**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 April 30, 2007**
 
 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 o Non-Accelerated Filer x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act. o Yes x No
 
 The
        number of shares of Registrant's Common Stock, $.01 par value, outstanding
        as of
        June 1, 2007 was 29,298,016 shares.
  
 
 **NORTH
        AMERICAN SCIENTIFIC, INC.**
  **Index**
 
 
 
 **Page****Part
                  I - Financial Information****Item
                  1. Financial Statements**Consolidated
                  Balance Sheets as of April 30, 2007 and October 31, 2006
              3Consolidated
                  Statements of Operations for the three and six months
                  endedApril
                  30, 2007 and 2006
              4Consolidated
                  Statements of Cash Flows for the six months ended April
                  30, 2007 and 2006
              5Condensed
                  Notes to the Consolidated Financial Statements
              6**Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations**
              25**Item
                  3. Quantitative and Qualitative Disclosures about Market Risk**
              36**Item
                  4. Controls and Procedures**
              36
 
 **Part
        II - Other Information**
  **Item
                  1A. Risk Factors**
              37**Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds**
              55**Item
                  4. Submission of Matters to a Vote of Security
                  Holders**
              56**Item
                  6. Exhibits**
              56**Signatures**
              57
 
 2
 **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
  **NORTH
        AMERICAN SCIENTIFIC, INC.**
  **Consolidated
        Balance Sheets**
 **April
                      30,**
                    **2007**
                
                **October
                    31,**
                    **2006**(Unaudited)**Assets**Current
                    assetsCash
                    and cash equivalents
                
                $
                1,223,000
                
                $
                903,000Marketable
                    securities, held to maturity
                
                
                859,000
                
                
                8,420,000Accounts
                    receivable, net of reserves
                
                
                4,569,000
                
                
                4,711,000Inventories,
                    net of reserves
                
                
                4,333,000
                
                
                4,202,000Prepaid
                    expenses and other current assets
                
                
                1,562,000
                
                
                1,085,000Total
                    current assets
                
                
                12,546,000
                
                
                19,321,000Equipment
                    and leasehold improvements, net
                
                
                2,094,000
                
                
                2,400,000Goodwill
                
                
                2,564,000
                
                
                2,564,000Intangible
                    assets, net
                
                
                2,218,000
                
                
                2,532,000Other
                    assets
                
                
                235,000
                
                
                381,000Total
                    assets
                
                $
                19,657,000
                
                $
                27,198,000**Liabilities
                    and Stockholders’ Equity**Current
                    liabilitiesAccounts
                    payable
                
                $
                1,630,000
                
                $
                2,406,000Accrued
                    expenses
                
                
                3,353,000
                
                
                3,940,000Deferred
                    revenue
                
                
                3,524,000
                
                
                3,664,000Total
                    current liabilities
                
                
                8,507,000
                
                
                10,010,000Commitments
                    and contingenciesStockholders’
                    EquityPreferred
                    stock, $0.01 par value, 2,000,000 shares authorized; no
                    sharesIssued
                
                
                —
                
                
                —Common
                    stock, $0.01 par value, 100,000,000 shares authorized, 29,504,037and
                    29,447,270 shares issued 29,298,016 and 29,336,144 shares outstanding
                    as
                    of April 30, 2007 and October 31, 2006, respectively
                
                
                298,000
                
                
                298,000Additional
                    paid-in capital
                
                
                144,974,000
                
                
                144,543,000Treasury
                    stock, at cost - 206,021 and 111,126 common shares as of April
                    30, 2007
                    and October 31, 2006, respectively
                
                
                (227,000
                )
                
                (133,000
                )Accumulated
                    deficit
                
                
                (133,895,000
                )
                
                (127,520,000
                )Total
                    stockholders’ equity
                
                
                11,150,000
                
                
                17,188,000Total
                    liabilities and stockholders’ equity
                
                $
                19,657,000
                
                $
                27,198,000
  See
        condensed notes to the consolidated financial statements.
  3
  **NORTH
        AMERICAN SCIENTIFIC, INC.**
  **Consolidated
        Statements of Operations**
 **(Unaudited)**
 **Three
                    months ended April 30,**
                
                **Six
                    months ended April 30,****2007**
                
                **2006**
                
                **2007**
                
                **2006**RevenueProduct
                
                $
                4,276,000
                
                $
                5,835,000
                
                $
                9,773,000
                
                $
                11,004,000Service
                
                
                1,936,000
                
                
                2,222,000
                
                
                4,000,000
                
                
                4,580,000Total
                    revenue
                
                
                6,212,000
                
                
                8,057,000
                
                
                13,773,000
                
                
                15,584,000Cost
                    of revenueProduct
                
                
                3,519,000
                
                
                4,190,000
                
                
                7,047,000
                
                
                8,045,000Service
                
                
                592,000
                
                
                941,000
                
                
                1,326,000
                
                
                1,762,000Total
                    cost of revenue
                
                
                4,111,000
                
                
                5,131,000
                
                
                8,373,000
                
                
                9,807,000Gross
                    profit
                
                
                2,101,000
                
                
                2,926,000
                
                
                5,400,000
                
                
                5,777,000Operating
                    expensesSelling
                    expenses
                
                
                1,466,000
                
                
                2,331,000
                
                
                3,557,000
                
                
                4,185,000General
                    and administrative expenses
                
                
                2,404,000
                
                
                2,617,000
                
                
                5,438,000
                
                
                4,811,000Research
                    and development
                
                
                1,202,000
                
                
                1,416,000
                
                
                2,429,000
                
                
                2,740,000Amortization
                    of intangible assets
                
                
                157,000
                
                
                157,000
                
                
                313,000
                
                
                314,000Total
                    operating expenses
                
                
                5,229,000
                
                
                6,521,000
                
                
                11,737,000
                
                
                12,050,000Loss
                    from operations
                
                
                (3,128,000
                )
                
                (3,595,000
                )
                
                (6,337,000
                )
                
                (6,273,000
                )Interest
                    and other income (expense), net
                
                
                (51,000
                )
                
                (100,000
                )
                
                (38,000
                )
                
                (97,000
                )Loss
                    before provision for income taxes
                
                
                (3,179,000
                )
                
                (3,695,000
                )
                
                (6,375,000
                )
                
                (6,370,000
                )Loss
                    from continuing operations
                
                
                (3,179,000
                )
                
                (3,695,000
                )
                
                (6,375,000
                )
                
                (6,370,000
                )Net
                    loss
                
                $
                (3,179,000
                )
                $
                (3,695,000
                )
                $
                (6,375,000
                )
                $
                (6,370,000
                )Basic
                    and diluted loss per share:
                
                $
                (
                    0.11
                )
                $
                (
                    0.22
                )
                $
                (
                    0.22
                )
                $
                (
                    0.38
                )Weighted
                    average number of shares outstanding
                
                
                29,335,385
                
                
                16,988,863
                
                
                29,332,148
                
                
                16,975,087
 See
        condensed notes to the consolidated financial statements.
 
 4
  **NORTH
        AMERICAN SCIENTIFIC, INC.**
  **Consolidated
        Statements of Cash Flows**
 **(Unaudited)**
 **Six
                    Months Ended April 30,****2007**
                
                **2006**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (6,375,000
                )
                $
                (6,370,000
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                    and amortization
                
                
                754,000
                
                
                784,000Amortization
                    of warrants
                
                
                159,000
                
                
                47,000Share-based
                    compensation expense
                
                
                375,000
                
                
                479,000Provision
                    for doubtful accounts
                
                
                (263,000
                )
                
                450,000Provision
                    for inventory adjustments
                
                
                (99,000
                )
                
                224,000Loss
                    on sale of equipment
                
                
                4,000
                
                
                —Changes
                    in assets and liabilities, net of discontinued operation:Accounts
                    receivable
                
                
                406,000
                
                
                (1,714,000
                )Inventories
                
                
                (32,000
                )
                
                (402,000
                )Prepaid
                    and other current assets
                
                
                (490,000
                )
                
                (420,000
                )Accounts
                    payable
                
                
                (776,000
                )
                
                384,000Accrued
                    expenses
                
                
                (587,000
                )
                
                (1,384,000
                )Deferred
                    revenue
                
                
                (140,000
                )
                
                (96,000
                )Net
                    cash used in continuing operations
                
                
                (7,064,000
                )
                
                (8,018,000
                )Net
                    cash used in discontinued operation
                
                
                —
                
                
                (81,000
                )Net
                    cash used in operating activities
                
                
                (7,064,000
                )
                
                (8,099,000
                )Cash
                    flows from investing activities:Proceeds
                    from maturity of marketable securities
                
                
                7,561,000
                
                
                993,000Proceeds
                    from sale of equipment
                
                
                14,000
                
                
                —Capital
                    expenditures
                
                
                (152,000
                )
                
                (155,000
                )Net
                    cash provided by investing activities
                
                
                7,423,000
                
                
                838,000Cash
                    flow from financing activities:Proceeds
                    from line of credit
                
                
                —
                
                
                3,314,000Proceeds
                    from long-term debt
                
                
                —
                
                
                3,000,000Proceeds
                    from exercise of stock options and stock purchase plan
                
                
                55,000
                
                
                70,000Purchase
                    of stock for treasury
                
                
                (94,000
                )
                
                —Net
                    cash (used in) provided by financing activities
                
                
                (39,000
                )
                
                6,384,000Net
                    increase (decrease) in cash and cash equivalents
                
                
                320,000
                
                
                (877,000
                )Cash
                    and cash equivalents at beginning of period
                
                
                903,000
                
                
                2,630,000Cash
                    and cash equivalents at end of period
                
                $
                1,223,000
                
                $
                1,753,000
 
 Supplemental
        disclosure:
 In
        the
        six months ended April 30, 2006, the Company has issued warrants with an
        estimated fair value totaling $526,000 to a bank and a debt provider as
        consideration for entering into Loan and Security Agreements. See Note
        9 to
        the Financial Statements.
 In
        the
        six months ended April 30, 2007 and 2006, respectively, there were no cash
        flows
        from investing activities or from financing activities associated with
        discontinued operations.
 
 See
        condensed notes to the consolidated financial statements.
  5
 **NORTH
        AMERICAN SCIENTIFIC, INC.**
 
 **Condensed
        Notes to Consolidated Financial Statements**
 **(Unaudited)**
 
 
 **NOTE
        1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *Basis
        of Presentation*
 
 The
        accompanying consolidated financial statements of the Company are unaudited,
        other than the consolidated balance sheet at October 31, 2006, and reflect
        all
        material adjustments, consisting only of normal recurring adjustments, which
        management considers necessary for a fair statement of the Company’s financial
        position, results of operations and cash flows for the interim periods. The
        results of operations for the current interim periods are not necessarily
        indicative of the results to be expected for the entire fiscal
        year.
 
 These
        consolidated financial statements have been prepared in accordance with the
        rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
        information and footnotes normally included in financial statements prepared
        in
        accordance with generally accepted accounting principles in the United States
        of
        America have been condensed or omitted pursuant to these rules and regulations.
        These consolidated financial statements should be read in conjunction with
        the
        consolidated financial statements and the notes thereto included in the
        Company’s Form 10-K, as filed with the SEC for the fiscal year ended October 31,
        2006.
 
 Certain
        reclassifications have been made to prior period balances in order to conform
        to
        the current period presentation.
 
 *Management’s
        Plans*
 
 The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and liquidation of liabilities
        in
        the normal course of business.  We have incurred net losses of $6.4 million
        in the six months ended April 30, 2007, and $17.1 million, $55.5 million
        and
        $36.3 million for the years ended October 31, 2006, 2005 and 2004, respectively.
        We have used cash in operations of $7.1 million in the six months ended April
        30, 2007, and $15.9 million, $11.9 million and $23.1 million for the years
        ended
        October 31, 2006, 2005 and 2004, respectively.  As of April 30, 2007, we
        had an accumulated deficit of $133.9 million; cash, cash equivalents and
        marketable securities of $2.1 million, and no long-term debt.
 
 Based
        on
        the Company’s current operating plans, management believes that the Company’s
        existing cash resources and cash forecasted by management to be generated
        by
        operations, funds to be raised by the Company through an equity or debt
        financing, as well as the Company’s anticipated available lines of credit, will
        be sufficient to meet working capital and capital requirements through at
        least
        the next twelve months. In this regard, we expect that we will need to raise
        additional financing in fiscal 2007 to support the launch of ClearPath and
        fund
        our continuing operations and other activities. Management also expects that
        in
        future periods new products and services will provide additional cash flow,
        although we are presently placing an emphasis on controlling expenses. 
However, there is no assurance that the Company will be successful with its
        plans.  If events and circumstances occur such that the Company does not
        meet its current operating plans, the Company is unable to raise sufficient
        additional equity or debt financing, or the Company’s lines of credit (which
        presently expire on September 28 and October 3, 2007, respectively) are
        insufficient or not available, the Company may be required to further reduce
        expenses or take other steps which could have a material adverse effect on
        our
        future performance, including but not limited to, the premature sale of some
        or
        all of our assets or product lines on undesirable terms, merger with or
        acquisition by another company on unsatisfactory terms, or the cessation
        of
        operations.
  6
 *Use
        of Estimates*
 
 In
        the
        normal course of preparing the financial statements in conformity with generally
        accepted accounting principles in the United States of America, management
        is
        required to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and reported amounts of revenue and
        expenses during the reporting period.  Actual results could differ from
        those amounts.
 
 *Marketable
        Securities*
 
 The
        Company invests excess cash in marketable securities consisting primarily
        of
        commercial paper, corporate notes and bonds, U.S. Government securities and
        money market funds. Investments with maturities of less than one year are
        considered to be short term and are classified as current assets.
 
 Debt
        securities that the Company has the positive intent and ability to hold to
        maturity are classified as "held-to-maturity" and reported at amortized cost.
        Debt securities not classified as held-to-maturity and marketable equity
        securities are classified as either "trading" or "available-for-sale," and
        are
        recorded at fair value with unrealized gains and losses included in earnings
        or
        stockholders' equity, respectively. All other equity securities are accounted
        for using either the cost method or the equity method.
 
 The
        Company continually reviews its investments to determine whether a decline
        in
        fair value below the cost basis is other than temporary. If the decline in
        fair
        value is judged to be other than temporary, the cost basis of the security
        is
        written down to fair value and the amount of the write-down is included in
        the
        Consolidated Statements of Operations.
 
 *Accounts
        Receivable and Allowance for Doubtful Accounts*
  Accounts
        receivable are recorded at the invoiced amount and do not bear interest.
        The
        allowance for doubtful accounts is the Company’s best estimate of the amount of
        probable credit losses in our existing accounts receivable. The Company
        determines the allowance based on historical write-off experience and customer
        economic data. We review our allowance for doubtful accounts monthly. Past
        due
        balances over 60 days and over a specified amount are reviewed individually
        for
        collectibility. Account balances are charged off against the allowance when
        the
        Company believes that it is probable the receivable will not be recovered.
        The
        Company does not have any off-balance-sheet credit exposure related to our
        customers.
 
 *Equipment
        and Leasehold Improvements*
 
 Equipment
        and leasehold improvements are stated at cost. Maintenance and repair costs
        are
        expensed as incurred, while improvements are capitalized. Gains or losses
        resulting from the disposition of assets are included in income. Depreciation
        and amortization are computed using the straight-line method over the estimated
        useful lives as follows:
 
 Furniture,
                  fixtures and equipment
              3-7
                  yearsLeasehold
                  improvements
              Lesser
                  of the useful life or term of lease
 
 7
  *Goodwill*
 
 Goodwill
        represents the excess of cost over the value of net assets of businesses
        acquired pursuant to Statement of Financial Accounting Standards ("SFAS")
        No. 141, "Business Combinations" and is carried at cost unless write-downs
        for impairment are required. The Company evaluates the carrying value of
        goodwill on an annual basis and whenever events and changes in circumstances
        indicate that the carrying amount may not be recoverable.
 
 *Intangible
        Assets*
 
 License
        agreements are amortized on a straight-line basis over periods ranging up
        to
        fifteen years. The amortization periods of patents are based on the lives
        of the
        license agreements to which they are associated or the approximate remaining
        lives of the patents, whichever is shorter. Purchased intangible assets with
        finite lives are carried at cost less accumulated amortization and are amortized
        on a straight-line basis over periods ranging from three to twelve
        years.
 
 The
        Company reviews for impairment whenever events and changes in circumstances
        indicate that such assets might be impaired. If the estimated future cash
        flows
        (undiscounted and without interest charges) from the use of an asset are
        less
        than the carrying value, a write-down is recorded to reduce the related asset
        to
        its estimated fair value.
 
 *Revenue
        Recognition*
 
 The
        Company sells products for radiation therapy treatment, including brachytherapy
        seeds used in the treatment of cancer, and IMRT and IGRT products and services,
        and non-therapeutic radiation sources.  Product revenue consists of
        brachytherapy, non-therapeutic sources, and certain IMRT hardware devices,
        including our MiMIC and Crane products. Software revenues consist of IMRT
        treatment planning software Corvus, Peacock, and nomosSTAT, and our IGRT
        products. Service revenue consists of warranty revenue and maintenance service
        agreements.
 
 Product
        revenue
  The
        Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104,
“Revenue Recognition” for the sale of non-software products.  SAB No. 104,
        which supercedes SAB No. 101, “Revenue Recognition in Financial Statements”,
        provides guidance on the recognition, presentation and disclosure of revenue
        in
        financial statements.  SAB No. 104 outlines the basic criteria that must be
        met to recognize revenue and provides guidance for the disclosure of revenue
        recognition policies.  In general, the Company recognizes revenue related
        to product sales when (i) persuasive evidence of an arrangement exists, (ii)
        delivery has occurred, (iii) the fee is fixed or determinable, and (iv)
        collectibility is reasonably assured.
 
 Software
        revenue
  The
        Company’s software revenue is generated from the sale of advanced medical
        equipment products.  The software element of the Company’s products is
        deemed an essential element of the functionality of the product. 
Maintenance and support are provided with the initial product sale for a
        twelve
        month period.  The maintenance and support is renewable annually or longer,
        at the customer’s discretion.
  The
        Company recognizes revenue in accordance with the provisions of Statement
        of
        Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain
        Transactions”.  Under the provisions of SOP 97-2, the Company recognizes
        software revenue upon delivery and acceptance, provided all significant
        obligations have been met, persuasive evidence of an arrangement exists,
        fees
        are fixed or determinable, collection is probable, and the Company is not
        involved in providing services that are essential to the functionality of
        the
        product.
  8
 The
        Company’s software sales are generally multiple element arrangements, which
        could include the product, first year annual maintenance and support, and
        training and installation.  Revenues from the multiple element arrangements
        are allocated to each element based on the relative fair value of the
        elements.  If the fair value of the element exists, the determination is
        based on vendor specific objective evidence.  If such evidence of fair
        value for each element of the arrangement does not exist, all revenue from
        the
        arrangement is deferred until such time that evidence of fair value of each
        element does exist or until all elements of the arrangement are delivered. 
If in a multiple element arrangement, fair value does not exist for one or
        more
        of the undelivered elements, the residual method of accounting is applied. 
Under the residual method, the fair value of the undelivered elements is
        deferred, and the remaining portion of the arrangement fee is recognized
        as
        revenue.
  Service
        revenue
 
 Services
        revenues are derived mainly from maintenance and support contracts and are
        recognized on a straight-line basis over the term of the contract. Payments
        for
        maintenance revenues are normally received in advance and are nonrefundable.
 
 *Stock-based
        Compensation*
 
 Effective
        November 1, 2005, the Company adopted Statement of Financial Accounting
        Standards (“SFAS”) No. 123(R), *Share-Based
        Payment* (“SFAS
        123(R)”), which requires the measurement and recognition of compensation expense
        for all share-based payment awards made to employees and directors, including
        stock options and employee stock purchases related to the Company’s Employee
        Stock Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair
        values. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* (“APB
        25”), which the Company previously followed in accounting for stock-based
        awards. In March 2005, the SEC issued *Staff
        Accounting Bulletin No. 107* (“SAB
        107”) to provide guidance on SFAS 123(R). The Company has applied SAB 107 in
        its
        adoption of SFAS 123(R).
 
