**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**


**FORM
      10-Q**





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


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





**For
      the quarterly period ended July 31, 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, $0.01 par value, outstanding
      as
      of August 31, 2007 was 29,511,912 shares.













**NORTH
      AMERICAN SCIENTIFIC, INC.**




**Index**


**Page****Part
                  I - Financial Information****Item
                  1.**
              **Financial
                  Statements**Consolidated
                  Balance Sheets as of July 31, 2007 and October 31, 2006
              3Consolidated
                  Statements of Operations for the three and nine months
                  endedJuly
                  31, 2007 and 2006
              4Consolidated
                  Statements of Cash Flows for the nine months endedJuly
                  31, 2007 and 2006
              5Condensed
                  Notes to the Consolidated Financial Statements
              7**Item
                  2.**
              **Management’s
                  Discussion and Analysis of Financial Condition
                  and****Results
                  of Operations**
              27**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**
              50**Item
                  4.**
              **Submission
                  of Matters to a Vote of Security Holders**
              50**Item
                  5.**
              **Other
                  Information**
              50**Item
                  6.**
              **Exhibits**
              51**Signatures**
              52





2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


**NORTH
                  AMERICAN SCIENTIFIC, INC.****Consolidated
                  Balance Sheets****July
                  31,**
              
              **October
                  31,****2007**
              
              **2006**(Unaudited)**Assets**Current
                  assetsCash
                  and cash equivalents
              
              $
              1,817,000
              
              $
              903,000Marketable
                  securities, held to maturity
              
              
              ---
              
              
              8,420,000Accounts
                  receivable, net of reserves
              
              
              1,911,000
              
              
              2,618,000Inventories,
                  net of reserves
              
              
              1,775,000
              
              
              1,284,000Prepaid
                  expenses and other current assets
              
              
              909,000
              
              
              830,000Assets
                  held for sale
              
              
              3,634,000
              
              
              11,377,000Total
                  current assets
              
              
              10,046,000
              
              
              25,432,000Equipment
                  and leasehold improvements, net
              
              
              1,047,000
              
              
              1,318,000Goodwill
              
              
              ---
              
              
              ---Intangible
                  assets, net
              
              
              117,000
              
              
              138,000Other
                  assets
              
              
              59,000
              
              
              310,000Total
                  assets
              
              $
              11,269,000
              
              $
              27,198,000**Liabilities
                  and Stockholders’ Equity**Current
                  liabilitiesLine
                  of Credit
              
              $
              1,363,000
              
              $
              ---Accounts
                  payable
              
              
              2,468,000
              
              
              2,406,000Accrued
                  expenses
              
              
              3,422,000
              
              
              3,790,000Deferred
                  revenue
              
              
              ---
              
              
              ---Liabilities
                  held for sale
              
              
              3,263,000
              
              
              3,814,000Total
                  current liabilities
              
              
              10,516,000
              
              
              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 and 40,000,000 sharesauthorized,
                  29,601,352 and 29,447,270 shares issued, 29,395,331 and 29,336,144
                  shares
                  outstanding, as of July 31, 2007 andOctober
                  31, 2006, respectively
              
              
              299,000
              
              
              298,000Additional
                  paid-in capital
              
              
              145,264,000
              
              
              144,543,000Treasury
                  stock, at cost - 206,021 and 111,126 common shares as of July 31,
                  2007 and
                October
                  31, 2006, respectively
              
              
              (227,000
              )
              
              (133,000
              )Accumulated
                  deficit
              
              
              (144,583,000
              )
              
              (127,520,000
              )Total
                  stockholders’ equity
              
              
              753,000
              
              
              17,188,000Total
                  liabilities and stockholders’ equity
              
              $
              11,269,000
              
              $
              27,198,000See
                  condensed notes to the consolidated financial
                  statements.




3




**NORTH
                  AMERICAN SCIENTIFIC, INC.****Consolidated
                  Statements of Operations****(Unaudited)****Three
                  months ended July 31,**
              
              **Nine
                  months ended July 31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Revenue
                  -Product
              
              $
              3,438,000
              
              $
              3,166,000
              
              $
              11,140,000
              
              $
              9,245,000Total
                  revenue
              
              
              3,438,000
              
              
              3,166,000
              
              
              11,140,000
              
              
              9,245,000Cost
                  of revenue -Product
              
              
              2,688,000
              
              
              2,172,000
              
              
              7,792,000
              
              
              6,700,000Total
                  cost of revenue
              
              
              2,688,000
              
              
              2.172,000
              
              
              7,792,000
              
              
              6,700,000Gross
                  profit
              
              
              750,000
              
              
              994,000
              
              
              3,348,000
              
              
              2,545,000Operating
                  expensesSelling
                  expenses
              
              
              1,060,000
              
              
              654,000
              
              
              2,845,000
              
              
              1,972,000General
                  and administrative expenses
              
              
              2,073,000
              
              
              2,605,000
              
              
              6,516,000
              
              
              6,302,000Research
                  and development
              
              
              518,000
              
              
              182,000
              
              
              1,282,000
              
              
              715,000Total
                  operating expenses
              
              
              3,651,000
              
              
              3,441,000
              
              
              10,643,000
              
              
              8,989,000Loss
                  from operations
              
              
              (2,901,000
              )
              
              (2,447,000
              )
              
              (7,295,000
              )
              
              (6,444,000
              )Interest
                  and other (expense) income, net
              
              
              (69,000
              )
              
              (79,000
              )
              
              (98,000
              )
              
              (171,000
              )Loss
                  before provision for income taxes
              
              
              (2,970,000
              )
              
              (2,526,000
              )
              
              (7,393,000
              )
              
              (6,615,000
              )Loss
                  from continuing operations
              
              
              (2,970,000
              )
              
              (2,526,000
              )
              
              (7,393,000
              )
              
              (6,615,000
              )Loss
                  from discontinued operations, net of
                tax
                  benefits
              
              
              (7,718,000
              )
              
              (2,107,000
              )
              
              (9,670,000
              )
              
              (4,388,000
              )Net
                  loss
              
              $
              (10,688,000
              )
              $
              (4,633,000
              )
              $
              (17,063,000
              )
              $
              (11,003,000
              )Basic
                  and diluted loss per share:Net
                  loss per share from continuing
                operations
              
              $
              (
                  0.10
              )
              $
              (
                  0.10
              )
              $
              (
                  0.25
              )
              $
              (
                  0.34
              )Net
                  loss per share from discontinued
                operations
              
              $
              (
                  0.26
              )
              $
              (
                  0.09
              )
              $
              (
                  0.33
              )
              $
              (
                  0.23
              )Net
                  loss per share
              
              $
              (
                  0.36
              )
              $
              (
                  0.19
              )
              $
              (
                  0.58
              )
              $
              (
                  0.57
              )Weighted
                  average number of shares
                outstanding
              
              
              29,317,056
              
              
              23,954,948
              
              
              29,327,062
              
              
              19,327,230




See
        condensed notes to the consolidated financial statements.




4




**NORTH
                  AMERICAN SCIENTIFIC, INC.****Consolidated
                  Statements of Cash Flows****(Unaudited)****Nine
                  months ended July 31,****2007**
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (17,063,000
              )
              $
              (11,003,000
              )Net
                  loss from discontinued operations
              
              
              (9,670,000
              )
              
              (4,388,000
              )Net
                  loss from continuing operations
              
              
              (7,393,000
              )
              
              (6,615,000
              )Depreciation
                  and amortization
              
              
              414,000
              
              
              482,000Amortization
                  of warrants
              
              
              238,000
              
              
              142,000Share-based
                  compensation expense
              
              
              490,000
              
              
              645,000Provision
                  for doubtful accounts
              
              
              (213,000
              )
              
              39,000Provision
                  for inventory adjustments
              
              
              88,000
              
              
              (88,000
              )Loss
                  on sale of equipment
              
              
              4,000
              
              
              ---Changes
                  in assets and liabilities, net of discontinued operations:Accounts
                  receivable
              
              
              921,000
              
              
              (659,000
              )Inventories
              
              
              (581,000
              )
              
              (249,000
              )Prepaid
                  and other current assets
              
              
              (26,000
              )
              
              (439,000
              )Accounts
                  payable
              
              
              8,000
              
              
              62,000Accrued
                  expenses
              
              
              40,000
              
              
              (159,000
              )Net
                  cash used in continuing operations
              
              
              (6,010,000
              )
              
              (6,839,000
              )Net
                  cash used in discontinued operations
              
              
              (2,675,000
              )
              
              (4,235,000
              )Net
                  cash used in operating activities
              
              
              (8,685,000
              )
              
              (11,074,000
              )Cash
                  flows from investing activities:Proceeds
                  from maturity (purchase) of marketable securities
              
              
              8,419,000
              
              
              (8,956,000
              )Proceeds
                  from sale of equipment
              
              
              15,000
              
              
              ---Capital
                  expenditures
              
              
              (139,000
              )
              
              (232,000
              )Net
                  cash provided by (used in) investing activities - continuing
                  operations
              
              
              8,295,000
              
              
              (9,188,000
              )Net
                  cash used in investing activities - discontinued
                  operations
              
              
              (102,000
              )
              
              (75,000
              **)**Net
                  cash provided (used in) by investing activities
              
              
              8,193,000
              
              
              (9,263,000
              )Cash
                  flow from financing activities:Net
                  borrowings under line of credit
              
              
              1,363,000
              
              
              ---Proceeds
                  from private placement of common stock and warrants, net
              
              
              ---
              
              
              21,961,000Proceeds
                  from exercise of stock options and stock purchase plan
              
              
              137,000
              
              
              163,000Purchase
                  of stock for treasury
              
              
              (94,000
              )
              
              ---Net
                  cash provided by financing activities - continuing
                  operations
              
              
              1,406,000
              
              
              22,124,000Net
                  cash provided (used in) by financing activities - discontinued
                  operations
              
              
              ---
              
              
              ---Net
                  cash provided by financing activities
              
              
              1,406,000
              
              
              22,124,000Net
                  increase in cash and cash equivalents
              
              
              914,000
              
              
              1,787,000Cash
                  and cash equivalents at beginning of period
              
              
              903,000
              
              
              2,630,000Cash
                  and cash equivalents at end of period
              
              $
              1,817,000
              
              $
              4,417,000




5




Supplemental
      disclosure:


In
      the
      nine months ended July 31, 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
      8 to
      the Financial Statements.


