class II devices. Our brachytherapy products have been
        classified as Class I devices. Before a new device can be introduced into
        the
        United States market, the manufacturer must obtain FDA clearance or approval
        through either a 510(k) premarket notification or a premarket approval, unless
        the product is otherwise exempt from the requirements. Class I devices are
        statutorily exempt from the 510(k) process, unless the device is intended
        for a
        use which is of substantial importance in preventing impairment of human
        health
        or it presents a potential unreasonable risk of illness or injury.
  A
        510(k)
        premarket notification clearance will typically be granted for a device that
        is
        substantially equivalent to a legally marketed Class I or Class II
        medical device or a Class III medical device for which the FDA has not yet
        required submission of a premarket approval. A 510(k) premarket notification
        must contain information supporting the claim of substantial equivalence,
        which
        may include laboratory results or the results of clinical studies. Following
        submission of a 510(k) premarket notification, a company may not market the
        device for clinical use until the FDA finds the product is substantially
        equivalent for a specific or general intended use. FDA clearance generally
        takes
        from four to twelve months, but it may take longer, and there is no assurance
        that the FDA will ultimately grant a clearance. The FDA may determine that
        a
        device is not substantially equivalent and require submission and approval
        of a
        premarket approval or require further information before it is able to make
        a
        determination regarding substantial equivalence.
  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 premarket
        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 premarket approval process, our product introductions or
        modifications could be delayed or cancelled, which could cause our revenues
        to
        be below expectations.
  -38-
 