 The
        Company adopted SFAS 123(R) using the modified prospective transition method
        as
        of and for the six months ended April 30, 2007 and 2006. In accordance with
        the
        modified prospective transition method, the Company’s financial statements for
        prior periods have not been restated to reflect, and do not include, the
        impact
        of SFAS 123(R). Share-based compensation expense recognized is based on the
        value of the portion of share-based payment awards that is ultimately expected
        to vest. Share-based compensation expense recognized in the Company’s
        Consolidated Statement of Operations during the six months ended April 30,
        2007
        and 2006 includes compensation expense for share-based payment awards granted
        prior to, but not yet vested as of, October 31, 2005 based on the grant date
        fair value estimated in accordance with the pro forma provisions of SFAS
        123 and
        new stock option grants made subsequent to October 31, 2005. A total of
        1,815,000, and 1,303,000 stock option grants were awarded to employees during
        the six months ended April 30, 2007 and 2006, respectively, and a total of
        150,000 stock option grants were awarded to directors on May 3, 2006 and
        June
        14, 2006.
 
 In
        conjunction with the adoption of SFAS 123(R), the Company elected to attribute
        the value of share-based compensation to expense using the straight-line
        method,
        which was previously used for its pro forma information required under SFAS
        123
        and SFAS 148. Note that the stock option grants on March 16, 2006 included
        a total of 650,500 stock options that contain certain market condition
        requirements (“2007 Premium Price Awards”) The 2007 Premium Price Awards are, to
        the extent provided by law, incentive stock options that have an exercise
        price
        of $3.35 per share, which is equal to 159% of the fair market value of the
        Company’s common stock on the grant date. The 2007 Premium Price Awards also
        include a market condition that provides that such stock options will only
        vest
        if the closing price of the Company's common stock is equal to or greater
        than
        $3.35 on each day over any consecutive four month period beginning on any
        date
        after the date of grant and ending no later than the third anniversary of
        the
        date of grant. If the market condition is not satisfied by the third anniversary
        of the date of grant, the 2007 Premium Price Awards will not vest. Subject
        to
        the attainment of the market condition by the Company’s common stock, the 2007
        Premium Price Awards will vest, if at all, in equal annual installments over
        a
        four year period beginning on the second anniversary of the grant date of
        March
        16, 2006. The 2007 Premium Price Awards have a term of 8 years from the date
        of
        grant. As of April 30, 2007 the market condition for the vesting of the 2007
        Premium Price Awards has not been met. Share-based compensation expense related
        to stock options and employee stock purchases, including the 2007 Premium
        Price
        Awards, of $170,000 and $221,000 for the three months ended April 30, 2007
        and
        2006, respectively, and $375,000 and $479,000 for the six months ended April
        30,
        2007 and 2006, respectively, was recorded in the financial statements as
        a
        component of general and administrative expense.
 
 9
 The
        Company uses the Black-Scholes option-pricing model for estimating the fair
        value of options granted. The Black-Scholes option-pricing model was developed
        for use in estimating the fair value of traded options that have no vesting
        restrictions and are fully transferable. In addition, option valuation models
        require the input of highly subjective assumptions, including the expected
        stock
        price volatility. The Company uses projected volatility rates, which are
        based
        upon historical volatility rates, trended into future years. Because the
        Company’s employee stock options have characteristics significantly different
        from those of traded options, and because changes in the subjective input
        assumptions can materially affect the fair value estimate, in management’s
        opinion, the existing models do not necessarily provide a reliable single
        measure of the fair value of the Company’s options. For purposes of financial
        statement presentation and pro forma disclosures, the estimated fair values
        of
        the options are amortized over the options’ vesting periods.
 
 *Net
        Loss per Share*
 
 Basic
        loss per share is computed by dividing the loss by the weighted average number
        of shares outstanding for the period.
 
 Diluted
        earnings (loss) per share is computed by dividing the net income (loss) by
        the
        sum of the weighted average number of common shares outstanding for the period
        plus the assumed exercise of all dilutive securities by applying the treasury
        stock method. Stock options for which the exercise price exceeds the average
        market price over the period have an anti-dilutive effect on earnings per
        share
        and, accordingly, are excluded from the calculation. The following table
        sets
        forth the computation of basic and diluted loss per share:
 **Three
                    months ended April 30,**
                
                **Six
                    months ended April 30,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Net
                    loss
                
                $
                (3,179,000
                )
                $
                (3,695,000
                )
                $
                (6,375,000
                )
                $
                (6,370,000
                )Weighted
                    average shares outstanding - basic
                
                
                29,335,385
                
                
                16,988,863
                
                
                29,332,148
                
                
                16,975,087Dilutive
                    effect of stock options and warrants
                
                
                —
                
                
                —
                
                
                —
                
                
                —Weighted
                    average shares outstanding -diluted
                
                
                29,335,385
                
                
                16,988,863
                
                
                29,332,148
                
                
                16,975,087Basic
                    loss per share
                
                $
                (0.11
                )
                $
                (0.22
                )
                $
                (0.22
                )
                $
                (0.38
                )Diluted
                    loss per share
                
                $
                (0.11
                )
                $
                (0.22
                )
                $
                (0.22
                )
                $
                (0.38
                )
  10
 
 Stock
        options to purchase 3,305,214 and 2,896,940 common shares for the three months
        ended April 30, 2007, and 2006, respectively, and 3,236,264 and 2,576,027
        common
        shares for the six months ended April 30, 2007 and 2006, respectively, were
        not
        included in the computation of diluted earnings per share because their effect
        would have been anti-dilutive.
 
 *Significant
        Concentrations*
 
 As
        of
        April 30, 2007, there was no customers that made up more than 10% of revenues
        and four customers that each made up more than 5% of accounts receivable,
        and
        one supplier that made up more than 10% of purchases and more than 5% of
        accounts payable.
 
 *Recent
        Accounting Pronouncements*
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation
        of FASB Statement No. 109, (FIN 48).  FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in an enterprise’s
        financial statements in accordance with FASB Statement No. 109, Accounting
        for Income Taxes. FIN 48 also prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return that results
        in a
        tax benefit. Additionally, FIN 48 provides guidance on de-recognition,
        income statement classification of interest and penalties, accounting in
        interim
        periods, disclosure, and transition. This interpretation is effective for
        fiscal
        years beginning after December 15, 2006. The Company is
        currently evaluating the effect that the application of FIN 48 will have
        on its
        financial position, results of operations or cash flows.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value ** Measurements”,
        (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in generally accepted accounting principles (GAAP),
        and
        expands disclosures about fair value measurements. This Statement applies
        under
        other accounting pronouncements that require or permit fair value measurements,
        and does not require any new fair value measurements. The application of
        SFAS
        No. 157, however, may change current practice within an organization. SFAS
        No.
        157 is effective for all fiscal years beginning after November 15, 2007,
        with
        earlier application encouraged. The
        Company is currently evaluating the effect that the application of SFAS No.
        157
        will have on its financial position, results of operations or cash
        flows.
 
 In
        February 2007, the FASB issued SFAS No. 159, *“The
        Fair Value Option for Financial Assets and Financial Liabilities.”* SFAS
        159
        provides companies with an option to report selected financial assets and
        liabilities at fair value. The standard’s objective is to reduce both complexity
        in accounting for financial instruments and the volatility in earnings caused
        by
        measuring related assets and liabilities differently. The standard requires
        companies to provide additional information that will help investors and
        other
        users of financial statements to more easily understand the effect of the
        company’s choice to use fair value on its earnings. It also requires companies
        to display the fair value of those assets and liabilities for which the company
        has chosen to use fair value on the face of the balance sheet. The new standard
        does not eliminate disclosure requirements included in other accounting
        standards, including requirements for disclosures about fair value measurements
        included in SFAS 157, *“Fair
        Value Measurements,”* and
        SFAS
        107, *“Disclosures
        about Fair Value of Financial Instruments.”* SFAS
        159
        is effective as of the start of fiscal years beginning after November 15,
        2007. Early adoption is permitted. We are in the process of evaluating this
        standard and therefore have not yet determined the impact that the adoption
        of
        SFAS 159 will have on our financial position, results of operations or cash
        flows.
 
 11
  **NOTE
        2 - SEGMENT INFORMATION**
  The
        Company’s operations are divided into segments based upon a combination of
        factors including: product produced, manufacturing process and management
        oversight.  The Company’s two segments are: IMRT/IGRT and Radiation
        Sources. IMRT/IGRT develops and markets products used during external beam
        radiation therapy for the treatment of cancer.  Radiation Sources develops
        and markets radioisotopic products including brachytherapy seeds and accessories
        used in the treatment of cancer and non-therapeutic products used in medical,
        environmental, research and industrial applications.
 
 The
        Company evaluates performance and allocates resources based on operating
        results
        and development milestones.  The accounting polices of the reportable
        segments are the same as those described in Note 1 in the summary of significant
        accounting policies.  There are no inter-company sales or
        profits.
  The
        Company’s segments are business units that either offer different products or
        are managed separately because they operate with distinct manufacturing and
        development processes.
  **Three
                    months ended April 30,**
                
                **Six
                    months ended April 30,****2007**
                
                **2006**
                
                **2007**
                
                **2006****Revenues**IMRT/IGRT
                
                $
                2,424,000
                
                $
                4,831,000
                
                $
                6,070,000
                
                $
                9,506,000Radiation
                    Sources
                
                
                3,788,000
                
                
                3,226,000
                
                
                7,703,000
                
                
                6,078,000$
                6,212,000
                
                $
                8,057,000
                
                $
                13,773,000
                
                $
                15,584,000**Loss
                    from Operations**IMRT/IGRT
                
                $
                (1,740,000
                )
                $
                (1,907,000
                )
                $
                (3,513,000
                )
                $
                (3,358,000
                )Radiation
                    Sources
                
                
                (1,388,000
                )
                
                (1,688,000
                )
                
                (2,824,000
                )
                
                (2,915,000
                )$
                (3,128,000
                )
                $
                (3,595,000
                )
                $
                (6,337,000
                )
                $
                (6,273,000
                )
  **April
                    30,**
                
                **October
                    31,****2007**
                
                **2006****Goodwill**IMRT/IGRT
                
                $
                2,564,000
                
                $
                2,564,000$
                2,564,000
                
                $
                2,564,000**Total
                    assets**IMRT/IGRT
                
                $
                12,042,000
                
                $
                15,789,000Radiation
                    Sources
                
                
                7,615,000
                
                
                11,409,000$
                19,657,000
                
                $
                27,198,000
 
 **NOTE
        3 - DISCONTINUED OPERATION**
 
 In
        September 2004, the Company discontinued its Theseus Operation which had
        been
        engaged in the research and development of a proprietary radiopharmaceutical
        agent (referred to as “Hynic-Annexin V”) since its acquisition in October 2000.
        The Company believed that successful completion of development and receipt
        of
        regulatory approvals allowing the marketing of Hynic-Annexin V would not
        occur
        earlier than 2007 and the additional costs would be substantial. During the
        third quarter of fiscal 2004, the Company determined that it needed to review
        the carrying value of Theseus assets for possible impairment due to ongoing
        discussions with various third parties concerning strategic alternatives
        for the
        Hynic-Annexin V product development program. The Company determined that
        the
        carrying value of the Theseus assets at July 31, 2004 exceeded their fair
        value,
        as determined by estimated future cash flows, and therefore, recorded a $4.7
        million charge for the impairment of goodwill and long-lived assets. Discussions
        with the various potential financial and strategic partners ceased in August
        2004, which resulted in the Company’s decision to shut-down the Theseus
        operation in September 2004. The Company recorded additional costs of $0.7
        million for severance, license termination fees and facility shut down costs,
        offset by $0.2 in proceeds from the sale of long-lived assets and research
        materials during the quarter ended October 31, 2004. As of October 31, 2005,
        the
        Company revised downward its estimate of the costs of the shut-down of its
        Theseus operation, resulting in a gain of $0.4 million related to that
        discontinued operation in the year ended October 31, 2005. As of October
        31,
        2006, the Company wrote off the remaining accounts of the Theseus operation,
        resulting in a gain of $0.3 million related to that discontinued operation
        in
        the year ended October 31, 2006.
 
 12
 As
          a
          result of the shut-down in September 2004, the Company has presented the
          Theseus
          operation as a discontinued operation in the accompanying financial statements.
 
 The
          Company had no revenues or expenses from the discontinued operation during
          the
          three months and six months ended April 30, 2007 and 2006, respectively,
          and no
          assets or liabilities are recorded on the Company’s balance sheet as of April
          30, 2007 or October 31, 2006.
 
 **NOTE
          4—MARKETABLE SECURITIES**
 
 Marketable
          securities consist of the following:
 **April
                        30, 2007**
                    
                    **October
                        31, 2006**Securities
                        held to maturity:Corporate
                        and government bonds
                    
                    $
                    859,000
                    
                    $
                    4,886,000Commercial
                        paper
                    
                    
                    —
                    
                    
                    2,947,000Certificate
                        of deposits and other
                    
                    
                    —
                    
                    
                    587,000859,000
                    
                    
                    8,420,000Less:
                        current portion
                    
                    
                    (859,000
                    )
                    
                    (8,420,000
                    )Non-current
                        portion
                    
                    $
                    —
                    
                    $
                    —
 The
          amortized cost of all held to maturity securities approximates fair value.
          At
          April 30, 2007, the entire balance of investments in debt securities matures
          within one year.
 
 **NOTE
          5—ACCOUNTS RECEIVABLE**
 
 Accounts
          receivable are recorded at the invoiced amount and do not bear interest.
          The
          allowance for doubtful accounts is the Company’s best estimate of the amount of
          probable credit losses in our existing accounts receivable. The Company
          determines the allowance based on historical write-off experience and customer
          economic data. We review our allowance for doubtful accounts monthly. Past
          due
          balances over 60 days and over a specified amount are reviewed individually
          for
          collectibility. Account balances are charged off against the allowance
          when the
          Company believes that it is probable the receivable will not be recovered.
          The
          Company does not have any off-balance-sheet credit exposure related to
          our
          customers.
  13
 
  Accounts receivable consist of the following:
 **April
                      30, 2007**
                  
                  **October
                      31, 2006**Accounts
                      receivable - trade
                  
                  $
                  5,409,000
                  
                  $
                  5,815,000Less:
                      allowance for doubtful accounts
                  
                  
                  (840,000
                  )
                  
                  (1,104,000
                  )$
                  4,569,000
                  
                  $
                  4,711,000
 
 The
          provision for doubtful accounts was $(522,000), and $(120,000) for the
          three
          months ended April 30, 2007 and 2006, respectively, and $(263,000) and
          $450,000
          for the six months ended April 30, 2007 and 2006, respectively.
 
 **NOTE
          6—INVENTORIES**
 Inventories
            consist of the following:
  **April
                      30, 2007**
                  
                  **October
                      31, 2006**Raw
                      materials
                  
                  $
                  4,665,000
                  
                  $
                  4,691,000Work
                      in process
                  
                  
                  168,000
                  
                  
                  174,000Finished
                      goods
                  
                  
                  1,982,000
                  
                  
                  1,959,000Reserve
                      for excess inventory
                  
                  
                  (2,482,000
                  )
                  
                  (2,622,000
                  )$
                  4,333,000
                  
                  $
                  4,202,000
 Adjustments
          to the reserve for excess inventory included in cost of sales was $(78,000)
          and
          $193,000 for the three months ended April 30, 2007 and 2006, respectively,
          and
          $(99,000) and $224,000 for the six months ended April 30, 2007 and 2006,
          respectively.
 
 **NOTE
          7—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**
 
 Equipment
          and leasehold improvements consist of the following:
 **April
                      30, 2007**
                  
                  **October
                      31, 2006**Furniture,
                      fixtures and equipment
                  
                  $
                  6,586,000
                  
                  $
                  6,528,000Leasehold
                      improvements
                  
                  
                  2,369,000
                  
                  
                  2,312,0008,955,000
                  
                  
                  8,840,000Less:
                      accumulated depreciation
                  
                  
                  (6,861,000
                  )
                  
                  (6,440,000
                  )$
                  2,094,000
                  
                  $
                  2,400,000
 Depreciation
          expense was $221,000, $227,000, for the three months ended April 30, 2007
          and
          2006, respectively, and $441,000 and $472,000 for the six months ended
          April 30,
          2007 and 2006, respectively.
 
 **NOTE
          8—INTANGIBLE ASSETS**
  **April
                    30, 2007**
                
                **October
                    31, 2006**Amortizable
                    intangible assetsPurchased
                    technology
                
                $
                3,129,000
                
                $
                3,129,000Existing
                    customer relationships
                
                
                1,770,000
                
                
                1,770,000Trademark
                
                
                1,666,000
                
                
                1,666,000Patents
                    and licenses
                
                
                98,000
                
                
                98,0006,663,000
                
                
                6,663,000Less:
                    accumulated amortization
                
                
                (4,445,000
                )
                
                (4,131,000
                )$
                2,218,000
                
                $
                2,532,000
 
 14
 Amortization
          expense was $157,000 for each three month period ended April 30, 2007 and
          2006,
          and $314,000 for each six month period ended April 30, 2007 and 2006.
 
 The
          estimate of aggregate amortization expense for the subsequent years is
          as
          follows:
  **For
                    the Years Ended April 30,**2007
                
                $
                627,0002008
                
                
                627,0002009
                
                
                627,0002010
                
                
                337,000$
                2,218,000
 
 **NOTE
          9 - BORROWINGS**
 
 *Line
          of Credit*
 
 On
          October 5, 2005, the Company entered into a Loan and Security Agreement
          (the
“Loan Agreement”) **** with
          Silicon Valley Bank (the “Bank”), for a secured, revolving line of credit of up
          to $5,000,000. The line of credit had a term of one year and includes a
          letter
          of credit sub-facility. Borrowings under the line of credit are subject
          to a
          borrowing base formula. The Company will pay interest on the borrowings
          under
          the line of credit at the Bank’s prime rate, which was 8.25% on April 30, 2007,
          or, if certain financial tests are not satisfied, at the Bank’s prime rate plus
          1.5%. The line of credit is secured by all of the assets of the Company
          and is
          subject to customary financial and other covenants, including reporting
          requirements.
 
 On
          January 12, 2006, the Company, entered into a First Amendment to Loan and
          Security Agreement (the “Amendment”) with the Bank.  The Amendment revised
          certain terms of the Loan Agreement to provide an adjustment to the borrowing
          base formula and to permit liens in favor of a holder of subordinated debt
          that
          are subordinated to the liens of the Bank.  In addition, the Amendment
          decreased the minimum tangible net worth that must be maintained by the
          Company
          under the Asset Based Terms of the Loan Agreement from $5 million to $1.5
          million and granted the Bank a warrant to purchase 39,683 shares of the
          Company’s common stock at an exercise price of $1.89 per share.  The
          warrant will expire in five years unless previously exercised. The
          Company calculated the fair value of the warrant on the date of grant to
          be
          $51,000 using the Black-Scholes model incorporating the following
          assumptions:
 
 Stock
                    price
                
                $
                1.89Dividend
                    yield
                
                
                0
                %Expected
                    volatility
                
                
                63
                %Risk-free
                    interest rate
                
                
                4.9
                %Expected
                    life
                
                
                5
                    years
 
 The
          value
          of the warrant is being amortized over the term of the line of credit at
          $5,100
          per month, and is included in Interest and Other Expense on the Income
          Statement.
 
 On
          October 31, 2006, the Company entered into a Second Amendment to Loan and
          Security Agreement (the “Second Amendment”) with the Bank.  The Second
          Amendment extended the term of the line of credit to October 3, 2007 and
          revised
          certain terms of the Loan Agreement. Specifically, the Second Amendment
          decreased the amount available under the line of credit from $5 million
          to $4
          million, and increased the minimum tangible net worth that must be maintained
          by
          the Company from $1.5 million to $5 million. Borrowings under the line
          of credit
          continue to be subject to a borrowing base formula. Borrowings now bear
          interest
          at the prime rate until such time as the Company’s quick ratio, which is defined
          as the ratio of unrestricted cash plus the Company’s net accounts receivable to
          the Company’s current liabilities, falls below 1.00 to 1.00. At such time as the
          Company’s quick ratio falls below 1.00 to 1.00, borrowings will bear interest at
          the prime rate plus 1.50%, and the Company will pay a fee of 0.50% per
          annum on
          the unused portion of the line of credit, and a collateral handling fee
          in an
          amount equal to $2,000 per month. No
          borrowings were outstanding against the Line of Credit as of April 30,
          2007.
 