See
      condensed notes to the consolidated financial statements.




6





**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 $17.1
      million in the nine months ended July 31, 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 $8.7 million in the nine months
      ended July 31, 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 July 31,
      2007, we had an accumulated deficit of $144.6 million; cash and cash equivalents
      of $1.8 million; borrowings under a line of credit of $1.4 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 financing,
      as
      well as the Company’s anticipated available line of credit, will be sufficient
      to meet working capital and capital requirements through at least the next
      twelve months. In this regard, we must raise additional financing in fiscal
      2007
      to support launch and continued development of ClearPath and fund our continuing
      operations and other activities. However, there is no assurance that the Company
      will be successful with its plans.  If events and circumstances occur such
      that the Company does not meet its current operating plans, the Company is
      unable to raise sufficient additional financing, or the Company’s line of credit
      (which presently expires on October 3, 2007) is insufficient or not available,
      the Company will 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.




7




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




*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





8




*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 non-therapuetic sources used in
      calibration devices.





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.




*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 nine months ended July 31, 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 nine months ended July 31,
      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
      1,850,000, and 1,303,000 stock option grants were awarded to employees during
      the nine months ended July 31, 2007 and 2006, respectively, and a total of
      115,000 and 150,000 stock option grants were awarded to directors during the
      nine months ended July 31, 2007 and 2006, respectively.




9




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 July 31, 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 $176,000 and $209,000 for the three months ended July 31, 2007 and
      2006, respectively, and $490,000 and $645,000 for the nine months ended July
      31,
      2007 and 2006, respectively, was recorded in the financial statements as a
      component of general and administrative expense. Share-based compensation
      expense of $33,000 and $41,000 for the three months ended July 31, 2007 and
      2006, respectively and $94,000 and $85,000 for the nine months ended July 31,
      2007 and 2006, respectively, was recorded as part of the discontinued operations
      of NOMOS Corporation.





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





*Net
      Loss per Share*





Basic
      loss per share is computed by dividing the loss by the weighted average number
      of shares outstanding for the period.





Diluted
      earnings (loss) per share is computed by dividing the net income (loss) by
      the
      sum of the weighted average number of common shares outstanding for the period
      plus the assumed exercise of all dilutive securities by applying the treasury
      stock method. Stock options for which the exercise price exceeds the average
      market price over the period have an anti-dilutive effect on earnings per share
      and, accordingly, are excluded from the calculation. The following table sets
      forth the computation of basic and diluted loss per share:





10








**Three
                months ended July 31,**
            
            **Nine
                months ended July 31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                loss from continuing operations
            
            $
            (2,970,000
            )
            $
            (2,526,000
            )
            $
            (7,393,000
            )
            $
            (6,615,000
            )Net
                loss from discontinued operations
            
            $
            (7,718,000
            )
            $
            (2,107,000
            )
            $
            (9,670,000
            )
            $
            (4,388,000
            )Net
                loss
            
            $
            (10,688,000
            )
            $
            (4,633,000
            )
            $
            (17,063,000
            )
            $
            (11,003,000
            )Weighted
                average shares outstanding - basic
            
            
            29,317,056
            
            
            23,954,948
            
            
            29,327,062
            
            
            19,327,230Dilutive
                effect of stock options and warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —Weighted
                average shares outstanding -diluted
            
            
            29,317,056
            
            
            23,954,948
            
            
            29,327,062
            
            
            19,327,230Basic
                and diluted net loss per share:Net
                loss per share from continuing operation
            
            $
            (0.10
            )
            $
            (0.10
            )
            $
            (0.25
            )
            $
            (0.34
            )Net
                loss per share from continuing operations
            
            $
            (0.26
            )
            $
            (0.09
            )
            $
            (0.33
            )
            $
            (0.23
            )Net
                loss per share
            
            $
            (0.36
            )
            $
            (0.19
            )
            $
            (0.58
            )
            $
            (0.57
            )





Stock
      options to purchase 4,629,600 and 3,594,588 common shares for the three months
      ended July 31, 2007, and 2006, respectively, and 3,705,813 and 2,919,278 common
      shares for the nine months ended July 31, 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
      July 31, 2007, there were two customers that made up more than 10% of revenues
      and five customers that each made up more than 5% of accounts receivable, and
      one supplier that made up more than 10% of purchases. No vendors represented
      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.




11




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.





**NOTE
      2—
      DISCONTINUED OPERATIONS**





On
      August
      3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology
      business (“NOMOS”), which develops and markets IMRT/IGRT products used during
      external beam radiation therapy for the treatment of cancer. The Company expects
      that the divestiture of NOMOS will allow it to better utilize financial
      resources to benefit the marketing and development of innovative brachytherapy
      products for the treatment of cancer The Company has executed a purchase and
      sale agreement with Best Medical International, Inc. (hereinafter referred
      to as
      the “Best”) to purchase certain assets and to assume certain liabilities of
      NOMOS for $0.4 million, net of estimated closing costs. The closing was
      completed on September 17, 2007.





In
      connection with the divestiture of NOMOS, the Company determined that the
      carrying value of the NOMOS assets held for sale at July 31, 2007 exceeded
      their
      fair value, as determined by estimated future cash flows, and therefore,
      recorded a $6.7 million charge for the impairment of its net assets. These
      amounts have been recorded as part of the loss from discontinued
      operations.





Summarized
      statement of earnings data for NOMOS:


**Three
                  Months Ended July 31,**
              
              **Nine
                  Months Ended July 31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Net
                  revenue
              
              $
              3,065,000
              
              $
              3,931,000
              
              $
              9,136,000
              
              $
              13,437,000Loss
                  from discontinued
                operations
                  before income tax benefit
              
              $
              (7,718,000
              )
              $
              (2,107,000
              )
              $
              (9,670,000
              )
              $
              (4,388,000
              )Income
                  tax benefit, net of reserve
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Loss
                  from discontinued
                operations
              
              $
              (7,718,000
              )
              $
              (2,107,000
              )
              $
              (9,670,000
              )
              $
              (4,388,000
              )




12




Summarized
                  balance sheet for NOMOS is as follows:**July
                  31, 2007**
              
              **October
                  31, 2006**Assets
                  held for sale:Accounts
                  receivable
              
              $
              1,492,000
              
              $
              2,093,000Inventories
              
              
              2,714,000
              
              
              2,918,000Prepaid
                  and other current assets
              
              
              604,000
              
              
              262,000Equipment
                  and leasehold improvements
              
              
              898,000
              
              
              1,082,000Goodwill
              
              
              2,564,000
              
              
              2,564,000Intangible
                  assets
              
              
              1,945,000
              
              
              2,394,000Other
                  assets
              
              
              71,000
              
              
              71,000Impairment
                  charge
              
              
              (6,654,000
              )
              
              ---Total
                  assets held for sale
              
              $
              3,634,000
              
              $
              11,384,000Liabilities
                  held for sale:Deferred
                  Revenue
              
              
              3,110,000
              
              
              3,664,000Other
                  current liabilities
              
              
              153,000
              
              
              150,000**$**
              3,263,000
              
              **$**
              3,814,000




Upon
      completion of the divestiture of the NOMOS related assets, the Company estimates
      NOMOS will incur payments for the retained obligations to its vendors, customers
      and former employees of approximately $1.9 million in accordance with their
      terms, which are included in accounts payable and accrued liabilities at July
      31, 2007.





During
      the nine months ended July 31, 2006, the Company paid $0.1 million related
      to
      expenses accrued during the shut-down of its Theseus operation in 2004, and
      this
      amount is included in cash used in discontinued operations in the Consolidated
      Statements of Cash Flows. No cash was paid, and no amounts remain outstanding
      related to the Theseus discontinued operations as of July 31, 2007. There were
      no revenues or expenses relating to the Theseus discontinued operations for
      the
      three months ended and the nine months ended July 31, 2007 and
      2006.





**NOTE
      3—
      MARKETABLE SECURITIES**





Marketable
      securities consist of the following:


**July
                  31, 2007**
              
              **October
                  31, 2006**Securities
                  held to maturity:Corporate
                  and government bonds
              
              $
              ---
              
              $
              4,886,000Commercial
                  paper
              
              
              ---
              
              
              2,947,000Certificate
                  of deposits and other
              
              
              ---
              
              
              587,000---
              
              
              8,420,000Less:
                  current portion
              
              
              ---
              
              
              (8,420,000
              )Non-current
                  portion
              
              $
              ---
              
              $
              —The
                  amortized cost of all held to maturity securities approximates
                  fair value.