 In
        addition to FDA-required market clearances and approvals, our manufacturing
        operations are required to comply with the FDA's Quality System Regulation,
        or
        QSR, which addresses the quality program requirements, such as a company's
        management responsibility for the company's quality systems, and good
        manufacturing practices, product design, controls, methods, facilities and
        quality assurance controls used in manufacturing, assembly, packing, storing
        and
        installing medical devices. Compliance with the QSR is necessary to receive
        FDA
        clearance or approval to market new products and is necessary for us to be
        able
        to continue to market cleared or approved product offerings. There
        can
        be no assurance that we will not incur significant costs to comply with these
        regulations in the future or that the regulations will not have a material
        adverse effect on our business, financial condition and results of operations.
        Our compliance and the compliance by some of our suppliers with applicable
        regulatory requirements is and will continue to be monitored through periodic
        inspections by the FDA. The
        FDA
        makes announced and unannounced inspections to determine compliance with
        the
        QSR's and may issue us 483 reports listing instances where we have failed
        to
        comply with applicable regulations and/or procedures or Warning Letters which,
        if not adequately responded to, could lead to enforcement actions against
        us,
        including fines, the total shutdown of our production facilities and criminal
        prosecution.
  If
        we or
        any of our suppliers fail to comply with FDA requirements, the FDA can institute
        a wide variety of enforcement actions, ranging from a public warning letter
        to
        more severe sanctions such as:
  •
                fines,
                    injunctions and civil penalties;
 •
              the
                  recall or seizure of our products;
 •
              the
                  imposition of operating restrictions, partial suspension or total
                  shutdown
                  of production;
 •
              the
                  refusal of our requests for 510(k) clearance or premarket approval
                  of new
                  products;
 •
              the
                  withdrawal of 510(k) clearance or premarket 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.
  **Doctors
        and hospitals may not adopt our products and technologies at levels sufficient
        to sustain our business or to achieve our desired growth rate.**
  Intensity
        modulated radiation therapy and image-guided radiation therapy are both
        relatively new technologies and, to date, we have attained only limited
        penetration of the total potential worldwide market. Our future growth and
        success depends upon creating broad awareness and acceptance of IMRT/IGRT
        generally and our products in particular by doctors, hospitals and freestanding
        clinics, as well as patients. This will require substantial marketing and
        educational efforts, which will be costly and may not be successful. The
        target
        customers for our IMRT/IGRT products may not adopt these technologies or
        may
        adopt them at a rate that is slower than desired. In addition, as described
        above, potential customers who decide to utilize IMRT/IGRT may choose to
        purchase competitors' products. Important factors that will affect our ability
        to attain broad market acceptance of our IMRT/IGRT products include:
  •
              doctor
                  and patient awareness and acceptance of IMRT/IGRT and our products;
 •
              the
                  real or perceived effectiveness and safety of IMRT/IGRT and our
                  products;
 •
              the
                  relationship between the cost of our products and the real or perceived
                  medical benefits of IMRT/IGRT and our products;
 •
                the
                    relationship between the cost of our products and the financial
                    benefits
                    to our customers of using our products, which will be greatly
                    affected by
                    the coverage of, and reimbursement for, IMRT/IGRT treatment and
                    ultrasound
                    guidance by governmental and private third-party payors; and
 •
              market
                  perception of our ability to continue to grow our business and
                  develop
                  enhanced IMRT/IGRT products.
  -39-
  Failure
        of our products to gain broad market acceptance could cause our revenues
        to
        decline and our business to suffer.
  **Our
        future growth depends, in part, on our ability to penetrate foreign markets,
        particularly in Asia and Europe. However, we may encounter difficulties in
        gaining acceptance of our products in foreign markets, where we have limited
        experience marketing, servicing and distributing our products, and where
        we will
        be subject to additional regulatory burdens and other
        risks.**
  Our
        future profitability will depend in part on our ability to establish, grow
        and
        ultimately maintain our product sales in foreign markets, particularly in
        Asia
        and Europe. However, we have limited experience in marketing, servicing and
        distributing our products in other countries. In 2005, less than 5% of our
        product revenues and less than 5% of our total revenues were derived from
        sales
        to customers outside the United States and Canada. Our foreign operations
        subject us to additional risks and uncertainties, including:
  •
              our
                  customers' ability to obtain reimbursement for procedures using
                  our
                  products in foreign markets;
 •
              the
                  burden of complying with complex and changing foreign regulatory
                  requirements;
 •
              language
                  barriers and other difficulties in providing long-range customer
                  support
                  and service;
 •
              longer
                  accounts receivable collection times;
 •
                significant
                    currency fluctuations, which could cause our distributors to
                    reduce the
                    number of products they purchase from us because the cost of
                    our products
                    to them could fluctuate relative to the price they can charge
                    their
                    customers;
 •
              reduced
                  protection of intellectual property rights in some foreign countries;
                  and
 •
              the
                  interpretation of contractual provisions governed by foreign laws
                  in the
                  event of a contract dispute.
  Our
        foreign sales of our products could also be adversely affected by export
        license
        requirements, the imposition of governmental controls, political and economic
        instability, trade restrictions, changes in tariffs and difficulties in staffing
        and managing foreign operations. In addition, we are subject to the Foreign
        Corrupt Practices Act, any violation of which could create a substantial
        liability for us and also cause a loss of reputation in the market.
  **As
        part of our business strategy, we intend to pursue transactions that may
        cause
        us to experience significant charges to earnings that may adversely affect
        our
        stock price and financial condition** .
 
 We
        regularly review potential transactions related to technologies, product
        candidates or product rights and businesses complementary to our business.
        Such
        transactions could include mergers, acquisitions, strategic alliances, licensing
        agreements or co-promotion agreements. Our acquisition of Theseus Imaging
        Corporation in October 2000 and the acquisition of NOMOS, in May 2004, are
        examples of such transactions. In the future, if we have sufficient available
        capital, we may choose to enter into such transactions. We may not be able
        to
        successfully integrate newly acquired organizations, products or technologies
        into our business and the process could be expensive and time consuming and
        may
        strain our resources. Depending upon the nature of any transaction, we may
        experience a charge to earnings which could be material.
  -40-
 