 15
 *Subordinated
          Debt*
 
 On
          March
          28, 2006, the Company entered into a Loan and Security Agreement (the “Loan
          Agreement”) **** with
          Partners for Growth, LLC (the “Debt Provider”), for a secured, revolving line of
          credit of up to $4,000,000, which will supplement an existing line of credit
          provided by Silicon Valley Bank. The line of credit has a term of eighteen
          months. Borrowings under the line of credit are subject to a borrowing
          base
          formula. The Company has paid interest on the borrowings under the line
          of
          credit at prime rate as quoted in the *Wall
          Street Journal,* which on
          April 30, 2007 was 8.25%. Amounts owing under the line of credit are secured
          by
          all of the assets of the Company and are subordinated to amounts owing
          under the
          line of credit with Silicon Valley Bank. The line of credit does not contain
          financial covenants; however the Company is subject to other customary
          covenants, including reporting requirements, and events of default. In
          connection with the Loan Agreement, the Company also granted the Debt Provider
          a
          warrant to purchase 395,000 shares of the Company’s common stock at an exercise
          price of $1.89 per share. As a result of the private placement of the Company’s
          common stock completed on June 7, 2006, and pursuant to the anti-dilution
          terms
          of the warrant issued to the Debt Provider, the warrant was amended to
          increase
          the number of shares of the Company’s common stock that the Debt Provider can
          purchase from 395,000 shares to 555,039 shares, and the exercise price
          was
          decreased from $1.89 per share to $1.35 per share. The warrant will expire
          in
          five years unless previously exercised. The
          Company calculated the fair value of the warrant on the date of grant to
          be
          $475,000 using the Black-Scholes model incorporating the following
          assumptions:
 
 Stock
                    price
                
                $
                2.05Dividend
                    yield
                
                
                0
                %Expected
                    volatility
                
                
                63
                %Risk-free
                    interest rate
                
                
                4.9
                %Expected
                    life
                
                
                5
                    years
 
 The
          issuance of the warrant has been accounted for as a loan origination fee.
          As
          such, the value of the warrant has been deferred and is being amortized
          over the
          life of the loan at $26,500 per month and is included in Interest and Other
          Expense on the Income Statement. No
          borrowings were outstanding against the Loan Agreement as of April 30,
          2007.
 
 **NOTE
          10—STOCKHOLDERS' EQUITY**
 
 *Preferred
          Stock*
 
 The
          Company has authorized the issuance of 2,000,000 shares of preferred stock;
          however, no shares have been issued. The designations, rights and preferences
          of
          any preferred stock that may be issued will be established by the Board
          of
          Directors at or before the time of such issuance.
 
 16
 
 *Authorized
          Shares of Common Stock*
 
 Pursuant
          to a consent solicitation dated April 5, 2007, a majority of the Company’s
          shareholders consented to amend the Company’s Certificate of Incorporation to
          increase the total number of authorized sharesof
          common stock of the Company from 40,000,000 shares to 100,000,000 shares
          on
          April 20, 2007. The Company used some of the additional authorized shares
          to
          cover the grant of stock options to the Company’s President and Chief Executive
          Officer and the Company intends to use some of the shares for issuance
          in
          connection with the Company’s stock-based benefit plans, as well as for future
          equity financings and other corporate purposes.
 
 *Sale
          of Common Stock and Warrants*
 
 On
          June
          7, 2006, we completed a private placement of 12,291,934
          shares of the Company’s common stock at a purchase price of $1.95 per share as
          well as warrants to purchase an additional 6,145,967 shares of the Company’s
          common stock at an exercise price of $2.08 per share for an aggregate
          consideration of approximately $24.0 million (before cash commissions and
          expenses of approximately $2.0 million). The warrants are exercisable beginning
          180 days after the date of closing until 7 years after the date of closing.
          The
          values of the warrants and common stock in excess of par value have been
          classified as stockholders’ equity in additional paid-in capital in our
          consolidated balance sheet as of January 31, 2007 and October 31, 2006.
          The
          warrants were evaluated under SFAS 133 and EITF 00-19, and the Company
          determined that the warrants have been correctly classified as
          equity.
 
 The
          shares of common stock sold to the investors and the shares of common stock
          issuable upon the exercise of the warrants are subject to certain registration
          rights as set forth in the Securities Purchase Agreements. Under the Securities
          Purchase Agreements, we agreed to file a registration statement with the
          Securities and Exchange Commission within 45 days after the closing of
          the
          transaction to register the resale of the shares of common stock and the
          shares
          of common stock issuable upon the exercise of the warrants. If we failed
          to file
          a registration statement within such time period or such registration statement
          was not declared effective within 90 days after the closing of the transaction,
          we would have been liable for certain specified liquidated damages as set
          forth
          in the Securities Purchase Agreements, except that the parties have agreed
          that
          the Company will not be liable for liquidated damages with respect to the
          warrants or the warrant shares. We have agreed to maintain the effectiveness
          of
          this registration statement until the earlier of such time as the passage
          of two
          years from the closing date or all of the securities registered under the
          registration statement may be sold under Rule 144(k) of the Securities
          Act of
          1933 or all of the securities registered under the registration statement
          have
          been sold. We will pay all expenses incurred in connection with the
          registration, except for underwriting discounts and commissions. Pursuant
          to the
          terms of the Securities Purchase Agreement, we filed a registration statement
          on
          Form S-3 with the Securities and Exchange Commission on July 21, 2006 to
          register the shares of common stock sold to the investors and the shares
          of
          common stock issuable upon the exercise of the warrants. The registration
          statement was declared effective by the Securities and Exchange Commission
          on
          August 4, 2006.
 
 The
          Securities Purchase Agreements contain certain customary closing conditions,
          as
          well as the requirement that we increase the number of members of the Board
          of
          Directors of the Company (the “Board”) from seven members to nine members. Under
          the Securities Purchase Agreements, Three Arch Partners, one of the investors,
          has the right to designate two members to the Board so long as Three Arch
          Partners beneficially owns greater than 3,500,000 shares of common stock
          (including shares of common stock issuable upon exercise of the warrants,
          and as
          appropriately adjusted for stock splits, stock dividends and recapitalizations)
          and the right to designate one member to the Board so long as Three Arch
          Partners beneficially owns greater than 2,000,000 shares of common stock
          (including shares of common stock issuable upon exercise of the warrants,
          and as
          appropriately adjusted for stock splits, stock dividends and recapitalizations).
          In accordance with the terms of the Securities Purchase Agreements, we
          increased
          the number of members of our Board from seven members to nine members and
          Three
          Arch Partners designated Wilfred E. Jaeger, M.D. and Roderick A. Young
          to fill
          the two vacancies. Our Board elected Dr. Jaeger and Mr. Young to serve
          as
          members of the Board on June 13, 2006.
 
 17
 In
          connection with the issuance of the warrants and upon closing of the
          transaction, we entered into a Warrant Agreement with our transfer agent
          relating to the warrant of Three Arch Partners and a different Warrant
          Agreement
          with our transfer agent relating to the warrants of the investors other
          than
          Three Arch Partners. The material differences between the two Warrant Agreements
          are described below.
 
 The
          Three
          Arch Partners Warrant Agreement includes a non-waivable provision that
          provides
          that the number of shares issuable upon exercise of the warrants that may
          be
          acquired by Three Arch Partners will be limited to the extent necessary
          to
          assure that, following such exercise, the total number of shares of common
          stock
          then beneficially owned by Three Arch Partners and its affiliates does
          not
          exceed 19.9% of the total number of issued and outstanding shares of common
          stock as of the date of such exercise (including for such purpose the shares
          of
          common stock issuable upon such exercise of warrants), unless approved
          by our
          stockholders prior to such exercise. The Warrant Agreement relating to
          the
          warrants of the other investors does not include such a provision.
 
 The
          Warrant Agreement relating to the investors other than Three Arch Partners
          includes a waivable provision that provides that the number of shares issuable
          upon exercise of the warrants that may be acquired by a registered holder
          of
          warrants upon an exercise of warrants will be limited to the extent necessary
          to
          assure that, following such exercise, the total number of shares of common
          stock
          then beneficially owned by its holder and its affiliates does not exceed
          4.99%
          of the total number of issued and outstanding shares of common stock (including
          for such purpose the shares of common stock issuable upon such exercise
          of
          warrants). This provision may be waived by a registered holder of warrants
          upon,
          at the election of such holder, upon not less than 61 days prior notice
          to us.
          This Warrant Agreement also contains a non-waivable provision that provides
          that
          the number of shares issuable upon exercise of the warrants that may be
          acquired
          by a registered holder of warrants upon an exercise of warrants will be
          limited
          to the extent necessary to assure that, following such exercise, the total
          number of shares of common stock then beneficially owned by such holder
          and its
          affiliates does not exceed 9.99% of the total number of issued and outstanding
          shares of common stock (including for such purpose the shares of common
          stock
          issuable upon such exercise of warrants). The Warrant Agreement relating
          to the
          warrants of Three Arch Partners does not include such provisions.
 
 *Stock
          Options*
 
 The
          Company's 1996 Stock Option Plan ("1996 Plan"), as amended April 6, 2001,
          provided for the issuance of incentive stock options to employees of the
          Company
          and non-qualified options to employees, directors and consultants of the
          Company
          with exercise prices equal to the fair market value of the Company's stock
          on
          the date of grant. Certain options are immediately exercisable while other
          options vest over periods up to four years. The options expire ten years
          from
          the date of grant. The 1996 Plan provided for the automatic increase on
          January 1 of each year, beginning with calendar year 2002 and continuing
          through calendar year 2004, by a number of shares equal to 3.5% of the
          total
          number of shares of the Company's Common Stock outstanding on the last
          trading
          day in the immediately preceding calendar year. In May 2004, the Company’s
          shareholders approved proposals to amend the 1996 Plan to make an additional
          600,000 shares available for issuance under the plan and to permit the issuance
          of 1,362,589 replacement options in connection with the acquisition of
          NOMOS.
          From November 1, 2005 through March 31, 2006, stock options for 1,303,000
          shares
          were granted to employees under the 1996 Plan. The 1996 Plan expired on
          April 1,
          2006.
 
 On
          May 3,
          2006, the Company’s shareholders approved the North American Scientific, Inc.
          2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
          1,700,000 shares, plus any shares from the 1996 Plan that are subsequently
          terminated, expire unexercised or forfeited, to employees of the Company
          through
          incentive stock options, non-qualified options, stock appreciation rights,
          restricted stock and restricted stock units. The exercise price of an option
          is
          equal to the fair market value of the Company’s stock on the date of the grant.
          As of April 30, 2007, 531,650 shares were terminated, expired unexercised
          or
          forfeited in the 1996 Plan and were transferred to the 2006 Plan. During
          the
          three months and six months ended April 30, 2007, stock options for an
          aggregate
          615,000 shares were granted to employees under the 2006 Plan, There were
          no
          equity awards granted under the 2006 Plan during the three months and six
          months
          periods ended April 30, 2006. At April 30, 2007, there were 1,616,650 shares
          available for grant under the 2006 Plan.
 
 18
 In
          March 2003, the Company's shareholders approved the 2003 Non-Employee
          Directors' Equity Compensation Plan ("Directors' Plan"). The Directors'
          Plan
          supersedes prior provisions for grants of stock options to non-employee
          directors contained in the 1996 Plan. Under the Directors' Plan, the Company
          may
          issue up to 500,000 shares to non-employee directors of the Company through
          non-qualified options or restricted stock. The exercise price of an option
          is
          equal to the fair market value of the Company's stock on the date of grant.
          Options and restricted stock vest equally over a three-year period. The
          options
          expire ten years from the date of grant. In the three months and six months
          ended April 30, 2007, no stock options shares were granted to non-employee
          directors under the Directors’ Plan. At April 30, 2007, there were 85,000 shares
          available for grant under the Directors’ Plan.
 
 On
          April
          23, 2007 the Company granted stock options with respect to 1,800,000 shares
          of
          its common stock in connection with the employment by the Company of its
          new
          CEO. (See Note 11 - Commitments and Contingencies). Options with respect
          to
          600,000 shares of the Company’s common stock were issued under the 2006 Plan.
          Options with respect to the remaining 1,200,000 shares of the Company’s common
          stock were issued as a stand-alone grant outside the 2006 Plan as approved
          by
          written consent of a majority of shareholders on April 20, 2007. The stock
          options have an exercise price of $1.16, which was equal to the fair market
          value per share of the Company’s common stock on the grant date. All of the
          options have a term of ten years and vest monthly over a four-year period.
          The
          options remain exercisable until the earlier of the expiration of the term
          of
          the option or (i) three months following Mr. Rush’s date of termination in the
          case of termination for reasons other than cause, death or disability (as
          such
          terms are defined in his employment agreement) or (ii) 12 months following
          Mr.
          Rush’s date of termination in the case of termination on account of death or
          disability. In the event that Mr. Rush is terminated for cause, all outstanding
          options, whether vested or not, will immediately lapse.
  At
          April
          30, 2007, a total of 6,633,450 shares of the Company’s common stock were
          reserved for issuance. The following table summarizes stock option activity
          for
          both plans:
 **Options
                      Outstanding****Options**
                    **Available**
                    **for
                      Grant**
                  
                  **Number**
                    **Outstanding**
                  
                  **Exercise
                      Price**Balance
                      at October 31, 2004
                  
                  
                  1,579,742
                  
                  
                  3,253,821
                  
                  $
                  0.03
                      - $24.54Granted
                  
                  
                  (275,000
                  )
                  
                  275,000
                  
                  $
                  2.25
                      - $3.66Forfeited
                      and expired
                  
                  
                  427,699
                  
                  
                  (427,699
                  )
                  $
                  1.11
                      - $16.75Exercised
                  
                  
                  —
                  
                  
                  (687,013
                  )
                  $
                  1.11
                      - $1.96Balance
                      at October 31, 2005
                  
                  
                  1,732,441
                  
                  
                  2,414,109
                  
                  $
                  0.03
                      - $24.54Granted
                  
                  
                  (1,453,000
                  )
                  
                  1,453,000
                  
                  $
                  1.92
                      - $3.35Forfeited
                      and expired
                  
                  
                  (194,441
                  )
                  
                  (426,618
                  )
                  $
                  1.11
                      - $16.75Exercised
                  
                  
                  —
                  
                  
                  (2,186
                  )
                  $
                  1.11
                      - $1.12Additional
                      shares reserved
                  
                  
                  1,700,000
                  
                  
                  —Balance
                      at October 31, 2006
                  
                  
                  1,785,000
                  
                  
                  3,438,305
                  
                  $
                  0.03
                      - $24.54Granted
                  
                  
                  (1,815,000
                  )
                  
                  1,815,000
                  
                  $
                  0.93
                      - $1.16Forfeited
                      and expired
                  
                  
                  531,650
                  
                  
                  (321,505
                  )
                  $
                  0.70
                      - $8.80Exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Additional
                      shares reserved
                  
                  
                  1,200,000
                  
                  
                  —
                  
                  
                  —Balance
                      at April 30, 2007
                  
                  
                  1,701,650
                  
                  
                  4,931,800
                  
                  $
                  0.03
                      - $24.54
 
 19
 There
          were 1,842,533, 1,878,663 and 1,873,220 options exercisable with weighted
          average exercise prices of $8.85, $8.57 and $8.79 at April 30, 2007, October
          31,
          2006 and 2005, respectively.
 
 The
          following table summarizes options outstanding at April 30, 2007 and the
          related
          weighted average exercise price and remaining contractual life
          information:
 **Employee
                      Options Outstanding**
                  
                  **Employee
                      Options Exercisable****Range
                      of**
                    **Exercise
                      Prices**
                  
                  **Shares**
                  
                  **Weighted
                      Avg.**
                    **Remaining**
                    **Contractual**
                    **Life
                      (Years)**
                  
                  **Weighted**
                    **Avg.**
                    **Exercise**
                    **Price**
                  
                  **Shares**
                  
                  **Weighted**
                    **Avg.**
                    **Exercise**
                    **Price**$0.03
                      - $1.12
                  
                  
                  119,849
                  
                  
                  4.81
                  
                  $
                  1.02
                  
                  
                  99,704
                  
                  $
                  1.03$1.13
                      - $1.16
                  
                  
                  1,800,000
                  
                  
                  9.98
                  
                  
                  1.16
                  
                  
                  —
                  
                  
                  —$1.17
                      - $6.65
                  
                  
                  1,595,058
                  
                  
                  6.42
                  
                  
                  3.15
                  
                  
                  385,935
                  
                  
                  4.26$6.66
                      - $16.75
                  
                  
                  1,309,933
                  
                  
                  4.92
                  
                  
                  9.55
                  
                  
                  1,249,934
                  
                  
                  9.62$16.76
                      - $24.54
                  
                  
                  106,960
                  
                  
                  1.41
                  
                  
                  23.68
                  
                  
                  106,960
                  
                  
                  23.684,931,800
                  
                  
                  7.18
                  
                  $
                  4.52
                  
                  
                  1,842,533
                  
                  $
                  8.85
 The
          average fair value for accounting purposes of options granted was $0.65,
          $1.09
          and $2.47 for the six months ended April 30, 2007 and for the years ended
          October 31, 2006 and 2005, respectively.
 
 The
          following table summarizes the weighted average price, weighted average
          remaining contractual life and intrinsic value for granted and exercisable
          options outstanding as of April 30, 2007 and October 31, 2006:
 **Number
                      of Shares**
                  
                  **Weighted
                      Average Exercise Price**
                  
                  **Weighted
                      Avg.**
                    **Remaining**
                    **Contractual**
                    **Life
                      (Years)**
                  
                  **Intrinsic
                      Value***As
                      of October 31, 2006:*Employee
                      Options Outstanding
                  
                  
                  3,438,305
                  
                  $
                  6.06
                  
                  
                  5.81
                  
                  $
                  56,500Employee
                      Options Expected to Vest
                  
                  
                  1,559,642
                  
                  $
                  2.68
                  
                  
                  7.14
                  
                  $
                  —Employee
                      Options Exercisable
                  
                  
                  1,878,663
                  
                  $
                  8.57
                  
                  
                  4.52
                  
                  $
                  56,500*As
                      of April 30, 2007*Employee
                      Options Outstanding
                  
                  
                  4,931,800
                  
                  $
                  4.52
                  
                  
                  7.18
                  
                  $
                  13,838Employee
                      Options Expected to Vest
                  
                  
                  3,089,267
                  
                  $
                  1.35
                  
                  
                  7.50
                  
                  $
                  23,167Employee
                      Options Exercisable
                  
                  
                  1,842,533
                  
                  $
                  8.85
                  
                  
                  4.53
                  
                  $
                  11,512
 
 20
 *Fair
          Value Disclosures*
 
 The
          Company calculated the fair value of each option grant on the respective
          date of
          grant using the Black-Scholes option-pricing model as prescribed by
          SFAS 123(R) using the following assumptions:
 **Six
                      Months Ended April 30**
                  
                  **Year
                      Ended October 31,****2007**
                  
                  **2006**
                  
                  **2005**Dividend
                      yield
                  
                  
                  0
                  %
                  
                  0
                  %
                  
                  0
                  %Expected
                      volatility
                  
                  
                  61
                  %
                  
                  63
                  %
                  
                  82
                  %Risk-free
                      interest rate
                  
                  
                  4.8
                  %
                  
                  4.9
                  %
                  
                  3.9
                  %Expected
                      life
                  
                  
                  5
                      years
                  
                  
                  5
                      years
                  
                  
                  5
                      years
 
 *Stockholders'
          Rights Plan*
 
 In
          October 1998, the Board of Directors of the Company implemented a rights
          agreement to protect stockholders' rights in the event of a proposed takeover
          of
          the Company. In the case of a triggering event, each right entitles the
          Company's stockholders to buy, for $80, $160 worth of common stock for
          each
          share of common stock held. The rights will become exercisable only if
          a person
          or group acquires, or commences a tender offer to acquire, 15% or more
          of the
          Company's common stock. The rights, which expire in October 2008, are
          redeemable at the Company's option for $0.001 per right. The Company also
          has
          the ability to amend the rights, subject to certain limitations.
 
 *Employee
          Stock Purchase Plan*
 
 In
          March
          2000, the Board of Directors authorized an Employee Stock Purchase Plan
          ("the
          ESPP") under which 300,000 shares of the Company's common stock are reserved
          for
          issuance. Eligible employees may authorize payroll deductions of up to
          15% of
          their salary to purchase shares of the Company's common stock at a discount
          of
          up to 15% of the market value at certain plan-defined dates. In the six
          months
          ended April 30, 2007 and the years ended October 31, 2006 and 2005, the
          shares
          issued under the ESPP were 56,767, 96,489 and 59,742 shares, respectively.
          At
          April 30, 2007 and October 31, 2006, 17,072 and 73,839 shares were
          available for issuance under the ESPP, respectively.
 
 *Common
          Stock Repurchase Program*
 
 In
          October 2001, the Board of Directors authorized a stock repurchase program
          to acquire up to $10 million of the Company's common stock in the open
          market at any time. The number of shares of common stock actually acquired
          by
          the Company will depend on subsequent developments and corporate needs,
          and the
          repurchase of shares may be interrupted or discontinued at any time. As
          of April
          30, 2007 and October 31, 2006, a cumulative total of 116,995 and 22,100
          shares had been repurchased by the Company at a cost of $227,000 and $133,000,
          respectively and are reflected as Treasury Stock on the Balance Sheet at
          the
          respective dates.
 