13




**NOTE
      4—ACCOUNTS RECEIVABLE**





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


Accounts
      receivable consist of the following:


**July
                  31, 2007**
              
              **October
                  31, 2006**Accounts
                  receivable - trade
              
              $
              2,135,000
              
              $
              3,392,000Less:
                  allowance for doubtful accounts
              
              
              (224,000
              )
              
              (774,000
              )$
              1,911,000
              
              $
              2,618,000




The
      provision for doubtful accounts was $(103,000) and $95,000 for the three months
      ended July 31, 2007 and 2006, respectively, and $(213,000) and $281,000 for
      the
      nine months ended July 31, 2007 and 2006, respectively





**NOTE
      5—INVENTORIES**


Inventories
                  consist of the following:**July
                  31, 2007**
              
              **October
                  31, 2006**Raw
                  materials
              
              $
              1,457,000
              
              $
              1,059,000Work
                  in process
              
              
              128,000
              
              
              140,000Finished
                  goods
              
              
              328,000
              
              
              135,000Reserve
                  for excess inventory
              
              
              (138,000
              )
              
              (50,000
              )$
              1,775,000
              
              $
              1,284,000




Adjustments
      to the reserve for excess inventory included in cost of sales was $88,000 for
      the three months ended July 31, 2007,and $88,000 and $(88,000) for the nine
      months ended July 31, 2007 and 2006, respectively. No adjustments to the reserve
      were recorded for the three months ended July 31, 2006.





**NOTE
      6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**





Equipment
      and leasehold improvements consist of the following:


**July
                  31, 2007**
              
              **October
                  31, 2006**Furniture,
                  fixtures and equipment
              
              $
              4,902,000
              
              $
              4,861,000Leasehold
                  improvements
              
              
              2,194,000
              
              
              2,134,0007,096,000
              
              
              6,995,000Less:
                  accumulated depreciation
              
              
              (6,049,000
              )
              
              (5,677,000
              )$
              1,047,000
              
              $
              1,318,000




Depreciation
      expense was $114,000 and $151,000 for the three months ended July 31, 2007
      and
      2006, respectively, and $392,000 and $461,000 for the nine months ended July
      31,
      2007 and 2006, respectively.





**NOTE
      7—INTANGIBLE ASSETS**


**July
                  31, 2007**
              
              **October
                  31, 2006**Amortizable
                  intangible assetsPurchased
                  technology
              
              $
              98,000
              
              $
              98,000Existing
                  customer relationships
              
              
              11,000
              
              
              11,000Trademark
              
              
              19,000
              
              
              19,000Patents
                  and licenses
              
              
              158,000
              
              
              158,000286,000
              
              
              286,000Less:
                  accumulated amortization
              
              
              (169,000
              )
              
              (148,000
              )$
              117,000
              
              $
              138,000




14




Amortization
      expense was $7,000 for each three month period ended July 31, 2007 and 2006,
      and
      $21,000 for each nine month period ended July 31, 2007 and 2006. Estimated
      amortization expense for the subsequent years is $28,000 annually through the
      October, 2011.





**NOTE
      8—
      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 July 31, 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. $1.4 million was
      outstanding against the Line of Credit as of July 31, 2007 at an interest rate
      of 9.75% per annum.




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 supplemented an existing line of credit
      provided by Silicon Valley Bank. The line of credit had a term of eighteen
      months. Borrowings under the Loan Agreement were subject to a borrowing base
      formula. The Company has paid interest on the borrowings under the Loan
      Agreement at prime rate as quoted in the *Wall
      Street Journal,* which on
      July 31, 2007 was 8.25%. Amounts owing under the Loan Agreement 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 Loan Agreement 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 July 31,
      2007.





**NOTE
      9—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.





*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.




16




*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.





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.




17




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 July 31, 2007, 927,525 shares were terminated, expired unexercised or
      forfeited in the 1996 Plan and were transferred to the 2006 Plan. During the
      three months and nine months ended July 31, 2007, stock options for an aggregate
      650,000 shares were granted to employees under the 2006 Plan, There were no
      equity awards granted under the 2006 Plan during the three months and nine
      months ended July 31, 2006. At July 31, 2007, there were 2,002,525 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 on the
      anniversary date of grant. The options expire ten years from the date of grant.
      On June 5, 2007, the Board of Directors granted stock options underlying 115,000
      shares of common stock to the elected non-employee Directors, of which 30,000
      shares are pending approval of an increase in authorized shares for the
      Directors’ Plan by the shareholders at the next annual meeting.





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 10 - 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
      July
      31, 2007, a total of 6,618,978 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
              
              
              (1,965,000
              )
              
              1,965,000
              
              $
              0.93
                  - $1.50Forfeited
                  and expired
              
              
              972,525
              
              
              (776,852
              )
              $
              0.70
                  - $24.54Exercised
              
              
              —
              
              
              —
              
              
              —Additional
                  shares reserved
              
              
              1,200,000
              
              
              —
              
              
              —Balance
                  at July 31, 2007
              
              
              1,992,525
              
              
              4,626,453
              
              $
              0.03
                  - $23.50




19






There
      were 1,649,187, 1,878,663 and 1,873,220 options exercisable with weighted
      average exercise prices of $7.18, $8.57 and $8.79 at July 31, 2007, October
      31,
      2006 and 2005, respectively.





The
      following table summarizes options outstanding at July 31, 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
              
              
              118,945
              
              
              4.58
              
              $
              1.02
              
              
              98,800
              
              $
              1.03$1.13
                  - $1.16
              
              
              1,800,000
              
              
              9.73
              
              
              1.16
              
              
              112,500
              
              
              1.16$1.17
                  - $3.18
              
              
              994,500
              
              
              7.13
              
              
              2.28
              
              
              246,879
              
              
              2.44$3.19
                  - $7.60
              
              
              1,126,566
              
              
              5.45
              
              
              5.36
              
              
              604,566
              
              
              7.01$7.61
                  - $23.50
              
              
              586,442
              
              
              4.18
              
              
              11.54
              
              
              586,442
              
              
              11.544,626,453
              
              
              7.30
              
              $
              3.73
              
              
              1,649,187
              
              $
              7.18




The
      average fair value for accounting purposes of options granted was $1.17, $1.09
      and $2.47 for the nine months ended July 31, 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 July 31, 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 July 31, 2007*Employee
                  Options Outstanding
              
              
              4,626,453
              
              $
              3.73
              
              
              7.30
              
              $
              24,640Employee
                  Options Expected to Vest
              
              
              2,977,266
              
              $
              0.65
              
              
              1.65
              
              $
              17,250Employee
                  Options Exercisable
              
              
              1,649,187
              
              $
              7.18
              
              
              5.05
              
              $
              7,840




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:


**Nine
                  months ended July 31**
              
              **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. On May 2,
      2007,
      the Company entered into a Third Amendment to Rights Agreement, which amended
      the Rights Agreement to provide, among other things, that the Board of Directors
      of the Company may determine that a person who would otherwise become an
      Acquiring Person has become such inadvertently, and provided certain conditions
      are satisfied, that such person is not an Acquiring Person for any purposes
      of
      the Rights Agreement.








*Employee
      Stock Purchase Plan*





In
      March
      2000, the Board of Directors authorized an Employee Stock Purchase Plan ("the
      ESPP") under which 300,000 shares of the Company's common stock are reserved
      for
      issuance. Eligible employees may authorize payroll deductions of up to 15%
      of
      their salary to purchase shares of the Company's common stock at a discount
      of
      up to 15% of the market value at certain plan-defined dates. In the nine months
      ended July 31, 2007 and the years ended October 31, 2006 and 2005, the shares
      issued under the ESPP were 154,082, 96,489 and 59,742 shares, respectively.
      On
      June 5, 2007, the Board of Directors approved a 300,000 share increase to
      600,000 authorized shares for the ESPP. At July 31, 2007 and October 31,
      2006, 219,757 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. No shares
      were repurchased by the Company during the three months ended July 31, 2007.
      As
      of July 31, 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
      10—COMMITMENTS AND CONTINGENCIES**





*Contract
      Commitments*





The
      Company has entered into purchase commitments of $112,000 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 which renew annually at rates that are subject to annual adjustment
      for increases in the Consumer Price Index. Future minimum lease payments under
      these operating leases are $350,000 annually. Total rent expense was $87,000
      and
      $98,000 for the three months ended July 31, 2007 and 2006, respectively, and
      $283,000 and $293,000, for the nine months ended July 31, 2007 and 2006,
      respectively.





*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:




IdeaMatrix,
                Inc.
            $
            125,000University
                of South Florida Research Foundation, Inc.
            
            50,000$
            175,000




22


*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.




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.




23




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).




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 moved the state court claim against
      Mr. Terwilliger to federal court and the cases have been consolidated. The
      defendants have answered both complaints and discovery has commenced
      in each matter. In April 2006, WWMT had its hearing for a preliminary injunction
      against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned
      that portion of their application for preliminary injunction that was based on
      an alleged misappropriation of trade secrets shortly before the hearing. On
      August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering
      that what remained of plaintiffs' motion be denied.  Specifically, the
      Magistrate Judge found that plaintiffs do not have a reasonable likelihood
      of
      success on the merits of their claim for declaratory judgment that some or
      all
      of plaintiffs are the sole owners of the intellectual property at issues, and
      she further found that there do not exist sufficiently serious questions
      going to the merits of that claim to make them a fair ground for
      litigation.  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.





As
      of
      this filing, the Company does not meet the $10 million stockholders’ equity
      requirement under
      Maintenance Standard 1 for continued listing on
      the
      Nasdaq Global Market set
      forth in Marketplace Rule 4450(a)(3). As a
      result of the Company’s non-compliance, The Nasdaq Stock Market may send the
      Company a notice that the Company’s stock is subject to delisting from the The
      Nasdaq Global Market  unless
      the Company requests a hearing with a Nasdaq Listing Qualifications Panel to
      appeal such delisting. A request for a hearing will stay the delisting action
      pending the issuance of a written determination by a Nasdaq Listing
      Qualifications Panel. While the Company is working diligently to meet the
      minimum stockholders’ equity requirement as promptly as possible, the Company
      can provide no assurances that a Nasdaq Listing Qualifications Panel will grant
      the Company’s request for continued listing on The Nasdaq Global Market.