 **Operating
        results for a particular period may fluctuate and are difficult to
        predict.**
 
 The
        results of operations for any fiscal quarter or fiscal year are not necessarily
        indicative of results to be expected in future periods. Our operating results
        have in the past been, and will continue to be, subject to quarterly and
        annual
        fluctuations as a result of a number of factors. As a consequence, operating
        results for a particular future period are difficult to predict. Such factors
        include the following:
 
 ·
              Our
                  net sales may grow at a slower rate than experienced in previous
                  periods
                  and, in particular periods, may
                  decline;
 ·
                Our
                    brachytherapy product lines may experience some variability in
                    revenue due
                    to seasonality. This is primarily due to three major holidays
                    occurring in
                    our first fiscal quarter and the apparent reduction in the number
                    of
                    procedures performed during summer months, which could affect
                    our third
                    fiscal quarter results;
 ·
              Estimates
                  with respect to the useful life and ultimate recoverability of
                  our
                  carrying basis of assets, including goodwill and purchased intangible
                  assets, could change as a result of such assessments and
                  decisions;
 ·
              As
                  a result of our growth in past periods, our fixed costs have increased.
                  With increased levels of spending and the impact of long-term commitments,
                  we may not be able to quickly reduce these fixed expenses in response
                  to
                  short-term business changes;
 ·
              Acquisitions
                  that result in in-process research and development expenses may
                  be charged
                  fully in an individual quarter;
 ·
              Sales
                  of our IMRT/IGRT products are typically heavier in the final month
                  of a
                  fiscal quarter, leading to a disproportionately high use of cash
                  in the
                  first two months of a quarter;
 ·
              Changes
                  or anticipated change in third-party reimbursement amounts or policies
                  applicable to treatments using our
                  products;
 ·
              Timing
                  of the announcement, introduction and delivery of new products
                  or product
                  enhancements by us and by our competitors;
 ·
              The
                  possibility that unexpected levels of cancellations of orders or
                  backlog
                  may affect certain assumptions upon which we base our forecasts
                  and
                  predictions of future performance;
 ·
              Changes
                  in the general economic conditions in the regions in which we do
                  business;
 ·
              Unfavorable
                  outcome of any litigation; and
 ·
              Accounting
                  adjustments such as those relating to reserves for product recalls,
                  stock
                  option expensing as required under SFAS No. 123R and changes in
                  interpretation of accounting
                  pronouncements.
 
 **Being
        a public company significantly increases our administrative
        costs.**
 
 The
        Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by
        the SEC
        and listing requirements subsequently adopted by NASDAQ in response to
        Sarbanes-Oxley, have required changes in corporate governance practices,
        internal control policies and audit committee practices of public companies.
        These rules, regulations, and requirements have significantly increased our
        legal, financial, compliance and administrative costs, and have made certain
        other activities more time consuming and costly, as well as requiring
        substantial time and attention of our senior management. The Company expects
        its
        continued compliance with these and future rules and regulations to continue
        to
        require significant resources. These new rules and regulations also may make
        it
        more difficult and more expensive for us to obtain director and officer
        liability insurance in the future, and could make it more difficult for us
        to
        attract and retain qualified members for our Board of Directors, particularly
        to
        serve on our audit committee.
  **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.**
  -41-
  The
        reports of publicly-traded companies are subject to review by the SEC from
        time
        to time for the purpose of assisting companies in complying with applicable
        disclosure requirements and to enhance the overall effectiveness of companies
        public filings, and comprehensive reviews of such reports are now required
        at
        least every three years under the Sarbanes-Oxley Act of 2002. While we believe
        that our previously filed SEC reports comply, and we intend that all future
        reports will comply in all material respects with the published rules and
        regulations of the SEC, we could be required to modify or reformulate
        information contained in prior filings as a result of an SEC review.  Any
        modification or reformulation of information contained in such reports could
        be
        significant and result in material liability to us and have a material adverse
        impact on the trading price of our common stock.
 