 **NOTE
          11—COMMITMENTS AND CONTINGENCIES**
 
 *Contract
          Commitments*
 
 The
          Company has entered into purchase commitments of $121,000 to suppliers
          under
          blanket purchase orders. The blanket purchase orders expire when the designated
          quantities have been purchased.
  21
 
 *Lease
          Commitments*
 
 The
          Company leases facilities and equipment under non-cancelable operating
          lease
          agreements. Future minimum lease payments are subject to annual adjustment
          for
          increases in the Consumer Price Index. Total rent expense was $220,000
          and
          $225,000 for the three months ended April 30, 2007 and 2006, respectively,
          and
          $443,000 and $450,000, for the six months ended April 30, 2007 and 2006,
          respectively.
 
 Future
          minimum annual lease payments under all operating leases are as
          follows:
 
 **For
                    the Years Ended April 30,**2008
                
                $
                694,0002009
                
                
                538,0002010
                
                
                538,0002011
                
                
                538,0002012
                
                
                515,000Thereafter
                
                
                411,000$
                3,234,000
 
 *Third
          Party License Agreements*
  We
          license from third parties some of the technologies used in our core products.
          The following are the minimum annual royalty amounts under each of the
          agreements:
  Lawrence
                    Livermore National Laboratory
                
                $
                25,000Wisconsin
                    Alumni Research Foundation
                
                
                15,000University
                    of Texas
                
                
                50,000National
                    Research Council of Canada
                
                
                30,000IdeaMatrix,
                    Inc.
                
                
                125,000University
                    of South Florida Research Foundation, Inc.
                
                
                50,000$
                295,000
  *Employment
          Agreements*
 
 On
          March
          22, 2007, the Company entered into an employment agreement (the “Agreement”)
          with John B. Rush in connection with his employment as the Company’s new
          President and Chief Executive Officer. Mr. Rush’s base salary will be $350,000.
          Mr. Rush will also be eligible to receive an annual bonus, if any, based
          upon
          performance goals approved by the Board or the Compensation Committee of
          the
          Board, in consultation with Mr. Rush, in an amount, not to exceed 60% of
          his
          base salary, to be determined by the Compensation Committee. For the period
          beginning on April 23,2007 and ending the last day of the Company’s fiscal year,
          October 31, 2007, Mr. Rush will receive a guaranteed, minimum, pro-rated
          bonus
          of 30% of his base salary.
  22
  On
          April
          23, 2007, the Company granted stock options to Mr. Rush with respect to
          1,800,000 shares of our common stock. The stock options have an exercise
          price
          of $1.16, which was equal to the fair market value per share of our common
          stock
          on the grant date. In addition, in the event that within 24 months of April
          23,
          2007, the Company issues additional shares of stock in connection with
          raising
          capital in a private placement transaction, the Company is required to
          grant
          options to Mr. Rush to acquire an additional number of shares of common
          stock
          equal to 3% of the number of shares issued in connection with such transaction
          (the “Additional Shares”).
  All
          of
          the options have a term of ten years and vest monthly over a four-year
          period.
          The options remain exercisable until the earlier of the expiration of the
          term
          of the option or (i) three months following Mr. Rush’s date of termination in
          the case of termination for reasons other than cause, death or disability
          (as
          such terms are defined in his employment agreement) or (ii) 12 months following
          Mr. Rush’s date of termination in the case of termination on account of death or
          disability. In the event that Mr. Rush is terminated for cause, all outstanding
          options, whether vested or not, will immediately lapse.
  In
          the
          event (a) Mr. Rush’s employment is terminated by the Company at any time after
          April 23, 2007 for any reason other than Mr. Rush’s death, disability or “cause”
(as defined in the Agreement) or (b) Mr. Rush resigns for a “good reason” (as
          defined in the Agreement), Mr. Rush will receive his base salary in effect
          on
          the date of termination for a period ending 12 months following the date
          of
          termination.
  In
          the
          event of a “Control Termination” (as defined in the Agreement), Mr. Rush will be
          entitled to receive his base salary in effect on the date of termination
          and
          group health benefits for a period ending 12 months following the date
          of
          termination and, in addition, Mr. Rush shall, as of the date of the Control
          Termination, become fully vested in any unvested options previously granted
          to
          him.
  Mr.
          Rush’s employment agreement also provides that the Company will make a tax
          gross-up payment to Mr. Rush in the event that payments to Mr. Rush on
          account
          of a change in control constitute an excess parachute payment subject to
          an
          excise tax under Section 4999 of the Code. Similarly, the Company will
          make a
          tax gross-up payment to Mr. Rush for any excise tax in the event that amounts
          or
          benefits payable to Mr. Rush are determined to be subject to the excise
          tax on
          nonqualified deferred compensation under Section 409A of the Code.
  In
          the
          event that any amount payable upon Mr. Rush’s termination would be determined to
          be “non-qualified deferred compensation” subject to Section 409A of the Code,
          the Company may delay payment for six months, in order to comply with Section
          409A of the Code.
  On
          November 2, 2006, the Company announced that Mr. Cutrer will transition
          from the
          position of President and Chief Executive Officer to become the Company’s
          Executive Vice President and Chief Technology Officer upon his successor
          being
          identified and joining the Company. As part of this transition process, on
          December 21, 2006, the Company and Mr. Cutrer entered into a First Amended
          and
          Restated Employment Agreement (the “Amended Agreement”), which became effective
          with the employment of Mr. Rush (the “Effective Date”). Under the Amended
          Agreement, Mr. Cutrer’s annual base salary will be $280,000. In addition, Mr.
          Cutrer will be eligible to receive an annual bonus, if any, based upon
          performance goals approved by the Compensation Committee or the Board in
          an
          amount to be determined in the sole discretion of the Compensation Committee
          or
          the Board. If Mr. Cutrer meets or exceeds the performance goals for a particular
          measuring year, the annual bonus may not be less than 25% of his base
          salary.
  In
          the
          event Mr. Cutrer’s employment terminates on or before October 31, 2007 for (a)
          any reason other than Mr. Cutrer ’s death, disability or “cause” (as defined in
          the Amended Agreement) or (b) Mr. Cutrer resigns for “good reason” (as defined
          in the Amended Agreement), Mr. Cutrer will continue to receive his base
          salary
          in effect on the termination date through October 31, 2007.
  In
          the event Mr. Cutrer’s employment terminates at any time after the Effective
          Date for any reason, except for a “Control Termination” (as defined in the
          Amended Agreement), and in addition to any payment that may be due if he
          is
          terminated on or before October 31, 2007 as noted above, Mr. Cutrer will
          be
          entitled to receive (a) severance pay equal to three times (3x) his highest
          base
          salary during his employment by the Company payable over a three year period
          in
          accordance with the Company’s standard payroll practices for salaried employees,
          and (b) any unvested stock options shall immediately vest as of the termination
          date. In addition, the exercise date of all stock options that, on the
          termination date, have an exercise price greater than the fair market value
          of
          the Company’s common stock will be extended to the later of (i) the last day of
          the year in which the stock option would otherwise have expired or (ii)
          two and
          a half months after the date on which the stock option would otherwise
          have
          expired (or such later date as may be permitted by final regulations issued
          pursuant to Section 409A of the Internal Revenue Code of 1986, as amended
          (the
“Code”), but in no event later than the date on which the stock option would
          have expired had Mr. Cutrer’s employment not been terminated).
  23
 In
          the event of a “Control Termination” (as defined in the Amended Agreement), Mr.
          Cutrer will be entitled to a “Control Severance Payment” in the gross amount
          equal to the total of: (a) three (3) years’ base salary; (b) the highest annual
          bonus paid to Mr. Cutrer in the three years prior to such termination multiplied
          by three (3); (c) the Black/Scholes valuation of the stock options received
          by
          Mr. Cutrer during the one year prior to such termination multiplied by
          three
          (3); and (d) a tax gross-up payment if any severance payment constitutes
          an
          excess parachute payment subject to the excise tax imposed by Section 4999
          of
          the Code. The Control Severance Payment will be paid as salary continuation
          ratably over a one year period. In addition, any unvested stock options
          will
          immediately vest as of the termination date.
  The
          Company also maintains employment agreements with certain other key management.
          The agreements provide for minimum base salaries, eligibility for stock
          options
          and performance bonuses and severance payments.
 
 *Litigation*
 
 In
          November, 2005, the Company was served with a complaint filed in U.S. District
          Court in Hartford, Connecticut by World Wide Medical Technologies (WWMT).
          WWMT’s
          six count complaint alleges breach of a confidentiality agreement, fraud,
          patent
          infringement, wrongful interference with contractual relations, violation
          of the
          Connecticut Uniform Trade Secrets Act, and violation of the Connecticut
          Unfair
          Practices Act. WWMT alleges that the Company fraudulently obtained WWMT’s
          confidential information during negotiations to purchase WWMT in 2004 and
          that
          once the Company acquired that information, it purportedly learned that
          Richard
          Terwilliger, (our former Vice President of New Product Development) owned
          certain patent rights and that we began trying to inappropriately gain
          property
          rights by hiring him away from WWMT. The Company was served with this matter
          at
          approximately the same time Mr. Terwilliger was served with a lawsuit in
          state court and with an application seeking a preliminary
          injunction declaring plaintiffs to be the sole owners of the intellectual
          property at issue and preventing Mr. Terwilliger from effectively serving
          as Vice President of New Product Development at the Company. The Company
          has
          agreed to defend Mr. Terwilliger. We have removed the state court claim
          against
          Mr. Terwilliger to federal court and the cases have been consolidated. The
          defendants have answered both complaints and discovery has commenced
          in each matter. In April 2006, WWMT had its hearing for a preliminary injunction
          against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned
          that portion of their application for preliminary injunction that was based
          on
          an alleged misappropriation of trade secrets shortly before the hearing. On
          August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering
          that what remained of plaintiffs' motion be denied.  Specifically, the
          Magistrate Judge found that plaintiffs do not have a reasonable likelihood
          of
          success on the merits of their claim for declaratory judgment that some
          or all
          of plaintiffs are the sole owners of the intellectual property at issues,
          and
          she further found that there do not exist sufficiently serious questions
          going to the merits of that claim to make them a fair ground for
          litigation.  The Company denies liability and intends to vigorously
          defend itself in this litigation as it progresses. No trial date has
          yet been set.
 
 24
 On
          April
          20, 2006, a lawsuit captioned *J.P.
          Morgan Trust Company, N.A. v. John Alan Friede, et al.* was
          filed in the U.S. District Court for the Southern District of New York
          against
          John A. Friede, a current director and stockholder of the Company, Mr.
          Friede’s
          wife, and NOMOS Corporation, a subsidiary of the Company. The plaintiff,
          J.P.
          Morgan Trust Company, filed the lawsuit in its capacity as personal
          representative of the Estate of Evelyn A.J. Hall, Mr. Friede’s deceased mother.
          The complaint, as amended on August 8, 2006, asserts claims for reimbursement
          and contribution, constructive fraud, breach of contract and other related
          claims arising out of loans made by Mrs. Hall to, or for the benefit of,
          Mr. and
          Mrs. Friede and/or NOMOS, or acting as an accommodation party in additional
          loans made to Mr. and Mrs. Friede by financial institutions that were not
          subsequently repaid. During the time periods alleged in the complaint,
          Mr.
          Friede was the Chairman, Chief Executive Officer and the largest stockholder
          of
          NOMOS. With respect to NOMOS, the complaint seeks at least approximately
          $5,250,000 principal amount of loans allegedly made to and still outstanding
          and
          owed by NOMOS, and other related equitable remedies plus interest, costs
          and
          expenses.
 
 On
          the
          basis of copies of documents that have been made available to us, we believe
          that the claims made against NOMOS in the lawsuit appear to be without
          merit and
          we intend to vigorously defend against them. However, in accordance with
          the
          indemnification provisions of the merger agreement under which we acquired
          NOMOS
          on May 4, 2004, and the related indemnity escrow agreement, we have made
          a claim
          for indemnification against the escrow to preserve our right of indemnity.
          Under
          these provisions, an indemnifying party will not have any indemnification
          obligations until such time as the aggregate indemnified losses for which
          we are
          entitled to indemnification equals or exceeds $400,000, at which point,
          the
          indemnifying party will be liable for the full amount of all such indemnified
          losses without regard to the $400,000 basket. As of the date hereof, the
          indemnity escrow account holds approximately $1,225,000 of cash and 526,810
          shares of our common stock. We also intend to review various other legal
          remedies that may be available to us.
  The
          Company is also subject to other legal proceedings, claims and litigation
          arising in the ordinary course of business. While the outcome of these
          matters
          is currently not determinable, management does not expect that the ultimate
          costs to resolve these matters will have a material adverse effect on the
          Company's consolidated financial position, results of operations, or cash
          flows.
  
 **Item
          2. Management’s Discussion and Analysis of Financial Condition and Results of
          Operations**
 
 The
          following discussion and analysis provides information, which our management
          believes is relevant to an assessment and understanding of our financial
          condition and results of operations. The discussion should be read in
          conjunction with the Consolidated Financial Statements contained herein
          and the
          notes thereto. Certain statements contained in this Form 10-Q, including,
          without limitation, statements containing the words “believes”, “anticipates”,
“estimates”, “expects”, “projections”, and words of similar import are forward
          looking as that term is defined by: (i) the Private Securities Litigation
          Reform Act of 1995 (the "1995 Act") and (ii) releases issued by the
          Securities and Exchange Commission (“SEC”). These statements are being made
          pursuant to the provisions of the 1995 Act and with the intention of obtaining
          the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution
          that
          any forward looking statements made herein are not guarantees of future
          performance and that actual results may differ materially from those in
          such
          forward looking statements as a result of various factors, including, but
          not
          limited to, any risks detailed herein or detailed from time to time in
          our other
          filings with the SEC including our most recent report on Form 10-K. We are
          not undertaking any obligation to update publicly any forward-looking
          statements. Readers should not place undue reliance on these forward-looking
          statements.
 
 25
 
 **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.
 
 On
          November 7, 2006, we announced the introduction of ClearPathTM, our unique
          multicatheter breast brachytherapy device for Accelerated Partial Breast
          Irradiation (APBI), at the American Society for Therapeutic Radiology and
          Oncology (ASTRO) Annual Meeting in Philadelphia. The ClearPath systems
          are
          placed through a single incision and are designed to conform to the resection
          cavity, allowing for more conformal therapeutic radiation dose distribution
          following lumpectomy compared to other methods of APBI. ClearPath is designed
          to
          accommodate either high-dose, ClearPath-HDRTM, or low-dose rate, ClearPath-CRTM,
          treatment methods. The Company received 510k approval from the United States
          Food and Drug Administration for a low-dose rate, or continuous release
          treatment utilizing the Company’s Prospera® brachytherapy seeds in April 2006
          and approval for the high-dose rate treatment in November 2006. We expect
          to
          commercially launch our ClearPath product during fiscal year 2007, with
          an
          initial focus on ClearPath-HDR, to be followed by release of our ClearPath-CR.
 
 Based
          on
          the Company’s current operating plans, management believes that the Company’s
          existing cash resources and cash forecasted by management to be generated
          by
          operations, funds to be raised by the Company through an equity or debt
          financing, as well as the Company’s anticipated available lines of credit, will
          be sufficient to meet working capital and capital requirements through
          at least
          the next twelve months. In this regard, we expect that we will need to
          raise
          additional financing in fiscal 2007 to support the launch of ClearPath
          and fund
          our continuing operations and other activities. Management also expects
          that in
          future periods new products and services will provide additional cash flow,
          although we are presently placing an emphasis on controlling expenses. 
However, there is no assurance that the Company will be successful with
          its
          plans.  If events and circumstances occur such that the Company does not
          meet its current operating plans, the Company is unable to raise sufficient
          additional equity or debt financing, or the Company’s lines of credit (which
          presently expire on September 28 and October 3, 2007, respectively) are
          insufficient or not available, the Company may be required to further reduce
          expenses or take other steps which could have a material adverse effect
          on our
          future performance, including but not limited to, the premature sale of
          some or
          all of our assets or product lines on undesirable terms, merger with or
          acquisition by another company on unsatisfactory terms, or the cessation
          of
          operations.
  On
          January 11, 2007, we announced that we had engaged CIBC World Markets
          Corporation as a financial advisor to assist us in identifying strategic
          opportunities for our IMRT/IGRT business segment that could enhance shareholder
          value.
 
 26
  **Results
          of Operations**
 
 **Three
          Months Ended April 30, 2007 Compared to Three Months Ended April 30,
          2006**
 **Total
              Revenue**
 **Three
                      Months Ended April 30,****2007**
                  
                  **2006**
                  
                  **%
                      Change****($
                      millions)**IMRT/IGRT
                      Products
                  
                  $
                  0.5
                  
                  $
                  2.6
                  
                  
                  (81)
                  %IMRT/IGRT
                      Services
                  
                  
                  1.9
                  
                  
                  2.2
                  
                  
                  (14)
                  %Total
                      IMRT/IGRT
                  
                  $
                  2.4
                  
                  $
                  4.8
                  
                  
                  (50)
                  %Radiation
                      Sources
                  
                  
                  3.8
                  
                  
                  3.3
                  
                  
                  17
                  %$
                  6.2
                  
                  $
                  8.1
                  
                  
                  (23)
                  %
 Total
          revenue decreased 23% to $6.2 million for the three months ended April
          30, 2007
          from $8.1 million for the three months ended April 30, 2006. The decrease
          in
          revenue is due to a $2.4 million, or 50%, decline in product and service
          revenues from our IMRT/IGRT business, partially offset by a 17% increase
          of net
          sales in our Radiation Sources products. The increase in our Radiation
          Sources
          business reflects a 21% increase in sales of our brachytherapy seeds and
          accessories, with increased product sales partially offset by a decline
          in
          average selling prices, and a 10% increase in sales of our non-therapeutic
          products. The decrease in the IMRT/IGRT revenue results from a decline
          in both
          the number of products sold and in average selling prices due to competition.
          Our service revenue is related to our IMRT/IGRT business, and decreased
          $0.3
          million, or 14%, to $1.9 million for the three months ended April 30, 2007
          from
          $2.2 million for the three months ended April 30, 2006.
 
 **Gross
          profit**
 **Three
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**IMRT/IGRT
                    Products
                
                $
                (0.4
                )
                $
                0.8
                
                
                (150)
                %IMRT/IGRT
                    Services
                
                
                1.3
                
                
                1.3
                
                
                ---
                %Total
                    IMRT/IGRT
                
                $
                0.9
                
                $
                2.1
                
                
                (57)
                %Radiation
                    Sources
                
                
                1.2
                
                
                0.8
                
                
                47
                %$
                2.1
                
                $
                2.9
                
                
                (28)
                %
  **Three
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Point Change****(%
                    of Revenue)**IMRT/IGRT
                    Products
                
                
                (80)
                %
                
                31
                %
                
                (101)
                %IMRT/IGRT
                    Services
                
                
                68
                %
                
                59
                %
                
                9
                %Total
                    IMRT/IGRT
                
                
                38
                %
                
                44
                %
                
                (6)
                %Radiation
                    Sources
                
                
                32
                %
                
                25
                %
                
                7
                %34
                %
                
                36
                %
                
                (2)
                %
 
 27
 Gross
          profit decreased $0.8 million, or 28%, to $2.1 million for the three months
          ended April 30, 2007 from $2.9 million for the three months ended April
          30,
          2006. The decrease in our gross profit is primarily due to reduced revenues
          of
          our IMRT/IGRT business, partially offset by increased product sales and
          reduced
          cost of outside stranding in our Radiation Sources business. Gross profit
          for
          the three months ended April 30, 2007 consisted of $0.9 million from our
          IMRT/IGRT business and $1.2 million from our Radiation Sources business.
          The
          gross profit on our service revenue, related to our IMRT/IGRT business,
          remained
          consistent period over period at $1.3 million for the three months ended
          April
          30, 2007 and 2006, respectively.
 
 Gross
          profit as a percent of sales decreased from 36% in the three months ended
          April
          30, 2006 to 34% in three months ended April 30, 2007 primarily due to reduced
          revenues of our IMRT/IGRT business, partially offset by increased product
          sales
          and reduced cost of outside stranding in our Radiation Sources business.
          Gross
          profit as a percent of sales by business segment for the three months ended
          April 30, 2007 consisted of 38% of sales from our IMRT/IGRT business and
          32% of
          sales from our Radiation Sources business. We anticipate that gross profit
          margins of both businesses will improve over time with the anticipated
          increase
          in sales volumes as new products are introduced.
 