25




**NOTE
      11—SUBSEQUENT
      EVENTS**





On
      August
      24, 2007, North American Scientific, Inc. (“NASI”) and two of its subsidiaries,
      NOMOS Corporation (“NOMOS”) and North American Scientific, Inc., a California
      corporation (“NASI-California” and collectively, with NASI and NOMOS, the
“Company”), entered into a Third Amendment to Loan and Security Agreement (the
“Third Amendment”) with Silicon Valley Bank (“Silicon Valley”). The Third
      Amendment amended that certain Loan and Security Agreement dated October 5,
      2005
      (the “Loan Agreement”).





The
      Third
      Amendment added a Bridge Loan Sub-limit to the Loan Agreement of up to
      $1,500,000 at an interest rate of prime plus 4.0%, subject to a borrowing base
      formula, and decreased the minimum tangible net worth that must be maintained
      by
      the Company from $5 million to $2 million. The maturity date of the Bridge
      Loan
      Sublimit shall be the earlier of October 3, 2007 or the date NASI closes a
      private investment public equity transaction. Concurrent with the Third
      Amendment, NASI issued Silicon Valley a warrant for 300,000 shares of NASI
      common stock at an exercise price of $0.98, the closing price of NASI common
      stock on August 24, 2007.





On
      August
      30, 2007 the Company terminated the Loan and Security Agreement (the “PFG Loan
      Agreement”) with Partners For Growth II, L.P. (“PFG”) by mutual consent. The PFG
      Loan Agreement was entered into on March 28, 2006 and was scheduled to expire
      on
      September 28, 2007. As a result of the termination, PFG released all liens
      on
      the Company’s assets. There were no outstanding borrowings under the PFG Loan
      Agreement at the date of termination.





On
      September 12, 2007 NASI announced that it had executed a purchase and sale
      agreement with Best Medical International, Inc. to purchase certain assets
      and
      to assume certain liabilities of our NOMOS Radiation Oncology business, which
      we
      previously had reported as our IMRT/IGRT business segment (“NOMOS Transaction”).
      The purchase price is $500,000 cash at closing, plus assumption of certain
      obligations and liabilities, including approximately $3.1 million of liabilities
      for warranty and maintenance agreements, $0.2 million of other accrued
      liabilities, as well as the NOMOS facility lease in Cranberry Township,
      Pennsylvania. NOMOS is retaining certain other liabilities, including certain
      trade accounts payable and certain employee obligations. The closing was
      completed on September 17, 2007. As a result, we have reported the results
      of
      the NOMOS Radiation Oncology business as a discontinued operation in our
      financial statements for the three and nine months ended July 31, 2007 and
      2006.





On
      September 14, 2007, NASI and NASI-California entered into a Fourth Amendment
      to
      Loan and Security Agreement (the “Fourth Amendment”) with Silicon Valley. The
      Fourth Amendment further amended the Loan Agreement.





The
      Fourth Amendment included: (i) a forbearance by Silicon Valley from exercising
      its rights and remedies against the Company, until such time as Silicon Valley
      determines in its discretion to cease such forbearance, due to the default
      under
      the Loan Agreement resulting from the Company failing to comply with the
      tangible net worth covenant in the Loan Agreement as of July 31, 2007 and August
      31, 2007, and (ii) a consent to a subordinated debt facility of up to $750,000
      with Agility Capital LLC. In connection with the Fourth Amendment, Silicon
      Valley consented to the NOMOS Transaction and released its lien on the NOMOS
      assets,





26




**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.





*Subsequent
      Events*





On
      August
      24, 2007, North American Scientific, Inc. (“NASI”) and two of its subsidiaries,
      NOMOS Corporation (“NOMOS”) and North American Scientific, Inc., a California
      corporation (“NASI-California” and collectively, with NASI and NOMOS, the
“Company”), entered into a Third Amendment to Loan and Security Agreement (the
“Third Amendment”) with Silicon Valley Bank (“Silicon Valley”). The Third
      Amendment amended that certain Loan and Security Agreement dated October 5,
      2005
      (the “Loan Agreement”).





The
      Third
      Amendment added a Bridge Loan Sub-limit to the Loan Agreement of up to
      $1,500,000 at an interest rate of prime plus 4.0%, subject to a borrowing base
      formula, and decreased the minimum tangible net worth that must be maintained
      by
      the Company from $5 million to $2 million. The maturity date of the Bridge
      Loan
      Sublimit shall be the earlier of October 3, 2007 or the date NASI closes a
      private investment public equity transaction. Concurrent with the Third
      Amendment, NASI issued Silicon Valley a warrant for 300,000 shares of NASI
      common stock at an exercise price of $0.98, the closing price of NASI common
      stock on August 24, 2007.





On
      August
      30, 2007 the Company terminated the Loan and Security Agreement (the “PFG Loan
      Agreement”) with Partners For Growth II, L.P. (“PFG”) by mutual consent. The PFG
      Loan Agreement was entered into on March 28, 2006 and was scheduled to expire
      on
      September 28, 2007. As a result of the termination, PFG released all liens
      on
      the Company’s assets. There were no outstanding borrowings under the PFG Loan
      Agreement at the date of termination.





On
      September 12, 2007 NASI announced that it had executed a purchase and sale
      agreement with Best Medical International, Inc. to purchase certain assets
      and
      to assume certain liabilities of our NOMOS Radiation Oncology business, which
      we
      previously had reported as our IMRT/IGRT business segment (“NOMOS Transaction”).
      The purchase price is $500,000 cash at closing, plus assumption of certain
      obligations and liabilities, including approximately $3.1 million of liabilities
      for warranty and maintenance agreements, $0.2 million of other accrued
      liabilities, as well as the NOMOS facility lease in Cranberry Township,
      Pennsylvania. NOMOS is retaining certain other liabilities, including certain
      trade accounts payable and certain employee obligations. The closing was
      completed on September 17, 2007. As a result, we have reported the results
      of
      the NOMOS Radiation Oncology business as a discontinued operation in our
      financial statements for the three and nine months ended July 31, 2007 and
      2006.




27




On
      September 14, 2007, NASI and NASI-California entered into a Fourth Amendment
      to
      Loan and Security Agreement (the “Fourth Amendment”) with Silicon Valley. The
      Fourth Amendment further amended the Loan Agreement.





The
      Fourth Amendment included: (i) a forbearance by Silicon Valley from exercising
      its rights and remedies against the Company, until such time as Silicon Valley
      determines in its discretion to cease such forbearance, due to the default
      under
      the Loan Agreement resulting from the Company failing to comply with the
      tangible net worth covenant in the Loan Agreement as of July 31, 2007 and August
      31, 2007, and (ii) a consent to a subordinated debt facility of up to $750,000
      with Agility Capital LLC. In connection with the Fourth Amendment, Silicon
      Valley consented to the NOMOS Transaction and released its lien on the NOMOS
      assets,





**Overview**





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





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
      begin the commercial launch our ClearPath product during fiscal year 2007,
      with
      an initial focus on ClearPath-HDR, to be followed by release of our
      ClearPath-CR.





As
      stated
      in Subsequent Events above, effective as of the end of our fiscal third quarter
      ended July 31, 2007, our NOMOS Radiation Oncology business has been treated
      as a
      discontinued operation in our financial statements. This business was sold
      on
      September 17, 2007.




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 financing,
      as
      well as the Company’s anticipated available line of credit, will be sufficient
      to meet working capital and capital requirements through at least the next
      twelve months. In this regard, we must raise additional financing in fiscal
      2007
      to support launch and future development of ClearPath and fund our continuing
      operations and other activities. However, there is no assurance that the Company
      will be successful with its plans.  If events and circumstances occur such
      that the Company does not meet its current operating plans, the Company is
      unable to raise sufficient additional financing, or the Company’s line of credit
      (which presently expires on October 3, 2007) is insufficient or not
      available, the Company will 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.




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




28




**Results
      of Operations**





**Three
      Months Ended July 31, 2007 Compared to Three Months Ended July 31,
      2006**


**Total
                  Revenue****Three
                  Months Ended July 31****,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              3.4
              
              $
              3.2
              
              
              8.6
              %




Total
      revenue increased 9% to $3.4 million for the three months ended July 31, 2007
      from $3.2 million for the three months ended July 31, 2006. The increase in
      revenue is due to a 17% increase in sales of our brachytherapy seeds and
      accessories, with increased product sales partially offset by a decline in
      average selling prices, and a 14% decrease in sales of our non-therapeutic
      products.





**Gross
      profit**


**Three
                  Months Ended July 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              0.8
              
              $
              1.0
              
              
              (24.5)
              %**(%
                  of Revenue)**Radiation
                  Sources
              
              
              21.8
              %
              
              31.4
              %
              
              (9.6)
              %




Gross
      profit decreased $0.2 million, or 25%, to $0.8 million for the three months
      ended July 31, 2007 from $1.0 million for the three months ended July 31, 2006.
      Gross profit as a percent of sales decreased from 31% in the three months ended
      July 31, 2006 to 22% in three months ended July 31, 2007. The decrease in our
      gross profit and gross profit as a percent of sales is primarily due to
      increased material usage costs in brachytherapy seeds and non-therapeutic
      products, partially offset by increased gross profit on higher product sales
      and
      reduced cost of outside stranding.








**Selling
      and marketing expenses**


**Three
                  Months Ended July 31,****2007**
              
              **2006**
              
              **%
                  Chang**e******($
                  millions)**Selling
                  and marketing expenses
              
              $
              1.1
              
              $
              0.7
              
              
              62.1
              %As
                  a percent of total revenue
              
              
              30.8
              %
              
              20.7
              %




Selling
      and marketing expenses, comprised primarily of salaries, commissions, and
      marketing costs, increased $0.4 million, or 62%, to $1.1 million for the three
      months ended July 31, 2007, from $0.7 million for the three months ended July
      31, 2006. The increase in selling and marketing expenses is primarily attributed
      to higher sales commissions related to the increased sales of brachytherapy
      products, and increased marketing spending on our ClearPath device.