 **We
        do not believe that we currently satisfy all of the continued listing criteria
        established by the Nasdaq National Market.**  **The
        liquidity of our common stock could be adversely affected if we are delisted
        from The Nasdaq National Market.**
  As
        of the
        end of our fiscal quarter ended January 31, 2006, we do not believe that
        we
        satisfied all of the continued listing criteria established by the Nasdaq
        National Market. To date, Nasdaq's Listing Qualifications department has
        not
        notified us of any deficiency or any action necessary to regain compliance.
        If
        Nasdaq determines that we no longer comply with an applicable requirement,
        then
        Nasdaq will issue a letter requesting that we submit a plan of compliance
        within
        15 calendar days. If we submit a plan of compliance, it will, among other
        things, need to address our plan to pursue various strategic and financing
        alternatives designed to regain compliance within the near term and maintain
        compliance over the long term. Upon review of our plan of compliance, Nasdaq
        will determine whether to grant us an extension of time to become compliant
        or
        delist our securities. If such delisting occurs, the market price and market
        liquidity of our common stock may be adversely affected.
  Alternatively,
        if faced with such delisting, we may submit an application to transfer the
        listing of our common stock to the Nasdaq Capital Market. Among other
        requirements, the Nasdaq Capital Market has a $1.00 minimum bid price
        requirement.
  Alternatively,
        if our common stock is delisted by Nasdaq, our common stock may be eligible
        to
        trade on the American Stock Exchange, the OTC Bulletin Board maintained by
        Nasdaq, another over-the-counter quotation system, or on the pink sheets
        where
        an investor may find it more difficult to dispose of or obtain accurate
        quotations as to the market value of our common stock, although there can
        be no
        assurance that our common stock will be eligible for trading on any alternative
        exchanges or markets. In
        addition, we would be subject to Rule 15c2-11 promulgated by the SEC. If
        we fail
        to meet criteria set forth in the rule (for example, by failing to file periodic
        reports as required by the Exchange Act), various practice requirements are
        imposed on broker-dealers who sell securities governed by the rule to persons
        other than established customers and accredited investors. For these types
        of
        transactions, the broker-dealer must make a special suitability determination
        for the purchaser and have received the purchaser's written consent to the
        transactions prior to sale. Consequently, such rule may deter broker-dealers from recommending or selling
        our common stock, which may further affect the liquidity of our common
        stock.
  Delisting
        from Nasdaq would make trading our common stock more difficult for investors,
        potentially leading to further declines in our share price. It would also
        make
        it more difficult for us to raise additional capital.
 
 **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
  **** On
        January 12, 2006, we issued a warrant to Silicon Valley Bank as consideration
        for entering into a First Amendment to Loan and Security Agreement between
        the
        parties. The warrant entitles the holder, for a period of five years, to
        purchase up to an aggregate of 39,683 restricted shares of our common stock
        at a
        price of $1.89 per share. The warrant was issued in reliance on the exemption
        from registration contained in Section 4(2) of the Securities Act of 1933
        as a
        transaction by an issuer not involving any public offering.
  -42-
  **Item
        6.**  **Exhibits**
 
 (a) Exhibits.
 
 Exhibits
                  No.
              Title10.1
              Amendment
                  to Loan Agreement and Security Agreement, dated January 12, 2006,
                  between
                  NASI, the Subsidiaries and Silicon Valley Bank (incorporated by
                  reference
                  to Exhibit 10.25 of Form 10-K filed January 18, 2006).31.1
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200231.2
              Certification
                  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200232.1
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002


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 **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 NORTH
                  AMERICAN
                  SCIENTIFIC, INC.March
                  13, 2006
                By:
                /s/ L.
                  Michael CutrerName:L.
                  Michael CutrerTitle:President
                    andChief
                    Executive Officer
                  (Principal Executive Officer)
 March
                  13, 2006
                By:
                /s/ James
                  W.
                  KlinglerName:James
                  W. KlinglerTitle:Senior
                    Vice President andChief
                    Financial Officer
                  (Principal Financial
                    Officer)
 
 -44-