 **Selling
          and marketing expenses**
 **Three
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**Selling
                    and marketing expenses
                
                $
                1.5
                
                $
                2.3
                
                
                (35)
                %As
                    a percent of total revenue
                
                
                24
                %
                
                28
                %
 
 Selling
          and marketing expenses comprised primarily of salaries, commissions, and
          marketing costs, decreased $0.8 million, or 35%, to $1.5 million for the
          three
          months ended April 30, 2007, from $2.3 million for the three months ended
          April
          30, 2006. The decrease in selling and marketing expenses is primarily attributed
          to reduced personnel expenses and lower sales commissions related to the
          decreased sales of IMRT/IGRT products.
 
 
 **General
          and administrative expenses ("G&A")**
 **Three
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**General
                    and administrative expenses
                
                $
                2.4
                
                $
                2.6
                
                
                (8
                )%As
                    a percent of total revenue
                
                
                39
                %
                
                32
                %
 
 G&A
          decreased $0.2 million, or 8%, to $2.4 million for the three months ended
          April
          30, 2007, from $2.6 million for the three months ended April 30, 2006.
          The
          decrease in G&A is primarily attributed to a $0.5 million decrease in the
          allowance for bad debts resulting from improved collections of receivables,
          partially offset by increased legal fees.
 .
 28
 
 **Research
          and development (“R&D”)**
 **Three
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**Research
                    and development expenses
                
                $
                1.2
                
                $
                1.4
                
                
                (14)
                %As
                    a percent of total revenue
                
                
                19
                %
                
                17
                %
 
 R&D
          decreased $0.2 million or 14%, to $1.2 million for the three months ended
          April
          30, 2007, from $1.4 million for the three months ended April 30, 2006.
          The
          decrease in R&D spending is primarily due to reduced project spending in
          IMRT/IGRT business, partially offset by increased spending on product
          development in our Radiation Sources business relating to our ClearPathTM breast
          brachytherapy device.
 
 **Amortization
          of intangible assets.** Amortization of intangible assets was $0.2 million in the three months
          ended
          April 30, 2007 and 2006.
 
 **Interest
          and other income (expense), net.** Interest
          and other income (expense) was $(0.1) million in the three months ended
          April
          30, 2007 and 2006.
  **Six
          Months Ended April 30, 2007 Compared to Six Months Ended April 30,
          2006**
  **Total
                    Revenue**
                
                **Six
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**IMRT/IGRT
                    Products
                
                $
                2.1
                
                $
                4.9
                
                
                (57)
                %IMRT/IGRT
                    Services
                
                
                4.0
                
                
                4.6
                
                
                (13)
                %Total
                    IMRT/IGRT
                
                $
                6.1
                
                $
                9.5
                
                
                (36)
                %Radiation
                    Sources
                
                
                7.7
                
                
                6.1
                
                
                26
                %$
                13.8
                
                $
                15.6
                
                
                (12)
                %
  Total
          revenue decreased 12% to $13.8 million for the six months ended April 30,
          2007
          from $15.6 million for the six months ended April 30, 2006. The decrease
          in
          revenue is due to a $3.4 million, or 36%, decline in product and service
          revenues from our IMRT/IGRT business, partially offset by a $1.6 million,
          or
          26%, increase of net sales in our Radiation Sources products. The increase
          in
          our Radiation Sources business reflects a 24% increase in sales of our
          brachytherapy seeds and accessories, with increased product sales partially
          offset by a decline in average selling prices, and a 36% increase in sales
          of
          our non-therapeutic products. The decrease in the IMRT/IGRT revenue results
          from
          a decline in both the number of products sold and in average selling prices
          due
          to competition. Our service revenue is related to our IMRT/IGRT business,
          and
          decreased $0.6 million, or 13%, to $4.0 million for the six months ended
          April
          30, 2007 from $4.6 million for the six months ended April 30, 2006.
  29
 **Gross
          profit**
 **Six
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**IMRT/IGRT
                    Products
                
                $
                0.1
                
                $
                1.4
                
                
                (93)
                %IMRT/IGRT
                    Services
                
                
                2.7
                
                
                2.8
                
                
                (4)
                %Total
                    IMRT/IGRT
                
                $
                2.8
                
                $
                4.2
                
                
                (33)
                %Radiation
                    Sources
                
                
                2.6
                
                
                1.6
                
                
                63
                %$
                5.4
                
                $
                5.8
                
                
                (7)
                %
 
 **Six
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Point Change****(%
                    of Revenue)**IMRT/IGRT
                    Products
                
                
                5
                %
                
                29
                %
                
                (24)
                %IMRT/IGRT
                    Services
                
                
                68
                %
                
                61
                %
                
                7
                %Total
                    IMRT/IGRT
                
                
                46
                %
                
                44
                %
                
                2
                %Radiation
                    Sources
                
                
                34
                %
                
                26
                %
                
                8
                %39
                %
                
                37
                %
                
                2
                %
 
 Gross
          profit decreased $0.4 million, or 7%, to $5.4 million for the six months
          ended
          April 30, 2007 from $5.8 million for the six months ended April 30, 2006.
          The
          decrease in our gross profit is primarily due to reduced revenues of our
          IMRT/IGRT business, partially offset by increased product sales and reduced
          cost
          of outside stranding in our Radiation Sources business. Gross profit for
          the six
          months ended April 30, 2007 consisted of $2.8 million from our IMRT/IGRT
          business and $2.6 million from our Radiation Sources business. The gross
          profit
          on our service revenue, related to our IMRT/IGRT business, decreased $0.1
          million, or 4%, to $2.7 million for the six months ended April 30, 2007
          from
          $2.8 million for the six months ended April 30, 2006.
 
 Gross
          profit as a percent of sales increased from 37% in the six months ended
          April
          30, 2006 to 39% in six months ended April 30, 2007 primarily due to increased
          product sales and reduced cost of outside stranding in our Radiation Sources
          business, and a shift in IMRT/IGRT revenues toward higher margin service
          revenues. Gross profit as a percent of sales by business segment for the
          six
          months ended April 30, 2007 consisted of 46% of sales from our IMRT/IGRT
          business and 34% of sales from our Radiation Sources business. We anticipate
          that gross profit margins of both businesses will improve over time with
          the
          anticipated increase in sales volumes as new products are
          introduced.
 
 **Selling
          and marketing expenses**
 **Six
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**Selling
                    and marketing expenses
                
                $
                3.6
                
                $
                4.2
                
                
                (14)
                %As
                    a percent of total revenue
                
                
                26
                %
                
                27
                %
 
 30
 Selling
          and marketing expenses comprised primarily of salaries, commissions, and
          marketing costs, decreased $0.6 million, or 14%, to $3.6 million for the
          six
          months ended April 30, 2007, from $4.2 million for the six months ended
          April
          30, 2006. The decrease in selling and marketing expenses is primarily attributed
          to reduced personnel expenses and lower sales commissions related to the
          decreased sales of IMRT/IGRT products, partially offset by marketing expenses
          related to the ClearPath product and trade show expenses.
 
 **General
          and administrative expenses ("G&A")**
 **Six
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**General
                    and administrative expenses
                
                $
                5.4
                
                $
                4.8
                
                
                13
                %As
                    a percent of total revenue
                
                
                39
                %
                
                31
                %
 
 G&A
          increased $0.6 million, or 13%, to $5.4 million for the six months ended
          April
          30, 2007, from $4.8 million for the six months ended April 30, 2006. The
          increase in G&A is primarily attributed to $0.9 million increase in
          professional fees, partially offset by $0.3 million decrease in the allowance
          for bad debts resulting from improved collections of accounts
          receivable.
 
 **Research
          and development (“R&D”)**
 **Six
                    Months Ended April 30,****2007**
                
                **2006**
                
                **%
                    Change****($
                    millions)**Research
                    and development expenses
                
                $
                2.4
                
                $
                2.7
                
                
                (11)
                %As
                    a percent of total revenue
                
                
                17
                %
                
                17
                %
 
 R&D
          decreased $0.3 million or 11%, to $2.4 million for the six months ended
          April
          30, 2007, from $2.7 million for the six months ended April 30, 2006. The
          decrease in R&D spending is primarily due to reduced project spending in
          IMRT/IGRT business, partially offset by increased spending on product
          development in our Radiation Sources business relating to our ClearPathTM breast
          brachytherapy device.
 
 **Amortization
          of intangible assets.** Amortization of intangible assets was $0.3 million in the six months ended
          April
          30, 2007 and 2006.
 
 **Interest
          and other income (expense), net.** Interest
          and other income (expense) decreased by $0.1 million to less than $(0.1)
          million
          due to a decrease in the portfolio of marketable securities.
 
 **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 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, issuance of our common stock
          and
          /or debt, and our anticipated available lines of credit.
 
 31
 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 April
          30,
          2007, the Company has an accumulated deficit of $133.9 million; cash, cash
          equivalents and marketable securities of $2.1 million and no long-term
          debt.
 
 Based
          on
          the Company’s current operating plans, management believes that the Company’s
          existing cash resources and cash forecasted by management to be generated
          by
          operations, funds to be raised by the Company through an equity or debt
          financing, as well as the Company’s anticipated available lines of credit, will
          be sufficient to meet working capital and capital requirements through
          at least
          the next twelve months. In this regard, we expect that we will need to
          raise
          additional financing in fiscal 2007 to support the launch of ClearPath
          and fund
          our continuing operations and other activities. Management also expects
          that in
          future periods new products and services will provide additional cash flow,
          although we are presently placing an emphasis on controlling expenses. 
However, there is no assurance that the Company will be successful with
          its
          plans.  If events and circumstances occur such that the Company does not
          meet its current operating plans, the Company is unable to raise sufficient
          additional equity or debt financing, or the Company’s lines of credit (which
          presently expire on September 28 and October 3, 2007, respectively) are
          insufficient or not available, the Company may be required to further reduce
          expenses or take other steps which could have a material adverse effect
          on our
          future performance, including but not limited to, the premature sale of
          some or
          all of our assets or product lines on undesirable terms, merger with or
          acquisition by another company on unsatisfactory terms, or the cessation
          of
          operations.
  At
          April
          30, 2007, we had cash, and cash equivalents, and investments in marketable
          securities aggregating approximately $2.1 million, a decrease of approximately
          $7.2 million from $9.3 million at October 31, 2006. The decrease was primarily
          attributed to $7.1 million used in continuing operations and $0.1 million
          used
          for capital expenditures.
 
 Cash
          flows used in operating activities decreased $1.0 million, or 12%, to $7.1
          million for the six months ended April 30, 2007 from $8.1 million for the
          six
          months ended April 30, 2006, primarily due to improved collections of accounts
          receivable ($2.1 million), partially offset by increased payments to suppliers
          ($0.4 million), and a decrease in the allowance for doubtful accounts of
          $0.3
          million compared to an increase of $0.4 million in the prior year. We expect
          that cash used in operating activities may fluctuate in future periods
          as a
          result of a number of factors, including fluctuations in our operating
          results,
          accounts receivable collections, inventory management, research and development
          expenses, and the timing of payments.
 
 Cash
          flows provided by investing activities increased $6.6 million to $7.4 million
          for the six months ended April 30, 2007, from $0.8 million for the six
          months
          ended April 30, 2006. The increase reflects the additional draw down of
          our
          balance of marketable securities to fund operations.
 
 Cash
          provided by financing activities decreased $6.4 million to less than $0.1
          million for the six months ended April 30, 2007 from $6.4 million for the
          six
          months ended April 30, 2006. The decrease is due to a drawdown on the lines
          of
          credit of $6.3 million in 2006 and no drawdown in 2007.
 
 32
 We
          have
          $3.2 million in operating lease obligations for facilities and equipment
          under
          non-cancelable operating lease agreements. We have also entered into purchase
          commitments to suppliers under blanket purchase orders in the amount of
          $0.1
          million.
 
 **Critical
          Accounting Policies**
 
 The
          preparation of financial statements and related disclosures in conformity
          with
          accounting principles generally accepted in the United States of America
          requires management to make judgments, assumptions and estimates that affect
          the
          amounts reported in the Consolidated Financial Statements included in the
          Company’s Form 10-K for the year ended October 31, 2006, and accompanying notes.
          Note 1 to the Consolidated Financial Statements describes the significant
          accounting policies and methods used in the preparation of the Consolidated
          Financial Statements. Estimates are used for, but not limited to, the accounting
          for revenue recognition, allowance for doubtful accounts, goodwill and
          long-lived asset impairments, loss contingencies, and taxes. Estimates
          and
          assumptions about future events and their effects cannot be determined
          with
          certainty. We base our estimates on historical experience and on various
          other
          assumptions believed to be applicable and reasonable under the circumstances.
          These estimates may change as new events occur, as additional information
          is
          obtained and as our operating environment changes. These changes have
          historically been minor and have been included in the consolidated financial
          statements as soon as they became known. The following critical accounting
          policies are impacted significantly by judgments, assumptions and estimates
          used
          in the preparation of the Consolidated Financial Statements and actual
          results
          could differ materially from the amounts reported based on these
          policies.
 
 *Revenue
          Recognition*
 
 We
          sell
          products and services for radiation therapy treatment of cancer, including
          intensity modulated radiation therapy (“IMRT”), image guided radiation therapy
          (“IGRT”), as well as brachytherapy. Product revenue consists of brachytherapy
          seeds and accessories, non-therapeutic sources, and certain IMRT hardware
          devices, including our MiMIC and Crane products. Software revenues consist
          of
          IMRT treatment planning software, including Corvus, Peacock, and nomosSTAT,
          and
          our IGRT products. Service revenue consists of warranty revenue and maintenance
          service agreements.
 
 Product
          revenue
 
 We
          apply
          the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
          Recognition” for the sale of non-software products. SAB No. 104 which supersedes
          SAB No. 101, “Revenue Recognition in Financial Statements”, provides guidance on
          the recognition, presentation and disclosure of revenue in financial statements.
          SAB No. 104 outlines the basic criteria that must be met to recognize revenue
          and provides guidance for the disclosure of revenue recognition policies.
          In
          general, the Company recognizes revenue related to product sales when (i)
          persuasive evidence of an arrangement exists, (ii) delivery has occurred,
          (iii)
          the fee is fixed or determinable, and (iv) collectibility is reasonably
          assured.
 
 Software
          revenue
 
 Our
          software revenue is generated from the sale of advanced medical equipment
          products. The software element of our products is deemed an essential element
          of
          the functionality of the product. Maintenance and support are provided
          with the
          initial product sale for a twelve month period. The maintenance and support
          is
          renewable annually or longer, at the customer’s discretion.
 
 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.
 
 33
 Our
          software sales are generally multiple element arrangements, which could
          include
          the product, first year annual maintenance and support, and training and
          installation. Revenues from the multiple elements arrangements are allocated
          to
          each element based on the relative fair value of the elements. If the fair
          value
          of the element exists, the determination is based on vendor specific objective
          evidence. If such evidence of fair value for each element of the arrangement
          does not exist, all revenue from the arrangement is deferred until such
          time
          that evidence of fair value of each element does exist or until all elements
          of
          the arrangement are delivered. If in a multiple element arrangement, fair
          value
          does not exist for one or more of the undelivered elements, the residual
          method
          of accounting is applied. Under the residual method, the fair value of
          the
          undelivered elements is deferred, and the remaining portion of the arrangement
          fee is recognized as revenue.
 
 Service
          revenue
 
 Services
          revenues are derived mainly from maintenance and support contracts and
          are
          recognized on a straight-line basis over the term of the contract. Payments
          for
          maintenance revenues are normally received in advance and are nonrefundable.
  *Allowance
          for Doubtful Accounts and Sales Returns*
 
 The
          allowance for doubtful accounts is based on our assessment of the collectibility
          of specific customer accounts and the aging of the accounts receivable.
          We
          regularly review the allowance by considering factors such as historical
          experience, age of the accounts receivable balances and current economic
          conditions that may affect a customer's ability to pay. If there was a
          deterioration of a major customer's credit worthiness or actual defaults
          are
          higher than our historical experience, our estimates of the recoverability
          of
          amounts due us could be overstated which could have an adverse impact on
          our
          financial results.
 
 A
          reserve
          for sales returns is established based on historical trends in product
          return
          rates and is recorded as a reduction of our accounts receivable. If the
          actual
          future returns were to deviate from the historical data on which the reserve
          had
          been established, our revenue could be adversely affected. To date, product
          returns have not been considered material to our results of
          operations.
 
 *Inventory
          Reserves*
 
 Inventories
          are valued at the lower of cost or market as determined under the first-in,
          first-out method. Costs include materials, labor and manufacturing
          overhead.
 
 The
          Company's Radiation Sources products are subject to shelf-life expiration
          periods, which are carefully monitored by the Company. Provision is made
          for
          inventory items which may not be sold because of expiring dates. The Company
          routinely reviews other inventories for evidence of impairment of value
          and
          makes provision as such impairments are identified.
 
 *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.
  34
 
 *Research
          and Development Costs*
 
 We
          account for research and development costs in accordance with several accounting
          pronouncements, including SFAS 2, Accounting for Research and Development
          Costs,
          and SFAS 86, Accounting for the Costs of Computer Software to be Sold,
          Leased,
          or Otherwise Marketed. SFAS 86 specifies that costs incurred internally
          in
          researching and developing a computer software product should be charged
          to
          expense until technological feasibility has been established for the product.
          Once technological feasibility is established, all software costs should
          be
          capitalized until the product is available for general release to customers.
          Judgment is required in determining when technological feasibility of a
          product
          is established. We have determined that technological feasibility for our
          software products is reached shortly before the products are released to
          manufacturing. Costs incurred after technological feasibility is established
          are
          not material, and accordingly, we expense all research and development
          costs
          when incurred.
 
 *Loss
          Contingencies*
 
 We
          record
          liabilities related to pending litigation when an unfavorable outcome is
          probable and we can reasonably estimate the amount of the loss. We are
          subject
          to various legal proceedings and claims, either asserted or unasserted,
          that
          arise in the ordinary course of business. We evaluate, among other factors,
          the
          degree of probability of an unfavorable outcome and an estimate of the
          amount of
          the loss. Significant judgment is required in both the determination of
          the
          probability and as to whether an exposure can be reasonably estimated.
          When we
          determine that it is probable that a loss has been incurred, the effect
          is
          recorded promptly in the consolidated financial statements. Although the
          outcome
          of these claims cannot be predicted with certainty, we do not believe that
          any
          of our existing legal matters will have a material adverse effect on our
          financial condition or results of operations.
 
 *Income
          Taxes*
 
 We
          account for income taxes using the liability method. Deferred taxes are
          determined based on the differences between the financial statement and
          tax
          bases of assets and liabilities, using enacted tax rates in effect for
          the year
          in which the differences are expected to reverse. Valuation allowances
          are
          established when necessary to reduce deferred tax assets to the amounts
          expected
          to be realized. In addition, we are subject to examination of our income
          tax
          returns by the Internal Revenue Service and other tax authorities. We regularly
          assess the likelihood of adverse outcomes resulting from these
          examinations.
 
 **Recent
          Accounting Pronouncements**
 
 In
          June
          2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
          No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation
          of FASB Statement No. 109, (FIN 48).  FIN 48 clarifies the
          accounting for uncertainty in income taxes recognized in an enterprise’s
          financial statements in accordance with FASB Statement No. 109, Accounting
          for Income Taxes. FIN 48 also prescribes a recognition threshold and
          measurement attribute for the financial statement recognition and measurement
          of
          a tax position taken or expected to be taken in a tax return that results
          in a
          tax benefit. Additionally, FIN 48 provides guidance on de-recognition,
          income statement classification of interest and penalties, accounting in
          interim
          periods, disclosure, and transition. This interpretation is effective for
          fiscal
          years beginning after December 15, 2006. The
          Company is currently evaluating the effect that the application of FIN
          48 will
          have on its financial position, results of operations or cash
          flows.
 
 35
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value ** Measurements”,
          (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
          measuring fair value in generally accepted accounting principles (GAAP),
          and
          expands disclosures about fair value measurements. This Statement applies
          under
          other accounting pronouncements that require or permit fair value measurements,
          and does not require any new fair value measurements. The application of
          SFAS
          No. 157, however, may change current practice within an organization. SFAS
          No.
          157 is effective for all fiscal years beginning after November 15, 2007,
          with
          earlier application encouraged. The
          Company is currently evaluating the effect that the application of SFAS
          No. 157
          will have on its financial position, results of operations or cash
          flows.
 