29





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


**Three
                  Months Ended July 31****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**General
                  and administrative expenses
              
              $
              2.1
              
              $
              2.6
              
              
              (20.4
              )%As
                  a percent of total revenue
              
              
              60.3
              %
              
              82.3
              %




G&A
      decreased $0.5 million, or 20%, to $2.1 million for the three months ended
      July
      31, 2007, from $2.6 million for the three months ended July 31, 2006. The
      decrease in G&A is primarily attributed to a reduction in professional fees
      and a decrease in the allowance for bad debts resulting from improved
      collections of receivables.








Research
      and development (“R&D”)


**Three
                  Months Ended July 31****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Research
                  and development expenses
              
              $
              0.5
              
              $
              0.2
              
              
              184.6
              %As
                  a percent of total revenue
              
              
              15.1
              %
              
              5.7
              %




R&D
      increased $0.3 million or 185%, to $0.5 million for the three months ended
      July
      31, 2007, from $0.2 million for the three months ended July 31, 2006. The
      increase in R&D spending is primarily due to increased spending on product
      development for our ClearPathTM breast brachytherapy device.





**Nine
      Months Ended July 31, 2007 Compared to Nine Months Ended July 31,
      2006**




**Total
                  Revenue****Nine
                  Months Ended July 31****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              11.1
              
              $
              9.2
              
              
              20.5
              %




Total
      revenue increased 21% to $11.1 million for the nine months ended July 31, 2007
      from $9.2 million for the nine months ended July 31, 2006. 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 18% increase in sales of our
      non-therapeutic products.




30




**Gross
      profit**


**Nine
                  Months Ended July 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              3.3
              
              $
              2.5
              
              
              31.5
              %**(%
                  of Revenue)**Radiation
                  Sources
              
              
              30.0
              %
              
              27.5
              %
              
              2.5
              %






Gross
      profit increased $0.8 million, or 32%, to $3.3 million for the nine months
      ended
      July 31, 2007 from $2.5 million for the nine months ended July 31, 2006. Gross
      profit as a percent of sales increased from 28% in the nine months ended July
      31, 2006 to 30% in nine months ended July 31, 2007. The increase in our gross
      profit and our gross profit as a percent of sales is primarily due to increased
      product sales and reduced cost of outside stranding in our brachytherapy
      business, and increased sales of our non-therapeutic products.





**Selling
      and marketing expenses**


**Nine
                  Months Ended July 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Selling
                  and marketing expenses
              
              $
              2.8
              
              $
              2.0
              
              
              44.3
              %As
                  a percent of total revenue
              
              
              25.5
              %
              
              21.3
              %





Selling
      and marketing expenses, comprised primarily of salaries, commissions, and
      marketing costs, increased $0.8 million, or 44%, to $2.8 million for the nine
      months ended July 31, 2007, from $2.0 million for the nine months ended July
      31,
      2006. The increase in selling and marketing expenses is primarily attributed
      to
      higher sales commissions related to the increased sales of brachytherapy
      products, and increased marketing expenses related to our ClearPath device
      and
      trade show expenses.





**General
      and administrative expenses ("G&A")** **Nine
                  Months Ended July 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**General
                  and administrative expenses
              
              $
              6.5
              
              $
              6.3
              
              
              3.4
              %As
                  a percent of total revenue
              
              
              58.6
              %
              
              68.5
              %




G&A
      increased $0.2 million, or 3%, to $6.5 million for the nine months ended July
      31, 2007, from $6.3 million for the nine months ended July 31, 2006. The
      increase in G&A is primarily attributed to $0.7 million increase in
      professional fees, partially offset by $0.5 million decrease in the allowance
      for bad debts resulting from improved collections of accounts
      receivable




31




**Research
      and development (“R&D”)** **Nine
                  Months Ended July 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Research
                  and development expenses
              
              $
              1.3
              
              $
              0.7
              
              
              79.3
              %As
                  a percent of total revenue
              
              
              11.5
              %
              
              7.7
              %




R&D
      increased $0.6 million or 79%, to $1.3 million for the nine months ended July
      31, 2007, from $0.7 million for the nine months ended July 31, 2006. The
      increase in R&D spending is primarily due to increased spending on product
      development for our ClearPathTM breast brachytherapy device.





**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 and
      borrowings from lenders.  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 our anticipated available
      line
      of credit.





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business. However, the Company has continued to incur
      substantial net losses and used substantial amounts of cash. As of July 31,
      2007, the Company has an accumulated deficit of $144.6 million; cash and cash
      equivalents of $1.8 million, borrowings under a line of credit of $1.4 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 financing,
      as
      well as the Company’s anticipated available line 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 raise additional financing
      in fiscal 2007 to fund our continuing operations, support the further
      development and launch of ClearPath and other activities. However, there is
      no
      assurance that the Company will be successful with its plans.  If events
      and circumstances occur such that the Company does not meet its current
      operating plans, the Company is unable to raise sufficient additional financing,
      or the Company’s line of credit (which presently expires on October 3,
      2007) is insufficient or not available, the Company may be required to
      further reduce expenses or take other steps which could have a material adverse
      effect on our future performance, including but not limited to, the premature
      sale of some or all of our assets or product lines on undesirable terms, merger
      with or acquisition by another company on unsatisfactory terms, or the cessation
      of operations.




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




At
      July
      31, 2007, we had cash and cash equivalents aggregating approximately $1.8
      million, a decrease of approximately $7.5 million from $9.3 million at October
      31, 2006. The decrease was primarily attributed to $8.7 million used in
      operations and $0.1 million used for capital expenditures, partially offset
      by
      borrowings under the line of credit of $1.4 million.





Cash
      flows used in operating activities decreased $2.4 million, or 22%, to $8.7
      million for the nine months ended July 31, 2007 from $11.1 million for the
      nine
      months ended July 31, 2006, primarily due to improved collections of accounts
      receivable ($1.8 million), and a decrease in the allowance for doubtful accounts
      of $0.2 million compared to an increase of $0.3 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.




32




Cash
      flows provided by investing activities increased $17.5 million to $8.2 million
      for the nine months ended July 31, 2007, from $9.3 million cash used in
      investing activities for the nine months ended July 31, 2006. The increase
      reflects the additional draw down of our balance of marketable securities to
      fund operations in 2007 compared to investments in marketable securities in
      2006.





Cash
      provided by financing activities decreased $20.7 million to $1.4 million for
      the
      nine months ended July 31, 2007 from $22.1 million for the nine months ended
      July 31, 2006. The decrease is due to a drawdown on the lines of credit of
      $1.4
      million in 2007 and proceeds from the sale of stock in 2006.





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





**Critical
      Accounting Policies**





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





The
      Company sells products for radiation therapy treatment, including brachytherapy
      seeds used in the treatment of cancer and non-therapuetic sources used in
      calibration devices.





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.




33





*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 products are subject to shelf-life expiration periods, which are
      carefully monitored by the Company. Provision is made for inventory items which
      may not be sold because of expiring dates. The Company routinely reviews other
      inventories for evidence of impairment of value and makes provision as such
      impairments are identified.





*Goodwill
      and Other Intangible Assets*





SFAS
      142,
      Goodwill and Other Intangible Assets, requires that goodwill be tested for
      impairment at the reporting unit level (operating segment or one level below
      an
      operating segment) on an annual basis (September 30) and between annual tests
      if
      an event occurs or circumstances change that would more likely than not reduce
      the fair value of a reporting unit below its carrying value. These events or
      circumstances could include a significant change in the business climate, legal
      factors, operating performance indicators, competition, sale or disposition
      of a
      significant portion of a reporting unit. Application of the goodwill impairment
      test requires judgment, including the identification of reporting units,
      assignment of assets and liabilities to reporting units, assignment of goodwill
      to reporting units, and determination of the fair value of each reporting unit.
      The fair value of each reporting unit is estimated using a discounted cash
      flow
      methodology. This requires significant judgments including estimation of future
      cash flows, which is dependent on internal forecasts, estimation of the
      long-term rate of growth for our business, the useful life over which cash
      flows
      will occur, and determination of our weighted average cost of capital. Changes
      in these estimates and assumptions could materially affect the determination
      of
      fair value and/or goodwill impairment for each reporting unit.




*Research
      and Development Costs*





We
      account for research and development costs in accordance with several accounting
      pronouncements, including SFAS 2, Accounting for Research and Development Costs,
      and SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased,
      or Otherwise Marketed. SFAS 86 specifies that costs incurred internally in
      researching and developing a computer software product should be charged to
      expense until technological feasibility has been established for the product.
      Once technological feasibility is established, all software costs should be
      capitalized until the product is available for general release to customers.
      Judgment is required in determining when technological feasibility of a product
      is established. We have determined that technological feasibility for our
      software products is reached shortly before the products are released to
      manufacturing. Costs incurred after technological feasibility is established
      are
      not material, and accordingly, we expense all research and development costs
      when incurred.




34




*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.





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.




35




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 July 31, 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.





(b)
      Changes in Internal Controls





There
      has
      been no change in our internal control over financial reporting during the
      quarter ended July 31, 2007, that has materially affected or is reasonably
      like
      to materially affect our internal control over financial reporting.