 In
          February 2007, the FASB issued SFAS No. 159, *“The
          Fair Value Option for Financial Assets and Financial Liabilities.”* SFAS
          159
          provides companies with an option to report selected financial assets and
          liabilities at fair value. The standard’s objective is to reduce both complexity
          in accounting for financial instruments and the volatility in earnings
          caused by
          measuring related assets and liabilities differently. The standard requires
          companies to provide additional information that will help investors and
          other
          users of financial statements to more easily understand the effect of the
          company’s choice to use fair value on its earnings. It also requires companies
          to display the fair value of those assets and liabilities for which the
          company
          has chosen to use fair value on the face of the balance sheet. The new
          standard
          does not eliminate disclosure requirements included in other accounting
          standards, including requirements for disclosures about fair value measurements
          included in SFAS 157, *“Fair
          Value Measurements,”* and
          SFAS
          107, *“Disclosures
          about Fair Value of Financial Instruments.”* SFAS
          159
          is effective as of the start of fiscal years beginning after November 15,
          2007. Early adoption is permitted. We are in the process of evaluating
          this
          standard and therefore have not yet determined the impact that the adoption
          of
          SFAS 159 will have on our financial position, results of operations or
          cash
          flows.
 
 **Item
          3.**  **Quantitative
          and Qualitative Disclosures about Market Risk**
  Information
          about market risks for the three months ended April 30, 2007, does not
          differ
          materially from that discussed under Item 7A of the registrant's Annual
          Report
          on Form 10-K for the fiscal year ended October 31, 2006.
 
  **Item
          4.**  **Controls
          and Procedures**
  (a)
          Evaluation of Disclosure Controls and Procedures
 
 As
          required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”), we have carried out an evaluation, under the supervision and
          with the participation of our management, including our Chief Executive
          Officer
          (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the
          end of the fiscal quarter covered by this report, of the design and operation
          of
          our “disclosure controls and procedures” as defined in Rule 13a-15(e)
          promulgated by the SEC under the Exchange Act. Based upon that evaluation,
          our
          CEO and our CFO concluded that our disclosure controls and procedures,
          as of the
          end of such fiscal quarter, were adequate and effective to ensure that
          information required to be disclosed by us in the reports that we file
          or submit
          under the Exchange Act is recorded, processed, summarized and reported
          within
          the time periods specified in the Commission’s rules and forms and that such
          information is accumulated and communicated to our management, including
          our CEO
          and CFO, as appropriate to all timely decisions regarding required disclosure.
 
 36
 (b)
          Changes in Internal Controls
 
 There
          has
          been no change in our internal control over financial reporting during
          the
          quarter ended April 30, 2007, that has materially affected or is reasonably
          like
          to materially affect our internal control over financial reporting.
 
 **PART
          II - OTHER INFORMATION**
 
 The
          Company was not required to report the information pursuant to Items 1
          through 6
          of Part II of Form 10-Q except as follows:
 
 *We
          operate in a rapidly changing environment that involves a number of risks,
          some
          of which are beyond our control. In addition to other information in this
          Form
          10-Q, you should carefully consider the risks described below before investing
          in our securities. This discussion highlights some of the risks that may
          affect
          future operating results. The risks described below are not the only ones
          facing
          us. Additional risks and uncertainties not presently known to us, which
          we
          currently deem immaterial or which are similar to those faced by other
          companies
          in our industry or business in general, may also impair our business operations.
          If any of the following risks or uncertainties actually occurs, our business,
          financial condition and operating results would likely suffer.*
  **Item
          1A. Risk Factors**
 
 **We
          have experienced significant losses and may continue to incur such losses
          in the
          future. As a result, the amount of our cash, cash equivalents, and investments
          in marketable securities has materially declined. We expect that we will
          need to
          raise additional financing in fiscal 2007 to support the launch of ClearPath
          and
          fund our continuing operations and other activities. If we continue to
          incur
          significant losses and are unable to access sufficient working capital
          from our
          operations or through external financings, we will be unable to fund future
          operations and operate as a going concern.**
 
 We
          have
          incurred substantial net losses in each of the last six fiscal years. As
          reflected in our financial statements, we have experienced net losses of
          $6.4
          million in the six months ended April 30, 2007, and $17.1 million, $55.5
          million
          and $36.3 million in our fiscal years ended October 31, 2006, 2005 and
          2004,
          respectively. As a result, the amount of our cash, cash equivalents, and
          investments in marketable securities has significantly declined from
          approximately  $15.0
          million at October 31, 2004 to $2.1 million at April 30, 2007. In addition,
          our
          lines of credit with Silicon Valley Bank and Partners For Growth expire
          on
          October 3, 2007 and September 28, 2007, respectively, and there is no assurance
          that they will be renewed.
 
 The
          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 taken
          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 additional financing,
          our
          ability to increase revenues and to reduce further our losses from operations,
          economic cycles, market acceptance of our products, competitors’ responses to
          our products, the intensity of competition in our markets, and the level
          of
          demand for our products.
 
 37
 The
          amount of working capital that we will need in the future will also depend
          on
          our efforts and many factors, including:
 
 •
                Our
                    ability to successfully market and sell our products, including
                    the
                    successful launch of our new ClearPath device for treatment of
                    breast
                    cancer;
 •
                Continued
                    scientific progress in our discovery and research
                    programs;
 •
                Levels
                    of sales and marketing that will be required to launch future
                    products and
                    achieve and maintain a competitive position in the marketplace
                    for both
                    existing and new products;
 •
                Structuring
                    our businesses in alignment with their revenues to reduce operating
                    losses;
 •
                Levels
                    of inventory and accounts receivable that we
                    maintain;
 •
                Level
                    of capital expenditures;
 •
                Acquisition
                    or development of other businesses, technologies or
                    products;
 •
                The
                    time and costs involved in obtaining regulatory approvals;
 •
                The
                    costs involved in preparing, filing, prosecuting, maintaining,
                    defending,
                    and enforcing patent claims; and
 •
                The
                    potential need to develop, acquire or license new technologies
                    and
                    products.
 
 We
          presently expect that we will need to raise additional equity and/or debt
          financing, reduce operations and take other steps to achieve positive cash
          flow.
          We cannot assure you that we will be successful in these efforts or that
          any or
          some of the above factors will not negatively impact us. We believe that
          we will
          have or be able to raise sufficient cash to sustain us at least through
          the next
          twelve months.
 
 **Future
          financing transactions may have a dilutive or other negative effect on
          our
          existing shareholders.**
 
 In
          June
          2006, the Company completed a private placement of shares of its common
          stock
          that also includes a significant number of warrants. This financing resulted
          in
          significant dilution of the Company’s current shareholders. In the future, the
          Company will likely endeavor to issue and sell additional equity, debt
          or
          convertible securities to raise capital. If the Company does so, the percentage
          ownership of the Company held by existing shareholders would be further
          reduced,
          and existing shareholders may experience significant dilution. In addition,
          new
          investors in the Company may demand rights, preferences or privileges that
          differ from, or are senior to, those of our existing shareholders, such
          as
          warrants in addition to the securities purchased and other protections
          against
          future dilutive transactions. In addition, any debt securities that we
          may issue
          and sell in the future could result in increased debt on our balance sheet,
          additional interest and financing expense and/or decreased operating
          income.
 
 **Success
          of our recently announced plans to introduce a breast brachytherapy product
          will
          be dependent upon a variety of factors.**
 
 We
          recently announced the introduction of ClearPath, a new brachytherapy device
          for
          the treatment of breast cancer. Because we believe that our ClearPath product
          has certain technical and market advantages, we expect that this product
          may
          generate significant revenues in the future; however, successful technical
          development of our products does not guarantee successful commercialization.
          There are a number of factors which could adversely affect our ability
          to
          achieve this goal, including:
  ·
              Successful
                  completion of the launch of this product; ·
              Our
                  ability to protect our intellectual property through patents and
                  licenses; ·
              Our
                  ability to successfully manufacture production quantities of the
                  product; ·
              The
                  acceptance of the product by physicians and health professionals
                  as an
                  alternative to products with competitive technologies;
                  and ·
              Our
                  ability to hire and train a direct sales force to sell the
                  product; 
 38
 **We
          may encounter insurmountable obstacles or incur substantially greater costs
          and
          delays than anticipated in the development process.**
 
 From
          time
          to time, we have experienced setbacks and delays in our research and development
          efforts and may encounter further obstacles in the course of the development
          of
          additional technologies, products and services. We may not be able to overcome
          these obstacles or may have to expend significant additional funds and
          time.
          Technical obstacles and challenges we encounter in our research and development
          process may result in delays in or abandonment of product commercialization,
          may
          substantially increase the costs of development, and may negatively affect
          our
          results of operations.
  New
          product developments in the healthcare industry are inherently risky and
          unpredictable. These risks include:
  •
failure
          to prove feasibility;
 •
time
          required from proof of feasibility to routine production;
 •
timing
          and cost of regulatory approvals and clearances;
 •
          competitors' response to new product developments;
 •
          manufacturing, installation, warranty and maintenance cost overruns;
 •
failure
          to obtain customer acceptance and payment;
 •
          customer demands for retrofits of both old and new products; and
 •
excess
          inventory caused by phase-in of new products and phase-out of old products.
  The
          high
          cost of technological innovation is coupled with rapid and significant
          change in
          the regulations governing the products that compete in our market, by industry
          standards that could change on short notice, and by the introduction of
          new
          products and technologies that could render existing products and technologies
          uncompetitive. We cannot be sure that we will be able to successfully develop
          new products or enhancements to our existing products. Without successful
          new
          product introductions, our revenues likely will continue to suffer. Even
          if
          customers accept new or enhanced products, the costs associated with making
          these products available to customers, as well as our ability to obtain
          capital
          to finance such costs, could reduce or prevent us from increasing our operating
          margins.
  **We
          have experienced a significant deterioration of revenues in our IMRT/IGRT
          business. If we are unable to successfully develop and market new generations
          of
          IMRT/IGRT products, such as nomosSTAT, we may be unable to retain our existing
          customers or attract new customers. We are currently evaluating various
          strategic alternatives regarding this business.**
  We
          have
          seen a significant deterioration of revenues in our IMRT/IGRT business,
          in part
          because of our inability to timely and successfully develop and market
          new
          products. Many of our products and product candidates are technologically
          innovative and require significant planning, design, development and testing.
          These activities require significant capital commitments and investment.
          We are
          currently evaluating various strategic alternatives regarding this business,
          but
          there can be no assurance that an alternative will be found that will
          significantly enhance shareholder value.
 
 **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.**
  39
 We
          expect
          that our serial tomotherapy, intensity-modulated radiation therapy, or
          IMRT, and
          image-guided radiation therapy, or IGRT, product lines, including CORVUS,
          nomosSTAT and BAT, will generate a significant part of our revenues, and
          we also
          believe that our ClearPath product will generate substantial revenues in
          the
          future. We will need to continue to develop enhancements to these products
          and
          improvements on our core technologies in order to compete effectively.
          Rapid
          change and technological innovation characterize the marketplace for medical
          products, and our competitors could develop technologies that are superior
          to
          our products or that render such products obsolete. We anticipate that
          expenditures for research and development will continue to be significant.
          The
          domestic and foreign markets for radiation therapy equipment are highly
          competitive. Many of our competitors and potential competitors have substantial
          installed bases of products and significantly greater financial, research
          and
          development, marketing and other resources than we do. Competition may
          increase
          as emerging and established companies enter the field. In addition, the
          marketplace could conclude that the tasks our products were designed to
          perform
          are no longer elements of a generally accepted treatment regimen. This
          could
          result in us having to reduce production volumes or discontinue production
          of
          one or more of our products.
  Our
          single largest competitor in the IMRT/IGRT market is Varian Medical
          Systems, Inc. (“Varian”). Varian is the largest worldwide manufacturer, in
          terms of market share, of linear accelerators. Linear accelerators are
          the
          machines that generate the radiation energy beams used in both IMRT and
          conventional radiation treatment. Varian also markets its own line of IMRT
          products, including several models of multileaf collimators and an IMRT
          inverse
          planning software package, which it often includes with its linear accelerators.
          Varian also offers an on-board imaging system (OBI) which integrates CT
          imaging
          capabilities for daily tumor localization. Varian is also one of the principal
          providers of record and verification systems, which are systems that keep
          track
          of all critical information in the treatment of radiation therapy patients
          and
          which allow the planning system to communicate with the linear accelerator.
          Varian acquired Zmed, Inc., one of our principal competitors for BAT.
          Varian expects the acquisition to enhance its 3-D ultrasound imaging
          capabilities and offer radiation oncology departments a new line of stereotactic
          positioning accessories and planning software, allowing Varian to directly
          compete against BAT.
  We
          also
          compete with Siemens and Elekta, each of which manufactures one or more
          multileaf collimators that compete with MIMiC and, therefore, with our
          integrated system, nomosSTAT. Both companies offer, or plan to offer, on-board
          imaging systems that indirectly compete with BAT. In addition, there are
          several
          other companies that currently offer or plan to offer IMRT modules, which
          typically add IMRT functionality to conventional radiation treatment planning
          products.
  Finally,
          we compete with all manufacturers of conventional radiation therapy products
          many of which are devoting substantial resources to promoting their
          products.
  Our
          brachytherapy business is also subject to intense competition. Our primary
          competitors in the brachytherapy seed business include: Nycomed Amersham
          PLC
          (through its control of Oncura) and C.R Bard, Inc., both of whom
          manufacture and sell Iodine-125 brachytherapy seeds, as well as distribute
          Palladium-103 seeds manufactured by a third party (in the case of Oncura,
          we
          currently manufacture a portion of its Palladium-103 seed requirements
          pursuant
          to a distribution agreement reached in July, 2005); Mentor, which manufactures
          and sells Iodine-125 brachytherapy seeds and currently distributes third
          party
          manufactured Palladium-103 brachytherapy seeds; and Theragenics Corporation,
          which manufacturers Palladium-103 seeds and sells Palladium-103 and Iodine-125
          brachytherapy seeds directly and its Palladium-103 brachytherapy seeds
          through
          marketing relationships with third parties. Several additional companies
          currently sell brachytherapy seeds as well. Our SurTRAK strands and needles
          are
          subject to competition from a number of companies, including Worldwide
          Medical
          Technologies, Inc.
 
 Our
          new
          ClearPath-HDR device for treatment of breast cancer faces competition from
          Cytyc
          Corp. SenoRx, Inc. and BioLucent, Inc. The MammoSite RTS device from Cytyc
          Corp., currently the market leader, uses a balloon and catheter system
          to place
          the radiation source directly into the post-lumpectomy cavity. A device
          developed by SenoRx, Inc. also uses a balloon and catheter system to deliver
          the
          radiation dose. The SAVI device manufactured by BioLucent, Inc. does not
          use a
          balloon and is comprised of an expandable bundle of catheters. All of these
          devices are designed to connect to a source of high-dose-rate (HDR) radiation
          which is administered in a specially shielded room in a hospital.
 
 40
 Our
          radiation reference source business also is subject to intense competition.
          Competitors in this industry include AEA Technology PLC and Eckert &
Ziegler AG. We believe that these companies have a dominant position in
          the
          market for radiation reference source products.
 
 Because
          we are a relatively small company, there is a risk that potential customers
          will
          purchase products from larger manufacturers, even if our products are
          technically superior, based on the perception that a larger, more established
          manufacturer may offer greater certainty of continued product improvements,
          support and service, which could cause our revenues to decline. In addition, many
          of
          our competitors are substantially larger and have greater sales, marketing
          and
          financial resources than we do. Developments by any of these or other companies
          or advances by medical researchers at universities, government facilities
          or
          private laboratories could render our products obsolete. Moreover, companies
          with substantially greater financial resources, as well as more extensive
          experience in research and development, the regulatory approval process,
          manufacturing and marketing, may be in a better position to seize market
          opportunities created by technological advances in our industry.
 
 **We
          are highly dependent on our direct sales organization, which is small compared
          to many of our competitors and which has relatively limited marketing and
          sales
          experience in our products. We have also experienced a high degree of turnover
          in our sales organization. Any failure to build, manage and maintain our
          direct
          sales organization could negatively affect our revenues.**
  Our
          current domestic direct sales force is small relative to many of our
          competitors. There is intense competition for skilled sales and marketing
          employees, particularly for people who have experience in the radiation
          oncology
          market. Accordingly, we could find it difficult to hire or retain skilled
          individuals to sell our products. Any failure to build our direct sales
          force
          could adversely affect our growth and our ability to meet our revenue goals.
  In
          addition, we have experienced higher than anticipated turnover in our domestic
          direct sales force, which has resulted in a relative lack of experience
          in
          selling our products.  As
          a
          result of our relatively small sales force, the intense competition for
          skilled
          sales and marketing employees, and the high turnover in our sales force,
          there
          can be no assurance that our direct sales and marketing efforts will be
          successful. If we are not successful in our direct sales and marketing,
          our
          sales revenue and results of operations are likely to be materially adversely
          affected.
  **We
          depend partially on our relationships with distributors and other industry
          participants to market some of our products, and if these relationships
          are
          discontinued or if we are unable to develop new relationships, our revenues
          could decline.**
  We
          currently rely, and will continue to rely, upon collaborative relationships
          with
          agents and distributors and other industry participants to maintain IMRT/IGRT
          market access to potential customers, particularly in Asia and Europe,
          and our
          business strategy includes entering into more of these relationships in
          the
          future. Some of the entities with whom we have relationships to help market
          and
          distribute our products also produce or distribute products that directly
          compete with our IMRT/IGRT products.
  We
          cannot
          assure you that we will be able to maintain or develop these relationships
          with
          agents and distributors and other industry participants or that these
          relationships will continue to be successful. If any of these relationships
          is
          terminated, not renewed or otherwise unsuccessful, or if we are unable
          to
          develop additional relationships, our product sales could decline, and
          our
          ability to grow our IMRT/IGRT business could be adversely affected. This
          is
          particularly the case with respect to foreign sales of our IMRT/IGRT products,
          where we currently rely, and we will continue to rely, on our distributors'
          expertise regarding foreign regulatory matters and their access to actual
          and
          potential customers.
  41
  In
          addition, our 2005 agreement with Oncura for distribution of our Palladium-103
          brachytherapy seeds may be an important component of that business.
  We
          do not
          have a direct sales force for our non-therapeutic radiation source products,
          and
          rely entirely on the efforts of agents and distributors for sales of those
          non-brachytherapy products. We cannot assure you that we will be able to
          maintain our existing relationships with our agents and distributors for
          the
          sale of our non-therapeutic radiation source products.
  **One
          of our primary markets in our IMRT product line is the market for upgrading
          linear accelerators that do not have IMRT capabilities to provide them
          with IMRT
          capabilities. This market will shrink over time, thereby limiting our potential
          revenues from the upgrading of linear accelerators.**
  To
          date,
          a majority of our revenues from the sale of our IMRT products has been
          derived
          from the sale of these products to customers who decide to upgrade linear
          accelerators that do not have IMRT capabilities to enable them to deliver
          IMRT
          treatments. Most of these linear accelerators are older models. Selling
          CORVUS
          to customers with newer multileaf collimator-equipped linear accelerators
          can be
          difficult because these linear accelerators may be offered with IMRT planning
          software at little or no additional cost. Accordingly, to make a sale,
          we often
          must convince these potential customers that CORVUS is sufficiently superior
          to
          the IMRT or conventional radiation treatment planning software products
          offered
          by the manufacturer to justify the additional costs of purchase. Selling
          nomosSTAT and MIMiC to potential customers with newer multileaf
          collimator-equipped linear accelerators is even more difficult because,
          in
          addition to the incremental costs of purchase, these potential customers
          may be
          reluctant to incur the additional effort required to retrofit the factory
          installed multileaf collimator with MIMiC. Over time, if more institutions
          purchase new linear accelerators that are IMRT-equipped or upgrade their
          older
          accelerators with technology from us or our competitors, the market for
          upgrading linear accelerators that do not have IMRT capabilities will shrink
          and
          may become saturated, which could adversely affect our sales and limit
          our
          potential revenues from our products.
  **We
          might not be able to make our IMRT products compatible with some existing
          linear
          accelerators and other radiation therapy products. In addition, any future
          changes in the configuration of the most common linear accelerators could
          require costly and time-consuming modifications to our products that could
          harm
          our business.**
  Our
          IMRT
          products are designed to be used in conjunction with most linear accelerators
          currently in use. Our products are not currently compatible with all linear
          accelerators. However, when manufacturers modify the design or functionality
          of
          their machines, we are often required to modify our products to ensure
          compatibility. Future changes cannot be predicted and, in the case of changes
          initiated by linear accelerator manufacturers who are our competitors,
          could be
          made or timed to place us at a competitive disadvantage. Responding to
          these
          changes can be costly and time-consuming. In addition, we could be required
          to
          obtain additional regulatory clearances for any modifications of our products.
          It is also possible that, despite our best efforts, we might be unable
          to make
          our products compatible with new or modified versions of linear accelerators
          or
          might only be able to do so at a prohibitive expense.
  **If
          alternative technologies prove to be superior to IMRT/IGRT or brachytherapy,
          physician adoption of our products could substantially decrease.**
  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.
  42
 **There
          is currently a lack of long-term data regarding the safety and effectiveness
          of
          IMRT products and negative data or the continued lack of adequate supporting
          data could adversely affect market acceptance of our IMRT products.**
  Although
          we estimate that our IMRT products have been used to treat thousands of
          patients
          worldwide, this is still a statistically small number, and these treatments
          have
          primarily involved tumors of the prostate, head, neck and spinal cord.
          Much of
          the data produced in current studies using IMRT and our products have involved
          small patient sample sizes, and any positive results of these studies may
          not be
          representative of the results that will be achieved in studies involving
          larger
          patient sample sizes. If we are unable to obtain additional and more
          comprehensive clinical studies, or if long-term clinical studies fail to
          confirm
          the effectiveness of IMRT or our products, our sales could fail to increase
          or
          could decrease.
  Some
          theoretical and non-clinical studies, meaning studies that are not based
          on
          significant empirical evidence, have suggested that the use of IMRT and
          potentially our products may cause serious negative side effects, such
          as a risk
          of induced cancer, as a result of the increased radiation delivered to
          the
          patient. At present, not enough time has passed to determine conclusively
          the
          long-term side effects. If future clinical studies confirm that these negative
          side effects occur as a result of IMRT treatments, our sales could fail
          to grow
          or could decline. In addition, if it is shown that our products cause harmful
          side effects, the U.S. Food and Drug Administration, or FDA, could require
          us to
          change our product labeling to describe these potential side effects or
          could
          even rescind the clearances for our products and potentially require a
          recall of
          our products.
  IMRT,
          whether using our products or those of our competitors, requires a substantial
          departure from customary quality assurance practices. The complexity and
          dynamic
          nature of IMRT deliveries make new demands on patient plan and dose
          verification. These difficulties and departures from customary practices
          may
          impede market acceptance of IMRT in general and our products in particular,
          which could adversely affect our ability to increase sales of our products
          and
          achieve our desired growth rate.
  **IMRT
          treatments expose patients to increased radiation leakage, which could
          potentially cause long-term deleterious side effects, including induced
          cancer.**
  In
          both
          IMRT and conventional radiation therapy, there is radiation leakage, which
          means
          radiation that escapes from the linear accelerator and is absorbed by the
          patient outside the area of the patient's body being treated. Linear
          accelerators are the machines that generate the radiation energy beams
          used in
          both IMRT and conventional radiation treatment. Leakage occurs at all times
          when
          the linear accelerator is producing radiation. In IMRT treatments, the
          linear
          accelerator is required to produce radiation for a longer period of time
          overall
          as compared to conventional radiation treatments. Also, in IMRT treatments
          there
          is additional leakage that is transmitted through or between the leaves
          of the
          multileaf collimator itself. As a result, there is an increase in the overall
          radiation leakage to which the patient is exposed due to the longer periods
          of
          radiation delivery.
  The
          increased radiation leakage associated with IMRT treatments could require
          additional room shielding to protect clinic personnel. In addition, concerns
          have been raised by some researchers that the increase in overall radiation
          leakage to which IMRT patients are exposed may have deleterious long-term
          effects, including the potential for inducing cancer.
  43
 These
          same studies suggest that an increase in the long-term risk of induced
          cancers
          from IMRT may be possible. The risk, or perceived risk, of induced cancers
          could
          slow or prevent expanded use of IMRT to treat additional types of cancers
          and
          could even result in decreased usage of IMRT to treat cancers currently
          treated
          with IMRT if the increased risk is shown or believed to be significant,
          which
          could cause our revenues from our products to decline and our business
          to
          suffer.
  **Our
          IMRT/IGRT products are used in connection with the delivery of intense
          radiation. Defects in, or misuse of, our products, or any detrimental side
          effects that result from the use of our products, could result in serious
          injury
          or death and could require costly recalls or subject us to costly and
          time-consuming product liability claims. This could harm future sales and
          require us to pay substantial damages.**
  Our
          IMRT/IGRT products are used in connection with the delivery of high-powered
          external beam radiation to cancer patients. One or more of our IMRT/IGRT
          products could malfunction or be misused and cause serious injury or death
          to a
          patient. In addition, our IMRT/IGRT products might otherwise be determined
          to
          cause serious injury or other detrimental side effects. There is an inherent
          risk in our industry that we could be sued if one of our products results
          in, or
          is alleged to result in, a personal injury. Although we believe that we
          currently have adequate insurance to address anticipated potential liabilities
          associated with product liability, any unforeseen product liability, exposure
          in
          excess of, or outside the scope of, such insurance coverage could adversely
          affect our operating results. Any such claim brought against us, with or
          without
          merit, could result in significant damage to our business.
  The
          FDA's
          medical device reporting regulations require us to report any incident
          in which
          our products may have caused or contributed to a death or serious injury,
          or in
          which our products malfunctioned in a way that would be likely to cause
          or
          contribute to a death or serious injury if the malfunction recurred. Any
          required filing could result in an investigation of our products and possibly
          subsequent regulatory action against us if it is found that one of our
          products
          caused the death or serious injury of a patient.
  Because
          of the nature of our IMRT/IGRT products and their use, the tolerance for
          error
          in the design, manufacture or use of our IMRT/IGRT products may be small
          or
          nonexistent. If a product designed or manufactured by us is defective,
          whether
          due to design or manufacturing defects, or improper assembly, use or servicing
          of the product or other reasons, the product may need to be recalled, possibly
          at our expense. Furthermore, the adverse effect of a product recall might
          not be
          limited to the cost of the recall. For example, a product recall could
          cause
          applicable regulatory authorities to investigate us as well as cause our
          customers to review and potentially terminate their relationships with
          us.
          Recalls, especially if accompanied by unfavorable publicity or termination
          of
          customer contracts, could cause us to suffer substantial costs, lost revenues
          and a loss of reputation, each of which could harm our business. Products
          as
          complex as our planning and dose calculation software systems may also
          contain
          undetected software errors or defects when they are first introduced or
          as new
          versions are released. Our products may not be free from errors or defects
          even
          after they have been tested, which could result in the rejection of our
          products
          by our customers and damage to our reputation, as well as lost revenue,
          diverted
          development resources and increased support costs. We may also be subject
          to
          claims for damages related to any errors in our products.
  We
          currently maintain product liability insurance, which has deductible amounts
          and
          per claim and aggregate limits. However, we cannot assure you that this
          insurance will continue to be available on terms acceptable to us or in
          sufficient amounts if at all, or that it will provide adequate coverage
          in the
          event that any product liability is actually incurred.
  **If
          we are sued for product-related liabilities, the cost could be prohibitive
          to
          us.** ******
 
 The
          testing, marketing and sale of human healthcare products entail an inherent
          exposure to product liability claims. Third parties may successfully assert
          product liability claims against us. Although we currently have insurance
          covering claims against our products, we may not be able to maintain this
          insurance at acceptable cost in the future, if at all. In addition, our
          insurance may not be sufficient to cover particularly large claims. Significant
          product liability claims could result in large and unexpected expenses
          as well
          as a costly distraction of management resources and potential negative
          publicity
          and reduced demand for our products.
  44
 **Currently,
          our products are predominantly used in the treatment of tumors of the prostate,
          head, neck and spinal cord. If we do not obtain wider acceptance of our
          products
          to treat other types of cancer, our sales could fail to increase and we
          could
          fail to achieve our desired growth rate.**
  Currently,
          our IMRT/IGRT products are predominantly used in the treatment of tumors
          of the
          prostate, head, neck and spinal cord, while our brachytherapy products
          are used
          almost exclusively for the treatment of prostate cancer. Further research,
          clinical data and years of experience will likely be required before there
          can
          be broad acceptance for the use of both our IMRT/IGRT as well as our
          brachytherapy products for additional types of cancer. In particular, some
          recognized members of the radiation oncology community have expressed skepticism
          as to the relative benefits of IMRT treatments other than for limited types
          of
          cancer such as prostate cancer, where mortality is closely linked to recurrence
          of the local tumor. They point out that in many types of cancer, such as
          breast
          cancer, mortality is usually a result of metastasis, meaning the expansion
          of
          the cancer to other parts of the patient's body, and that eliminating or
          controlling the growth of the local tumor, which is the goal of IMRT treatments,
          does little to prevent this from occurring. If our products do not become
          more
          widely accepted in treating other types of cancer, our sales could fail
          to
          increase or could decrease.
  **We
          may be required to record additional goodwill impairment in the
          future.**
  Under
          SFAS 142 and SFAS 144, goodwill and intangible assets having an indefinite
          life
          are not amortized but are subject to testing at least annually, or more
          often if
          an event occurs or circumstances indicate that the carrying values for
          goodwill
          and/or intangible assets may be impaired, using a fair value based approach.
          Accounting for impairment contains uncertainty because management must
          use
          judgment in determining appropriate assumptions to be used in the measurement
          of
          fair value. The Company engaged an appraisal firm to perform an analysis
          of the
          goodwill and intangible assets acquired from NOMOS, to determine the fair
          value
          thereof under the applicable standards as of the Company’s annual test date of
          September 30, 2005. As a result of this testing, in the fourth quarter
          of 2005,
          the Company recorded impairments of goodwill and intangible assets of NOMOS
          in
          the amount of $39,884,000, and impairments of goodwill and intangible assets
          of
          Radiation Therapy Products (“RTP”) in the amount of $329,000, in each case due
          to negative operating performance indications including declining sales
          and
          continued operating losses of the respective business segments.
  In
          fiscal
          year 2006, the Company engaged an appraisal firm to perform an analysis
          of the
          goodwill and intangible assets acquired from NOMOS, to determine the fair
          value
          thereof under the applicable standards as of the Company’s annual test date of
          September 30, 2006. As a result of this testing, the Company determined
          there
          was no impairment of its goodwill and intangible assets in fiscal year
          2006.
  The
          Company will continue to monitor impairment indicators in any of our reporting
          segments. If our future financial performance, including the expected revenue
          growth in the IMRT/IGRT business related to n omosSTAT,
          or other events indicate that the value of our recorded goodwill or intangible
          assets is further impaired, we may record additional impairment charges
          that
          could have a material adverse effect on our reported results.
  **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.**
  45
  Although
          we perform final product assembly of our IMRT/IGRT products, we purchase
          all
          major components for those products from third-party suppliers. We currently
          rely on a single source of supply for several key materials and components,
          the
          most important of which are the tungsten leaves used in our MIMiC multi-leaf
          collimator and all major components used in our BAT targeting system. We
          also
          obtain various other components for our IMRT/IGRT products from a limited
          number
          of sources. We cannot produce IMRT/IGRT products without these components.
          In
          the event of any extended or recurring interruption in supply, or if any
          of the
          significant components to our IMRT/IGRT products become obsolete or are
          no
          longer manufactured, we could be required to redesign our products or seek
          alternative supply sources, which could significantly impair our ability
          to sell
          these products. In some cases, we expect that it would take several months,
          or
          longer, for a new supplier to begin providing components to specification.
          In
          addition, we could be required to make a new or supplemental filing with
          the FDA
          and other applicable regulatory authorities and might have to obtain clearance
          or other regulatory approvals prior to marketing a product containing new
          components. We may be unable to obtain the necessary regulatory clearances
          or
          approvals on a timely basis, if at all, which could cause our revenues
          to
          decline and our business to suffer.
  We
          also
          depend upon a limited number of outside unaffiliated suppliers for our
          radioisotopes. Our principal suppliers are Nordion International, Inc. and
          a company in Russia. We also utilize other commercial isotope manufacturers
          located in the United States and overseas. To date, we have been able to
          obtain
          the required radioisotopes for our products without any significant delays
          or
          interruptions. Currently, we rely exclusively upon Nordion International
          for our
          supply of the Palladium-103 isotope; if Nordion International ceases to
          supply
          isotopes in sufficient quantity to meet our needs, there may not be adequate
          alternative sources of supply. If we lose any of these suppliers (including
          any
          single-source supplier), we would be required to find and enter into supply
          arrangements with one or more replacement suppliers. Obtaining alternative
          sources of supply could involve significant delays and other costs and
          these
          supply sources may not be available to us on reasonable terms or at all.
          Any
          disruption of supplies could delay delivery of our products that use
          radioisotopes, which could adversely affect our business and financial
          results
          and could result in lost or deferred sales.
  **If
          we are unable to attract and retain qualified employees, we may be unable
          to
          meet our growth and revenue needs.**
  Our
          success is materially dependent on a limited number of key employees, and,
          in
          particular, the continued services of Jobn B. Rush, our president and chief
          executive officer, L. Michael Cutrer, our executive vice president and
          chief
          technology officer, and James W. Klingler, our chief financial officer.
          Our
          future business and financial results could be adversely affected if the
          services of Messrs. Rush, 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.**
  46
  The
          medical device industry is characterized by a substantial amount of litigation
          over patent and other intellectual property rights. Our competitors, like
          companies in many high technology businesses, continually review other
          companies' products for possible conflicts with their own intellectual
          property
          rights. Determining whether a product infringes a patent involves complex
          legal
          and factual issues, and the outcome of patent litigation actions is often
          uncertain. Our competitors could assert that our products and the methods
          we
          employ in the use of our products are covered by United States or foreign
          patent
          rights held by them. In addition, because patent applications can take
          many
          years to issue, there could be applications now pending of which we are
          unaware,
          which could later result in issued patents that our products infringe.
          There
          could also be existing patents that one or more of our products could
          inadvertently be infringing of which we are unaware.
  While
          we
          do not believe that any of our products, services or technologies infringe
          any
          valid intellectual property rights of third parties, we may be unaware
          of
          third-party intellectual property rights that relate to our products, services
          or technologies. As the number of competitors in the radiation oncology
          market
          grows, and as the number of patents issued in this area grows, the possibility
          of a patent infringement claim against us going forward increases. We could
          incur substantial costs and diversion of management resources if we have
          to
          assert our patent rights against others. An unfavorable outcome to any
          litigation could harm us. In addition, we may not be able to detect infringement
          or may lose competitive position in the market before we do so.
  To
          address patent infringement or other intellectual property claims, we may
          have
          to enter into license agreements and technology cross-licenses or agree
          to pay
          royalties at a substantial cost to us. We may be unable to obtain necessary
          licenses. A valid claim against us and our failure to obtain a license
          for the
          technology at issue could prevent us from selling our products and materially
          adversely affect our business, financial results and future prospects.
  **If
          we fail to protect our intellectual property rights or if our intellectual
          property rights do not adequately cover the technologies we employ, or
          if such
          rights are declared to be invalid, other companies may take advantage of
          our
          technology ideas and more effectively compete directly against us, or we
          might
          be forced to discontinue selling certain products.**
  Our
          success depends in part on our ability to obtain and enforce patent protections
          for our products and operate without infringing on the proprietary rights
          of
          third parties. We rely on U.S. and foreign patents to protect our intellectual
          property. We also rely significantly on trade secrets and know-how that
          we seek
          to protect. We attempt to protect our intellectual property rights by filing
          patent applications for new features and products we develop. We enter
          into
          confidentiality or license agreements with our employees, consultants,
          independent contractors and corporate partners, and we seek to control
          access to
          our intellectual property and the distribution of our products, documentation
          and other proprietary information. We plan to continue these methods to
          protect
          our intellectual property and our products. These measures may afford only
          limited protection. In addition, the laws of some foreign countries may
          not
          protect our intellectual property rights to the same extent as do the laws
          of
          the United States.
  If
          a
          competitor infringes upon our patent or other intellectual property rights,
          enforcing those rights could be difficult, expensive and time-consuming,
          making
          the outcome uncertain. Competitors could also bring actions or counterclaims
          attempting to invalidate our patents. Even if we are successful, litigation
          to
          enforce our intellectual property rights or to defend our patents against
          challenge could be costly and could divert our management's attention.
  In
          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.
  47
  Even
          if
          we are able to effectively enforce our existing proprietary rights to the
          fullest extent permitted by law, this would not protect us from competition.
          We
          do not have any patents on IMRT delivery or planning generally, and we
          have
          competitors that currently market and sell IMRT planning and delivery products
          including inverse planning systems similar to our CORVUS product. In addition,
          our competitors could design around our patents or develop products that
          provide
          comparable or superior outcomes without infringing on our patents or other
          proprietary rights. The confidentiality agreements with our employees,
          consultants and other third parties may not be enforceable or may not provide
          meaningful protection for our trade secrets or other proprietary information
          in
          the event of unauthorized use or disclosure.
  In
          2006,
          we licensed intellectual property which was the subject of litigation brought
          by
          WorldWide Medical Technologies in U.S. District Court against both the
          Company
          as well as their former employee, Richard Terwilliger, who was previously
          our
          Vice-President of New Product Development. This intellectual property relates
          to
          the Company’s brachytherapy business, specifically, certain needle-loading and
          stranding technologies. While the Company does not believe that it has
          any
          liability in this matter, and is vigorously defending itself in the litigation,
          we cannot predict what effect an adverse result from this litigation would
          have
          on our future sales of the products at issue.
  **We
          use radioactive materials which are subject to stringent regulation and
          which
          may subject us to liability if accidents occur** .
 
 We
          manufacture and process radioactive materials which are subject to stringent
          regulation. We operate under licenses issued by the California Department
          of
          Health which are renewable every eight years. We received a renewal of
          our
          license for our North Hollywood facility in 1998 and we were issued a license
          for our Chatsworth facility in March 1999. California is one of the
          "Agreement States," which are so named because the Nuclear Regulatory
          Commission, or NRC, has granted such states regulatory authority over
          radioactive materials, provided such states have regulatory standards meeting
          or
          exceeding the standards imposed by the NRC. Most users of our products
          must
          obtain licenses issued by the state in which they reside (if they are Agreement
          States) or the NRC. Use licenses are also required by some of the foreign
          jurisdictions in which we may seek to market our products.
 
 Although
          we believe that our safety procedures for handling and disposing of these
          radioactive materials comply with the standards prescribed by state and
          federal
          regulations, the risk of accidental contamination or injury from these
          materials
          cannot be completely eliminated. In the event of such an accident, we could
          be
          held liable for any damages that result. We believe we carry reasonably
          adequate
          insurance to cover us in the event of any damages resulting from the use
          of
          hazardous materials.
  **Healthcare
          reforms, changes in health-care policies and unfavorable changes to third-party
          reimbursements for use of our products, could cause declines in the revenues
          of
          our products.**
  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.
  48
 Furthermore,
              any federal and state efforts to reform government and private healthcare
              insurance programs could significantly affect the purchase of healthcare
              services and products in general and demand for our products in particular.
              We
              are unable to predict whether potential reforms will be enacted, whether
              other
              healthcare legislation or regulation affecting the business may be
              proposed or
              enacted in the future or what effect any such legislation or regulation
              would
              have on our business, financial condition or results of operations.
  The
          federal Medicare program currently reimburses hospitals and freestanding
          clinics
          for both IMRT/IGRT and brachytherapy treatments. Medicare reimbursement
          amounts
          typically are reviewed and adjusted at least annually. Medicare reimbursement
          policies are reviewed and revised on an ad hoc basis. Adjustments could
          be made
          to these reimbursement policies or amounts, which could result in reduced
          or no
          reimbursement for IMRT/IGRT and brachytherapy services. Changes in Medicare
          reimbursement policies or amounts affecting hospitals and freestanding
          clinics
          could negatively affect market demand for our products.
  With
          respect to brachytherapy in particular, medicare reimbursement amounts
          for
          seeding are currently significantly less than for radical prostatectomy,
          or RP.
          Although seeding generally requires less physician time than RP, lower
          reimbursement amounts, when combined with physician familiarity with RP,
          may
          create disincentives for urologists to perform seeding.
  Private
          third-party payors often adopt Medicare reimbursement policies and payment
          amounts. As such, Medicare reimbursement policy and payment amount changes
          concerning our products also could be extended to private third-party payor
          reimbursement policies and amounts and could affect demand for our products
          in
          those markets as well.
  Acceptance
          of our products in foreign markets could be affected by the availability
          of
          adequate reimbursement or funding, as the case may be, within prevailing
          healthcare payment systems. Reimbursement, funding and healthcare payment
          systems vary significantly by country and include both government-sponsored
          healthcare and private insurance. We can provide no assurance that third-party
          reimbursement will be made available with respect to treatments using our
          products under any foreign reimbursement system.
  Problems
          with any of these reimbursement systems that adversely affect demand for
          our
          products could cause our revenues from our products to decline and our
          business
          to suffer.
  Also,
          we,
          our distributors and healthcare providers performing radiation therapy
          procedures are subject to state and federal fraud and abuse laws prohibiting
          kickbacks and, in the case of physicians, patient self-referrals. We may
          be
          subjected to civil and criminal penalties if we or our agents violate any
          of
          these prohibitions.
 