36




**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 will need to raise
      additional financing in fiscal 2007 to fund our continuing operations, support
      the further development and launch of ClearPath and other activities. If we
      continue to incur significant losses and are unable to access sufficient working
      capital from our operations or through external financings, we will be unable
      to
      fund future operations and operate as a going concern.**





We
      have
      incurred substantial net losses in each of the last six fiscal years. As
      reflected in our financial statements, we have experienced net losses of $17.1
      million in the nine months ended July 31, 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 $1.8 million at July 31, 2007. In addition,
      our
      subordinated line of credit with Partners For Growth was teminated by mutual
      consent on August 30, 2007, and although our line of credit with Silicon Valley
      Bank was expanded by $1.5 million with a bridge loan sublimit on August 24,
      2007, the line of credit expires on October 3, 2007, and there is no assurance
      that it 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 intended to improve our results. These actions include
      reducing cash operating expenses, developing new technologies and products,
      improving existing technologies and products, and expanding into new
      geographical markets. **** The
      availability of necessary working capital, however, is subject to many factors
      beyond our control, including our ability to obtain additional financing, our
      ability to increase revenues and to reduce further our losses from operations,
      economic cycles, market acceptance of our products, competitors’ responses to
      our products, the intensity of competition in our markets, and the level of
      demand for our products.





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


•
            Continued
                scientific progress in our discovery and research
                programs;


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


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


•
            Levels
                of inventory and accounts receivable that we
                maintain;


•
            Level
                of capital expenditures;


•
            Acquisition
                or development of other businesses, technologies or
                products;


•
            The
                time and costs involved in obtaining regulatory approvals;


•
            The
                costs involved in preparing, filing, prosecuting, maintaining, defending,
                and enforcing patent claims; and


•
            The
                potential need to develop, acquire or license new technologies and
                products.





We
      will
      need to raise additional equity financing, reduce operations and take other
      steps to achieve positive cash flow. We also may be required to curtail our
      expenses or to take steps that could hurt our future performance, including
      but
      not limited to, the termination of major portions of our research and
      development activities, the premature sale of some or all of our assets or
      product lines on undesirable terms, merger with or acquisition by another
      company on unsatisfactory terms or the cessation of operations. We cannot assure
      you that we will be successful in these efforts or that any or some of the
      above
      factors will not negatively impact us. We believe that we will be able to raise
      sufficient cash to sustain us at least through the next twelve months.





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





In
      June
      2006, the Company completed a private placement of shares of its common stock
      that also includes 6,145,967 shares of common stock issuable upon exercise
      of
      warrants. This financing resulted in significant dilution of the Company’s
      current shareholders. In fiscal 2007, the Company will endeavor to issue and
      sell additional equity 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.





**We
      currently do not meet the continued listing requirements of the Nasdaq Global
      Market. Our ability to publicly or privately sell equity securities and the
      liquidity of our common stock could be adversely affected if we are delisted
      from The Nasdaq Global Market.**





As
      of
      this filing, the Company does not meet the $10 million stockholders’ equity
      requirement under
      Maintenance Standard 1 for continued listing on
      the
      Nasdaq Global Market set
      forth in Marketplace Rule 4450(a)(3). As a
      result of the Company’s non-compliance, The Nasdaq Stock Market may send the
      Company a notice that the Company’s stock is subject to delisting from the The
      Nasdaq Global Market  unless
      the Company requests a hearing with a Nasdaq Listing Qualifications Panel to
      appeal such delisting. A request for a hearing will stay the delisting action
      pending the issuance of a written determination by a Nasdaq Listing
      Qualifications Panel. While the Company is working diligently to meet the
      minimum stockholders’ equity requirement as promptly as possible, the Company
      can provide no assurances that a Nasdaq Listing Qualifications Panel will grant
      the Company’s request for continued listing on The Nasdaq Global Market.





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. As of this filing, we do not meet the minimum $2.5 million
      stockholders’ equity requirement or the $1.00 minimum bid price requirement for
      listing on the Nasdaq Capital Market.




38




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 could adversely affect our ability to raise additional financing
      through the public or private sale of equity securities. We need to raise
      additional financing in fiscal 2007 to fund our continuing operations, support
      the launch and further development of ClearPath, and other activities. Delisting
      from Nasdaq also would make trading our common stock more difficult for
      investors, potentially leading to further declines in our share price. It would
      also make it more difficult for us to raise additional capital.





**Success
      of our announced plans to introduce a breast brachytherapy device will be
      dependent upon a variety of factors.**





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




·
            Successful
                further development of a commercially marketable
                device;


·
            Successful
                launch of a marketing and sales program for this
                device;


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


·
            Successful
                completion of technical improvements to the
                device;


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


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


·
            Our
                ability to hire and train a direct sales force to sell the
                device;





**We
      may encounter insurmountable obstacles or incur substantially greater costs
      and
      delays than anticipated in the development process.**





From
      time
      to time, we have experienced setbacks and delays in our research and development
      efforts and may encounter further obstacles in the course of the development
      of
      additional technologies, products and services. We may not be able to overcome
      these obstacles or may have to expend significant additional funds and time.
      Technical obstacles and challenges we encounter in our research and development
      process may result in delays in or abandonment of product commercialization,
      may
      substantially increase the costs of development, and may negatively affect
      our
      results of operations.




39




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 cost overruns;


•
failure
      to obtain customer acceptance and payment; and


•
excess
      inventory caused by phase-in of new products and phase-out of old products.




The
      high cost
      of technological innovation is coupled with rapid and significant change in
      the
      regulations governing the products that compete in our market, by industry
      standards that could change on short notice, and by the introduction of new
      products and technologies that could render existing products and technologies
      uncompetitive. We cannot be sure that we will be able to successfully develop
      new products or enhancements to our existing products. Without successful new
      product introductions, our revenues likely will continue to suffer, as
      competition erodes average selling prices. Even if customers accept new or
      enhanced products, the costs associated with making these products available
      to
      customers, as well as our ability to obtain capital to finance such costs,
      could
      reduce or prevent us from increasing our operating margins.




**All
      of our product lines are subject to intense competition. Our most significant
      competitors have greater resources than we do. As a result, we cannot be certain
      that our competitors will not develop superior technologies, larger more
      experienced sales forces or otherwise be able to compete against us more
      effectively. If we fail to maintain our competitive position in key product
      areas, we may lose significant sources of revenue.**




We
      believe that our Prospera brachytherapy seeds, our SurTRAK strands and needles
      and our new ClearPath device can generate substantial revenues in the future.
      We
      will need to continue to develop enhancements to these products and improvements
      on our core technologies in order to compete effectively. Rapid change and
      technological innovation characterize the marketplace for medical products,
      and
      our competitors could develop technologies that are superior to our products
      or
      that render such products obsolete. We anticipate that expenditures for research
      and development will continue to be significant. The domestic and foreign
      markets for radiation therapy are highly competitive. Many of our competitors
      and potential competitors have substantial installed bases of products and
      significantly greater financial, research and development, marketing and other
      resources than we do. Competition may increase as emerging and established
      companies enter the field. In addition, the marketplace could conclude that
      the
      tasks our products were designed to perform are no longer elements of a
      generally accepted treatment regimen. This could result in us having to reduce
      production volumes or discontinue production of one or more of our products.




Our
      primary
      competitors in the brachytherapy seed business include: 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); Core Oncology, 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.




40




Our
      new
      ClearPath-HDR device for treatment of breast cancer is, like its competitors,
      designed to connect to a source of high-dose-rate (HDR) radiation which is
      administered in a specially shielded room in a hospital. It faces competition
      from Cytyc Corp. SenoRx, Inc. and Cianna Medical, (previously 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 Cianna Medical does not use a balloon and is comprised of an expandable
      bundle of catheters.





Our
      radiation reference source business also is subject to intense competition.
      Competitors in this industry include AEA Technology PLC and Eckert &
Ziegler AG. We believe that these companies have a dominant position in the
      market for radiation reference source products.





Because
      we are a relatively small company, there is a risk that potential customers
      will
      purchase products from larger manufacturers, even if our products are
      technically superior, based on the perception that a larger, more established
      manufacturer may offer greater certainty of continued product improvements,
      support and service, which could cause our revenues to decline. In addition, many
      of
      our competitors are substantially larger and have greater sales, marketing
      and
      financial resources than we do. Developments by any of these or other companies
      or advances by medical researchers at universities, government facilities or
      private laboratories could render our products obsolete. Moreover, companies
      with substantially greater financial resources, as well as more extensive
      experience in research and development, the regulatory approval process,
      manufacturing and marketing, may be in a better position to seize market
      opportunities created by technological advances in our industry.





**We
      are highly dependent on our direct sales organization, which is small compared
      to many of our competitors. Also, we will need to hire and train additional
      sales representatives to sell our ClearPath device. Any failure to build, manage
      and maintain our direct sales organization could negatively affect our revenues.**




Our
      current
      domestic direct sales force is small relative to many of our competitors. There
      is intense competition for skilled sales and marketing employees, particularly
      for people who have experience in the radiation oncology market. Accordingly,
      we
      could find it difficult to hire or retain skilled individuals to sell our
      products. Any failure to build our direct sales force could adversely affect
      our
      growth and our ability to meet our revenue goals.




As
      a
      result of our relatively small sales force the need to hire and train additional
      sales representatives to sell our ClearPath device, and the intense competition
      for skilled sales and marketing employees, there can be no assurance that our
      direct sales and marketing efforts will be successful. If we are not successful
      in our direct sales and marketing, our sales revenue and results of operations
      are likely to be materially adversely affected.




**We
      depend partially on our relationships with distributors and other industry
      participants to market some of our products, and if these relationships are
      discontinued or if we are unable to develop new relationships, our revenues
      could decline.**




Our
      2005
      agreement with Oncura for distribution of our Palladium-103 brachytherapy seeds
      is be an important component of that business. In addition, we do not have
      a
      direct sales force for our non-therapeutic radiation source products, and rely
      entirely on the efforts of agents and distributors for sales of those
      non-brachytherapy products. We cannot assure you that we will be able to
      maintain our existing relationships with our agents and distributors for the
      sale of our Palladium-103 brachytherapy seeds and our non-therapeutic radiation
      source products.




**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.




41




**Currently,
      our products are predominantly used in the treatment of tumors of the prostate.
      If we do not obtain wider acceptance of our products to treat other types of
      cancer, our sales could fail to increase and we could fail to achieve our
      desired growth rate.**




Currently,
      our brachytherapy products are used almost exclusively for the treatment of
      prostate cancer. Further research, clinical data and years of experience will
      likely be required before there can be broad acceptance for the use of our
      brachytherapy products for additional types of cancer. If our products do not
      become more widely accepted in treating other types of cancer, our sales could
      fail to increase or could decrease.




**We
      rely on several sole source suppliers and a limited number of other suppliers
      to
      provide raw materials and significant components used in our products. A
      material interruption in supply could prevent or limit our ability to accept
      and
      fill orders for our products.**




We
      depend
      upon a limited number of outside unaffiliated suppliers for our radioisotopes.
      Our principal suppliers are Nordion International, Inc. and Eckert &
Ziegler AG. We also utilize other commercial isotope manufacturers located
      in
      the United States and overseas. To date, we have been able to obtain the
      required radioisotopes for our products without any significant delays or
      interruptions. Currently, we rely exclusively upon Nordion International for
      our
      supply of the Palladium-103 isotope; if Nordion International ceases to supply
      isotopes in sufficient quantity to meet our needs, there may not be adequate
      alternative sources of supply. If we lose any of these suppliers (including
      any
      single-source supplier), we would be required to find and enter into supply
      arrangements with one or more replacement suppliers. Obtaining alternative
      sources of supply could involve significant delays and other costs and these
      supply sources may not be available to us on reasonable terms or at all. Any
      disruption of supplies could delay delivery of our products that use
      radioisotopes, which could adversely affect our business and financial results
      and could result in lost or deferred sales.




**If
      we are unable to attract and retain qualified employees, we may be unable to
      meet our growth and revenue needs.**




Our
      success is materially dependent on a limited number of key employees, and,
      in
      particular, the continued services of John B. Rush, our president and chief
      executive officer, L. Michael Cutrer, our executive vice president and chief
      technology officer, Troy A. Barring, our chief operating 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, Barring
      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.




42




**The
      medical device industry is characterized by competing intellectual property,
      and
      we could be sued for violating the intellectual property rights of others,
      which
      may require us to withdraw certain products from the market.**




The
      medical
      device industry is characterized by a substantial amount of litigation over
      patent and other intellectual property rights. Our competitors, like companies
      in many high technology businesses, continually review other companies' products
      for possible conflicts with their own intellectual property rights. Determining
      whether a product infringes a patent involves complex legal and factual issues,
      and the outcome of patent litigation actions is often uncertain. Our competitors
      could assert that our products and the methods we employ in the use of our
      products are covered by United States or foreign patent rights held by them.
      In
      addition, because patent applications can take many years to issue, there could
      be applications now pending of which we are unaware, which could later result
      in
      issued patents that our products infringe. There could also be existing patents
      that one or more of our products could inadvertently be infringing of which
      we
      are unaware.




While
      we do
      not believe that any of our products, services or technologies infringe any
      valid intellectual property rights of third parties, we may be unaware of
      third-party intellectual property rights that relate to our products, services
      or technologies. As the number of competitors in the radiation oncology market
      grows, and as the number of patents issued in this area grows, the possibility
      of a patent infringement claim against us going forward increases. We could
      incur substantial costs and diversion of management resources if we have to
      assert our patent rights against others. An unfavorable outcome to any
      litigation could harm us. In addition, we may not be able to detect infringement
      or may lose competitive position in the market before we do so.




To
      address
      patent infringement or other intellectual property claims, we may have to enter
      into license agreements and technology cross-licenses or agree to pay royalties
      at a substantial cost to us. We may be unable to obtain necessary licenses.
      A
      valid claim against us and our failure to obtain a license for the technology
      at
      issue could prevent us from selling our products and materially adversely affect
      our business, financial results and future prospects.




**If
      we fail to protect our intellectual property rights or if our intellectual
      property rights do not adequately cover the technologies we employ, or if such
      rights are declared to be invalid, other companies may take advantage of our
      technology ideas and more effectively compete directly against us, or we might
      be forced to discontinue selling certain products.**




Our
      success
      depends in part on our ability to obtain and enforce patent protections for
      our
      products and operate without infringing on the proprietary rights of third
      parties. We rely on U.S. and foreign patents to protect our intellectual
      property. We also rely significantly on trade secrets and know-how that we
      seek
      to protect. We attempt to protect our intellectual property rights by filing
      patent applications for new features and products we develop. We enter into
      confidentiality or license agreements with our employees, consultants,
      independent contractors and corporate partners, and we seek to control access
      to
      our intellectual property and the distribution of our products, documentation
      and other proprietary information. We plan to continue these methods to protect
      our intellectual property and our products. These measures may afford only
      limited protection. In addition, the laws of some foreign countries may not
      protect our intellectual property rights to the same extent as do the laws
      of
      the United States.




If
      a
      competitor infringes upon our patent or other intellectual property rights,
      enforcing those rights could be difficult, expensive and time-consuming, making
      the outcome uncertain. Competitors could also bring actions or counterclaims
      attempting to invalidate our patents. Even if we are successful, litigation
      to
      enforce our intellectual property rights or to defend our patents against
      challenge could be costly and could divert our management's attention.




43




In
      2006,
      we licensed intellectual property which was later the subject of litigation
      brought by WorldWide Medical Technologies in U.S. District Court against both
      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
      licenses for our North Hollywood and Chatsworth facilities in 2007. California
      is one of the "Agreement States," which are so named because the Nuclear
      Regulatory Commission, or NRC, has granted such states regulatory authority
      over
      radioactive materials, provided such states have regulatory standards meeting
      or
      exceeding the standards imposed by the NRC. Most users of our products must
      obtain licenses issued by the state in which they reside (if they are Agreement
      States) or the NRC. Use licenses are also required by some of the foreign
      jurisdictions in which we may seek to market our products.





Although
      we believe that our safety procedures for handling and disposing of these
      radioactive materials comply with the standards prescribed by state and federal
      regulations, the risk of accidental contamination or injury from these materials
      cannot be completely eliminated. In the event of such an accident, we could
      be
      held liable for any damages that result. We believe we carry reasonably adequate
      insurance to cover us in the event of any damages resulting from the use of
      hazardous materials.




**Healthcare
      reforms, changes in health-care policies and unfavorable changes to third-party
      reimbursements for use of our products, could cause declines in the revenues
      of
      our products, and could hamper the introduction of new
      products.**




Hospitals
      and freestanding clinics may be less likely to purchase our products if they
      cannot be assured of receiving favorable reimbursement for treatments using
      our
      products from third-party payors, such as Medicare, Medicaid and private health
      insurance plans. Generally speaking, Medicare pays hospitals, freestanding
      clinics and physicians a fixed amount for services using our products,
      regardless of the costs incurred by those providers in furnishing the services.
      Such providers may perceive the set reimbursement amounts as inadequate to
      compensate for the costs incurred and thus may be reluctant to furnish the
      services for which our products are designed. Moreover, third-party payors
      are
      increasingly challenging the pricing of medical procedures or limiting or
      prohibiting reimbursement for some services or devices, and we cannot be sure
      that they will reimburse our customers at levels sufficient to enable us to
      achieve or maintain sales and price levels for our products. There is no uniform
      policy on reimbursement among third-party payors, and we can provide no
      assurance that procedures using our products will qualify for reimbursement
      from
      third-party payors or that reimbursement rates will not be reduced or
      eliminated. A reduction in or elimination of third-party payor reimbursement
      for
      treatments using our products would likely have a material adverse effect on
      our
      revenues.




Furthermore,
      any federal and state efforts to reform government and private healthcare
      insurance programs could significantly affect the purchase of healthcare
      services and products in general and demand for our products in particular.
      We
      are unable to predict whether potential reforms will be enacted, whether other
      healthcare legislation or regulation affecting the business may be proposed
      or
      enacted in the future or what effect any such legislation or regulation would
      have on our business, financial condition or results of
      operations.




44




The
      federal
      Medicare program currently reimburses hospitals and freestanding clinics for
      brachytherapy treatments. Medicare reimbursement amounts typically are reviewed
      and adjusted at least annually. Medicare reimbursement policies are reviewed
      and
      revised on an ad hoc basis. Adjustments could be made to these reimbursement
      policies or amounts, which could result in reduced or no reimbursement for
      brachytherapy services. Changes in Medicare reimbursement policies or amounts
      affecting hospitals and freestanding clinics could negatively affect market
      demand for our products.




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




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




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




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




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





**We
      are subject to extensive government regulation applicable to the manufacture
      and
      distribution of our products. Complying with the Food And Drug Administration
      and other domestic and foreign regulatory bodies is an expensive and
      time-consuming process, whose outcome can be difficult to predict. If we fail
      or
      are delayed in obtaining regulatory approvals or fail to comply with applicable
      regulations, we may be unable to market and distribute our products or may
      be
      subject to civil or criminal penalties.**





We
      and
      some of our suppliers and distributors are subject to extensive and rigorous
      government regulation of the manufacture and distribution of our products,
      both
      in the United States and in foreign countries. Compliance with these laws and
      regulations is expensive and time-consuming, and changes to or failure to comply
      with these laws and regulations, or adoption of new laws and regulations, could
      adversely affect our business.