 **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.**
 
 49
 We
          and
          some of our suppliers and distributors are subject to extensive and rigorous
          government regulation of the manufacture and distribution of our products,
          both
          in the United States and in foreign countries. Compliance with these laws
          and
          regulations is expensive and time-consuming, and changes to or failure
          to comply
          with these laws and regulations, or adoption of new laws and regulations,
          could
          adversely affect our business.
 
 In
          the
          United States, as a manufacturer and seller of medical devices and devices
          utilizing radioactive by-product material, we and some of our suppliers
          and
          distributors are subject to extensive regulation by federal governmental
          authorities, such as the United States Food and Drug Administration, or
          FDA, and
          state and local regulatory agencies, such as the State of California, State
          of
          Pennsylvania and the State of Washington **** to
          ensure
          such devices are safe and effective. Such regulations, which include the
          U.S.
          Food, Drug and Cosmetic Act, or the FDC Act, and regulations promulgated
          by the
          FDA, govern the design, development, testing, manufacturing, packaging,
          labeling, distribution, import/export, possession, marketing, disposal,
          clinical
          investigations involving humans, sale and marketing of medical devices,
          post-market surveillance, repairs, replacements, recalls and other matters
          relating to medical devices, radiation producing devices and devices utilizing
          radioactive by-product material. State regulations are extensive and vary
          from
          state to state. Our brachytherapy seeds and IMRT/IGRT products constitute
          medical devices subject to these regulations. Future products in any of
          our
          business segments may constitute medical devices and be subject to regulation
          as
          such. These laws require that manufacturers adhere to certain standards
          designed
          to ensure that the medical devices are safe and effective. Under the FDC
          Act,
          each medical device manufacturer must comply with requirements applicable
          to
          manufacturing practices.
  In
          the
          United States, medical devices are classified into three different categories,
          over which the FDA applies increasing levels of regulation: Class I,
          Class II, and Class III. The FDA has classified all of our IMRT/IGRT
          products to date as Class II devices. Our brachytherapy products have been
          classified as Class I devices. Before a new device can be introduced into
          the
          United States market, the manufacturer must obtain FDA clearance or approval
          through either a 510(k) premarket notification or a premarket approval,
          unless
          the product is otherwise exempt from the requirements. Class I devices are
          statutorily exempt from the 510(k) process, unless the device is intended
          for a
          use which is of substantial importance in preventing impairment of human
          health
          or it presents a potential unreasonable risk of illness or injury.
  A
          510(k)
          premarket notification clearance will typically be granted for a device
          that is
          substantially equivalent to a legally marketed Class I or Class II
          medical device or a Class III medical device for which the FDA has not yet
          required submission of a premarket approval. A 510(k) premarket notification
          must contain information supporting the claim of substantial equivalence,
          which
          may include laboratory results or the results of clinical studies. Following
          submission of a 510(k) premarket notification, a company may not market
          the
          device for clinical use until the FDA finds the product is substantially
          equivalent for a specific or general intended use. FDA clearance generally
          takes
          from four to twelve months, but it may take longer, and there is no assurance
          that the FDA will ultimately grant a clearance. The FDA may determine that
          a
          device is not substantially equivalent and require submission and approval
          of a
          premarket approval or require further information before it is able to
          make a
          determination regarding substantial equivalence.
  Most
          of
          the products that we are currently marketing have received clearances from
          the
          FDA through the 510(k) premarket notification process. For any devices
          already
          cleared through the 510(k) process, modifications or enhancements that
          could
          significantly affect safety or effectiveness, or constitute a major change
          in
          intended use require a new 510(k) submission and a separate FDA determination
          of
          substantial equivalence. We have made minor modifications to our products
          and,
          using the guidelines established by the FDA, have determined that these
          modifications do not require us to file new 510(k) submissions. If the
          FDA
          disagrees with our determinations, we may not be able to sell one or more
          of our
          products until the FDA has cleared new 510(k) submissions for these
          modifications, and there is no assurance that the FDA will ultimately grant
          a
          clearance. In addition, the FDA may determine that future products require
          the
          more costly, lengthy and uncertain premarket approval process under
          Section 515 of the FDC. The approval process under Section 515
          generally takes from one to three years, but in many cases can take even
          longer,
          and there can be no assurance that any approval will be granted on a timely
          basis, if at all. Under the premarket approval process, an applicant must
          generally conduct at least one clinical investigation and submit extensive
          supporting data and clinical information establishing the safety and
          effectiveness of the device, as well as extensive manufacturing information.
          Clinical investigations themselves are typically lengthy and expensive,
          closely
          regulated and frequently require prior FDA clearance. Even if clinical
          investigations are conducted, there is no assurance that they will support
          the
          claims for the product. If the FDA requires us to submit a new pre-market
          notification under Section 510(k) for modifications to our existing
          products, or if the FDA requires us to go through the lengthier, more rigorous
          Section 515 pre-market approval process, our product introductions or
          modifications could be delayed or cancelled, which could cause our revenues
          to
          be below expectations.
 
 50
 In
          addition to FDA-required market clearances and approvals, our manufacturing
          operations are required to comply with the FDA's Quality System Regulation,
          or
          QSR, which addresses the quality program requirements, such as a company's
          management responsibility for the company's quality systems, and good
          manufacturing practices, product design, controls, methods, facilities
          and
          quality assurance controls used in manufacturing, assembly, packing, storing
          and
          installing medical devices. Compliance with the QSR is necessary to receive
          FDA
          clearance or approval to market new products and is necessary for us to
          be able
          to continue to market cleared or approved product offerings. There
          can
          be no assurance that we will not incur significant costs to comply with
          these
          regulations in the future or that the regulations will not have a material
          adverse effect on our business, financial condition and results of operations.
          Our compliance and the compliance by some of our suppliers with applicable
          regulatory requirements is and will continue to be monitored through periodic
          inspections by the FDA. The
          FDA
          makes announced and unannounced inspections to determine compliance with
          the
          QSR's and may issue us 483 reports listing instances where we have failed
          to
          comply with applicable regulations and/or procedures or Warning Letters
          which,
          if not adequately responded to, could lead to enforcement actions against
          us,
          including fines, the total shutdown of our production facilities and criminal
          prosecution.
  If
          we or
          any of our suppliers fail to comply with FDA requirements, the FDA can
          institute
          a wide variety of enforcement actions, ranging from a public warning letter
          to
          more severe sanctions such as:
  •
fines,
          injunctions and civil penalties;
 •
the
          recall or seizure of our products;
 •
the
          imposition of operating restrictions, partial suspension or total shutdown
          of
          production;
 •
the
          refusal of our requests for 510(k) clearance or pre-market approval of
          new
          products;
 •
the
          withdrawal of 510(k) clearance or pre-market approvals already granted;
          and
 •
          criminal prosecution.
  Similar
          consequences could arise from our failure, or the failure by any of our
          suppliers, to comply with applicable foreign laws and regulations. Foreign
          regulatory requirements vary by country. In general, our products are regulated
          outside the United States as medical devices by foreign governmental agencies
          similar to the FDA. However, the time and cost required to obtain regulatory
          approvals from foreign countries could be longer than that required for
          FDA
          clearance and the requirements for licensing a product in another country
          may
          differ significantly from the FDA requirements. We rely, in part, on our
          foreign
          distributors to assist us in complying with foreign regulatory requirements.
          We
          may not be able to obtain these approvals without incurring significant
          expenses
          or at all, and the failure to obtain these approvals would prevent us from
          selling our products in the applicable countries. This could limit our
          sales and
          growth.
  **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:
  51
 •
doctor
          and patient awareness and acceptance of IMRT/IGRT and our products;
 •
the
          real or perceived effectiveness and safety of IMRT/IGRT and our products;
 •
the
          relationship between the cost of our products and the real or perceived
          medical
          benefits of IMRT/IGRT and our products;
 •
the
          relationship between the cost of our products and the financial benefits
          to our
          customers of using our products, which will be greatly affected by the
          coverage
          of, and reimbursement for, IMRT/IGRT treatment and ultrasound guidance
          by
          governmental and private third-party payors; and
 •
market
          perception of our ability to continue to grow our business and develop
          enhanced
          IMRT/IGRT products.
  Failure
          of our products to gain broad market acceptance could cause our revenues
          to
          decline and our business to suffer.
  **The
          liquidity of our common stock could be adversely affected if we are delisted
          from The Nasdaq Global Market.**
 
 In
          the
          event that we are unable maintain compliance with all relevant Nasdaq Listing
          Standards, our securities may be subject to delisting from the Nasdaq Global
          Market. If such delisting occurs, the market price and market liquidity
          of our
          common stock may be adversely affected.
 
 Alternatively,
          if faced with such delisting, we may submit an application to transfer
          the
          listing of our common stock to The Nasdaq Capital Market. Among other
          requirements, The Nasdaq Capital Market has a minimum $2.5 million stockholders’
equity requirement and a $1.00 minimum bid price requirement for continued
          listing.
 
 Alternatively,
          if our common stock is delisted by Nasdaq, our common stock may be eligible
          to
          trade on the American Stock Exchange, the OTC Bulletin Board maintained
          by
          Nasdaq, another over-the-counter quotation system, or on the pink sheets
          where
          an investor may find it more difficult to dispose of or obtain accurate
          quotations as to the market value of our common stock, although there can
          be no
          assurance that our common stock will be eligible for trading on any alternative
          exchanges or markets. In addition, we would be subject to Rule 15c2-11
          promulgated by the SEC. If we fail to meet criteria set forth in the rule
          (for
          example, by failing to file periodic reports as required by the Exchange
          Act),
          various practice requirements are imposed on broker-dealers who sell securities
          governed by the rule to persons other than established customers and accredited
          investors. For these types of transactions, the broker-dealer must make
          a
          special suitability determination for the purchaser and have received the
          purchaser's written consent to the transactions prior to sale. Consequently,
          such rule may deter broker-dealers from recommending or selling our common
          stock, which may further affect the liquidity and price of our common
          stock.
  Delisting
          from Nasdaq would make trading our common stock more difficult for investors,
          potentially leading to further declines in our share price. It would also
          make
          it more difficult for us to raise additional capital.
  **Our
          future growth depends, in part, on our ability to penetrate foreign markets,
          particularly in Asia and Europe. However, we have encountered difficulties
          in
          gaining acceptance of our products in foreign markets, where we have limited
          experience marketing, servicing and distributing our products, and where
          we will
          be subject to additional regulatory burdens and other
          risks.**
  52
  Our
          future profitability will depend in part on our ability to establish, grow
          and
          ultimately maintain our product sales in foreign markets, particularly
          in Asia
          and Europe. However, we have limited experience in marketing, servicing
          and
          distributing our products in other countries. In 2006, less than 5% of
          our
          product revenues and less than 5% of our total revenues were derived from
          sales
          to customers outside the United States and Canada. Our foreign operations
          subject us to additional risks and uncertainties, including:
  •
our
          customers' ability to obtain reimbursement for procedures using our products
          in
          foreign markets;
 •
the
          burden of complying with complex and changing foreign regulatory requirements;
 •
          language barriers and other difficulties in providing long-range customer
          support and service;
 •
longer
          accounts receivable collection times;
 •
          significant currency fluctuations, which could cause our distributors to
          reduce
          the number of products they purchase from us because the cost of our products
          to
          them could fluctuate relative to the price they can charge their customers;
 •
reduced
          protection of intellectual property rights in some foreign countries; and
 •
the
          interpretation of contractual provisions governed by foreign laws in the
          event
          of a contract dispute.
  Our
          foreign sales of our products could also be adversely affected by export
          license
          requirements, the imposition of governmental controls, political and economic
          instability, trade restrictions, changes in tariffs and difficulties in
          staffing
          and managing foreign operations. In addition, we are subject to the Foreign
          Corrupt Practices Act, any violation of which could create a substantial
          liability for us and also cause a loss of reputation in the market.
  **As
          part of our business strategy, we intend to pursue transactions that may
          cause
          us to experience significant charges to earnings that may adversely affect
          our
          stock price and financial condition** .
 
 We
          regularly review potential transactions related to technologies, product
          candidates or product rights and businesses complementary to our business.
          Such
          transactions could include mergers, acquisitions, strategic alliances,
          licensing
          agreements or co-promotion agreements. Our acquisition of Theseus Imaging
          Corporation in October 2000 and the acquisition of NOMOS, in May 2004, are
          examples of such transactions. In the future, if we have sufficient available
          capital, we may choose to enter into such transactions. We may not be able
          to
          successfully integrate newly acquired organizations, products or technologies
          into our business and the process could be expensive and time consuming
          and may
          strain our resources. Depending upon the nature of any transaction, we
          may
          experience a charge to earnings which could be material.
 
 **Operating
          results for a particular period may fluctuate and are difficult to
          predict.**
 
 The
          results of operations for any fiscal quarter or fiscal year are not necessarily
          indicative of results to be expected in future periods. Our operating results
          have in the past been, and will continue to be, subject to quarterly and
          annual
          fluctuations as a result of a number of factors. As a consequence, operating
          results for a particular future period are difficult to predict. Such factors
          include the following:
 
 ·
              Our
                  net sales may grow at a slower rate than experienced in previous
                  periods
                  and, in particular periods, may decline; ·
              Our
                  brachytherapy product lines may experience some variability in
                  revenue due
                  to seasonality. This is primarily due to three major holidays occurring
                  in
                  our first fiscal quarter and the apparent reduction in the number
                  of
                  procedures performed during summer months, which could affect our
                  third
                  fiscal quarter results; ·
              Estimates
                  with respect to the useful life and ultimate recoverability of
                  our
                  carrying basis of assets, including goodwill and purchased intangible
                  assets, could change as a result of such assessments and
                  decisions; ·
              As
                  a result of our growth in past periods, our fixed costs have increased.
                  With increased levels of spending and the impact of long-term commitments,
                  we may not be able to quickly reduce these fixed expenses in response
                  to
                  short-term business changes; and ·
              Acquisitions
                  that result in in-process research and development expenses may
                  be charged
                  fully in an individual quarter. ·
              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 
 53
 **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.**
  The
          reports of publicly-traded companies are subject to review by the SEC from
          time
          to time for the purpose of assisting companies in complying with applicable
          disclosure requirements and to enhance the overall effectiveness of companies
          public filings, and comprehensive reviews of such reports are now required
          at
          least every three years under the Sarbanes-Oxley Act of 2002. While we
          believe
          that our previously filed SEC reports comply, and we intend that all future
          reports will comply in all material respects with the published rules and
          regulations of the SEC, we could be required to modify or reformulate
          information contained in prior filings as a result of an SEC review.  Any
          modification or reformulation of information contained in such reports
          could be
          significant and result in material liability to us and have a material
          adverse
          impact on the trading price of our common stock.
 
 **Market
          volatility and fluctuations in our stock price and trading volume may cause
          sudden decreases in the value of an investment in our common stock.**
 
 The
          market price of our common stock has historically been, and we expect it
          to
          continue to be, volatile. The price of our common stock has ranged between
          $.88
          and $2.21 in the fifty-two week period ended April 30, 2007. The stock
          market
          has from time to time experienced extreme price and volume fluctuations,
          particularly in the medical device sector, which have often been unrelated
          to
          the operating performance of particular companies. Factors such as announcements
          of technological innovations or new products by our competitors or disappointing
          results by third parties, as well as market conditions in our industry,
          may
          significantly influence the market price of our common stock. Our stock
          price
          has also been affected by our own public announcements regarding such things
          as
          quarterly sales and earnings. Consequently, events both within and beyond
          our
          control may cause shares of our stock to lose their value rapidly.
 
 54
 In
          addition, sales of a substantial number of shares of our common stock by
          stockholders could adversely affect the market price of our shares. In
          the
          second quarter of 2007, our shares had an average daily trading volume
          of only
          approximately 80,000 shares. In connection with our June 2006 sale of
          common stock and accompanying warrants, we filed resale registration statements
          covering an aggregate of up to 12,291,934 shares of common stock and 6,145,967
          shares of common stock issuable to upon exercise of warrants for the benefit
          of
          the selling security holders. The actual or anticipated resale by such
          investors
          under these registration statements may depress the market price of our
          common
          stock. Bulk sales of shares of our common stock in a short period of time
          could
          also cause the market price for our shares to decline.
 
 **Item
          2.**  **Unregistered
          Sales of Equity Securities and Use of Proceeds**
 
 **** None.
  **Issuer
          Purchases of Equity Securities**
  The
          following table provides information with respect to the shares of common
          stock
          repurchased by us during the quarter ended April 30, 2007.
  **Period**
                
                **Total
                    Number of**
                  **Shares Purchased**
                
                **Average Price**
                  **Paid
                    Per**
                  **Share**
                
                **Total
                    Number of**
                  **Shares Purchased as**
                  **Part
                    of Publicly**
                  **Announced Plans or**
                  **Programs**
                
                **Approximate
                    Dollar Value**
                  **of Shares that May**
                  **Yet
                    Be Purchased**
                  **Under the Plans or**
                  **Programs**February
                    1 - 28, 2007
                
                
                ---
                
                $
                ---
                
                
                ---
                
                $
                9,840,000.March
                    1 - 31, 2007
                
                
                68,200
                
                $
                0.92
                
                
                68,200
                
                $
                9,773,000.April
                    1 - 30, 2007
                
                
                ---
                
                $
                ---
                
                
                ---
                
                $
                9,773,000.Total
                
                
                68,200
                
                $
                0.92
                
                
                68,200
 
 In
          October 2001, the Board of Directors authorized a stock repurchase program
          to acquire up to $10 million of the Company's common stock in the open
          market at any time. The number of shares of common stock actually acquired
          by
          the Company will depend on subsequent developments and corporate needs,
          and the
          repurchase of shares may be interrupted or discontinued at any time. As
          of April
          30, 2007 and October 31, 2006, a cumulative total of 116,995 shares and
          22,100 shares had been repurchased by the Company at a cost of $227,000
          and
          $133,000, respectively and are reflected as Treasury Stock on the Balance
          Sheet
          at the respective dates. We
          expect repurchases will be made in accordance with Rule 10b-18 and include
          a
          plan designed to satisfy the Rule 10b5-1 safe harbor.
 
 55
 
 **Item
          4. Submission of Matters to a Vote of Security Holders**
  On
          April
          5, 2007 the Company filed a Notice of Solicitation of Action of Stockholders
          By
          Written Consent In Lieu of Meeting of Stockholders with its stockholders
          of
          record as of the close of business on March 23, 2007, seeking consent on
          the
          following proposals:
 
 (1)
          To
          amend the Company’s Certificate of Incorporation to increase the number of
          shares of common stock that the Company is authorized to issue from 40,000,000
          shares to 100,000,000 shares; and
 (2)
          To
          ratify the grant of certain stock options to Mr. John Rush, the Company’s new
          President and Chief Executive Officer, to acquire shares of the Company’s common
          stock.
 
 Proposal
          1 to amend the Certificate of Incorporation and Proposal 2 to ratify the
          grant
          of certain stock options were approved. The number of shares cast for,
          withheld,
          abstained and broker non-votes with respect to each proposal were as
          follows:
 
 Description
                
                For
                
                Withheld
                
                Abstained
                
                Broker
                    Non-Votes(1)
                    Amend the Certificate of Incorporation
                
                
                16,249,594
                
                
                1,055,458
                
                
                200
                
                
                ---(2)
                    Ratify the Grant of Certain Stock Options
                
                
                14,684,556
                
                
                2,620,696
                
                
                ---
                
                
                ---
  **Item
          6.**  **Exhibits**
 
 (a)
              Exhibits. Exhibits
                      No.
                  
                  Title31.1
                  
                  Certification
                      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                      Act of 200231.2
                  
                  Certification
                      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                      Act of 200232.1
                  
                  Certification
                      of Chief Executive Officer and Chief Financial Officer Pursuant
                      to Section
                      906 of the Sarbanes-Oxley Act of
                      2002
 56
 **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.Date: June
                  14, 2007
                By:
                /s/ John
                  B.
                  RushName:John
                  B. RushTitle: President
                  and (Principal Executive Officer)
  Date: June
                  14, 2007
                By:
                /s/ James
                  W.
                  KlinglerName:James
                  W. KlinglerTitle:Senior
                    Vice President and
                  Chief
                    Financial Officer
                  (Principal
                    Financial Officer)
  57