In
      the
      United States, as a manufacturer and seller of medical devices and devices
      utilizing radioactive by-product material, we and some of our suppliers and
      distributors are subject to extensive regulation by federal governmental
      authorities, such as the United States Food and Drug Administration, or FDA,
      and
      state and local regulatory agencies, such as the State of California, to ensure
      such devices are safe and effective. Such regulations, which include the U.S.
      Food, Drug and Cosmetic Act, or the FDC Act, and regulations promulgated by
      the
      FDA, govern the design, development, testing, manufacturing, packaging,
      labeling, distribution, import/export, possession, marketing, disposal, clinical
      investigations involving humans, sale and marketing of medical devices,
      post-market surveillance, repairs, replacements, recalls and other matters
      relating to medical devices, radiation producing devices and devices utilizing
      radioactive by-product material. State regulations are extensive and vary from
      state to state. Our brachytherapy seeds constitute medical devices subject
      to
      these regulations. Future products in any of our business segments may
      constitute medical devices and be subject to regulation as such. These laws
      require that manufacturers adhere to certain standards designed to ensure that
      the medical devices are safe and effective. Under the FDC Act, each medical
      device manufacturer must comply with requirements applicable to manufacturing
      practices.




45




In
      the
      United States, medical devices are classified into three different categories,
      over which the FDA applies increasing levels of regulation: Class I,
      Class II, and Class III. The FDA has classified all of our
      brachytherapy products as Class I devices. Before a new device can be introduced
      into the United States market, the manufacturer must obtain FDA clearance or
      approval through either a 510(k) premarket notification or a premarket approval,
      unless the product is otherwise exempt from the requirements. Class I
      devices are statutorily exempt from the 510(k) process, unless the device is
      intended for a use which is of substantial importance in preventing impairment
      of human health or it presents a potential unreasonable risk of illness or
      injury.




A
      510(k)
      premarket notification clearance will typically be granted for a device that
      is
      substantially equivalent to a legally marketed Class I or Class II
      medical device or a Class III medical device for which the FDA has not yet
      required submission of a premarket approval. A 510(k) premarket notification
      must contain information supporting the claim of substantial equivalence, which
      may include laboratory results or the results of clinical studies. Following
      submission of a 510(k) premarket notification, a company may not market the
      device for clinical use until the FDA finds the product is substantially
      equivalent for a specific or general intended use. FDA clearance generally
      takes
      from four to twelve months, but it may take longer, and there is no assurance
      that the FDA will ultimately grant a clearance. The FDA may determine that
      a
      device is not substantially equivalent and require submission and approval
      of a
      premarket approval or require further information before it is able to make
      a
      determination regarding substantial equivalence.




Most
      of
      the products that we are currently marketing have received clearances from
      the
      FDA through the 510(k) premarket notification process. For any devices already
      cleared through the 510(k) process, modifications or enhancements that could
      significantly affect safety or effectiveness, or constitute a major change
      in
      intended use require a new 510(k) submission and a separate FDA determination
      of
      substantial equivalence. We have made minor modifications to our products and,
      using the guidelines established by the FDA, have determined that these
      modifications do not require us to file new 510(k) submissions. If the FDA
      disagrees with our determinations, we may not be able to sell one or more of
      our
      products until the FDA has cleared new 510(k) submissions for these
      modifications, and there is no assurance that the FDA will ultimately grant
      a
      clearance. In addition, the FDA may determine that future products require
      the
      more costly, lengthy and uncertain premarket approval process under
      Section 515 of the FDC. The approval process under Section 515
      generally takes from one to three years, but in many cases can take even longer,
      and there can be no assurance that any approval will be granted on a timely
      basis, if at all. Under the premarket approval process, an applicant must
      generally conduct at least one clinical investigation and submit extensive
      supporting data and clinical information establishing the safety and
      effectiveness of the device, as well as extensive manufacturing information.
      Clinical investigations themselves are typically lengthy and expensive, closely
      regulated and frequently require prior FDA clearance. Even if clinical
      investigations are conducted, there is no assurance that they will support
      the
      claims for the product. If the FDA requires us to submit a new pre-market
      notification under Section 510(k) for modifications to our existing
      products, or if the FDA requires us to go through the lengthier, more rigorous
      Section 515 pre-market approval process, our product introductions or
      modifications could be delayed or cancelled, which could cause our revenues
      to
      be below expectations.





In
      addition to FDA-required market clearances and approvals, our manufacturing
      operations are required to comply with the FDA's Quality System Regulation,
      or
      QSR, which addresses the quality program requirements, such as a company's
      management responsibility for the company's quality systems, and good
      manufacturing practices, product design, controls, methods, facilities and
      quality assurance controls used in manufacturing, assembly, packing, storing
      and
      installing medical devices. Compliance with the QSR is necessary to receive
      FDA
      clearance or approval to market new products and is necessary for us to be
      able
      to continue to market cleared or approved product offerings. There
      can
      be no assurance that we will not incur significant costs to comply with these
      regulations in the future or that the regulations will not have a material
      adverse effect on our business, financial condition and results of operations.
      Our compliance and the compliance by some of our suppliers with applicable
      regulatory requirements 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.




46
 
  If
        we or any
        of our suppliers fail to comply with FDA requirements, the FDA can institute
        a
        wide variety of enforcement actions, ranging from a public warning letter
        to
        more severe sanctions such as:




•
fines,
      injunctions and civil penalties;


•
the
      recall or seizure of our products;


•
the
      imposition of operating restrictions, partial suspension or total shutdown
      of
      production;


•
the
      refusal of our requests for 510(k) clearance or pre-market approval of new
      products;


•
the
      withdrawal of 510(k) clearance or pre-market approvals already granted; and


•
      criminal prosecution.




Similar
      consequences could arise from our failure, or the failure by any of our
      suppliers, to comply with applicable foreign laws and regulations. Foreign
      regulatory requirements vary by country. In general, our products are regulated
      outside the United States as medical devices by foreign governmental agencies
      similar to the FDA. However, the time and cost required to obtain regulatory
      approvals from foreign countries could be longer than that required for FDA
      clearance and the requirements for licensing a product in another country may
      differ significantly from the FDA requirements. We rely, in part, on our foreign
      distributors to assist us in complying with foreign regulatory requirements.
      We
      may not be able to obtain these approvals without incurring significant expenses
      or at all, and the failure to obtain these approvals would prevent us from
      selling our products in the applicable countries. This could limit our sales
      and
      growth.




**Our
      future growth depends, in part, on our ability to penetrate foreign markets,
      particularly in Asia and Europe. However, we have encountered difficulties
      in
      gaining acceptance of our products in foreign markets, where we have limited
      experience marketing, servicing and distributing our products, and where we
      will
      be subject to additional regulatory burdens and other
      risks.**




Our
      future
      profitability will depend in part on our ability to establish, grow and
      ultimately maintain our product sales in foreign markets, particularly in Asia
      and Europe. However, we have limited experience in marketing, servicing and
      distributing our products in other countries. In 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.




47




Our
      foreign
      sales of our products could also be adversely affected by export license
      requirements, the imposition of governmental controls, political and economic
      instability, trade restrictions, changes in tariffs and difficulties in staffing
      and managing foreign operations. In addition, we are subject to the Foreign
      Corrupt Practices Act, any violation of which could create a substantial
      liability for us and also cause a loss of reputation in the market.




**As
      part of our business strategy, we intend to pursue transactions that may cause
      us to experience significant charges to earnings that may adversely affect
      our
      stock price and financial condition** .





We
      regularly review potential transactions related to technologies, product
      candidates or product rights and businesses complementary to our business.
      Such
      transactions could include mergers, acquisitions, strategic alliances, licensing
      agreements or co-promotion agreements. Our acquisition of Theseus Imaging
      Corporation in October 2000 and the acquisition of NOMOS, in May 2004, are
      examples of such transactions. In the future, if we have sufficient available
      capital, we may choose to enter into such transactions. We may not be able
      to
      successfully integrate newly acquired organizations, products or technologies
      into our business and the process could be expensive and time consuming and
      may
      strain our resources. Depending upon the nature of any transaction, we may
      experience a charge to earnings which could be material.





**Operating
      results for a particular period may fluctuate and are difficult to
      predict.**





The
      results of operations for any fiscal quarter or fiscal year are not necessarily
      indicative of results to be expected in future periods. Our operating results
      have in the past been, and will continue to be, subject to quarterly and annual
      fluctuations as a result of a number of factors. As a consequence, operating
      results for a particular future period are difficult to predict. Such factors
      include the following:





·
            Our
                net sales may grow at a slower rate than experienced in previous
                periods
                and, in particular periods, may
                decline;


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


·
            Our
                brachytherapy product lines may experience some variability in revenue
                due
                to seasonality. This is primarily due to three major holidays occurring
                in
                our first fiscal quarter and the apparent reduction in the number
                of
                procedures performed during summer months, which could affect our
                third
                fiscal quarter results;


·
            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




48




**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
      $0.85
      and $2.00 in the fifty-two week period ended July 31, 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.





In
      addition, sales of a substantial number of shares of our common stock by
      stockholders could adversely affect the market price of our shares. In
      connection with our 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.




49




**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





**** None.




**Issuer
      Purchases of Equity Securities**





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. No shares
      were repurchased by the Company for the three months ended July 31, 2007. As
      of
      July 31, 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.





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




On
      June
      5, 2007 the Company, at its Annual Meeting of Stockholders, elected nine
      directors to hold office until the 2008 Annual Meeting.





The
      following table includes those persons nominated and elected as directors to
      hold office until the 2008 Annual Meeting of Stockholders, including the number
      of shares cast for, withheld, abstained and broker non-votes with respect to
      each of the nominees:





Description
            
            For
            
            Withheld
            
            Abstained
            
            Broker
              Non-VotesL.
                Michael Cutrer
            
            22,198,438
            
            360,118
            
            ---
            
            ---John
                A. Friede
            
            22,279,911
            
            278,645
            
            ---
            
            ---Dr.
                Wilfred E. Jaeger
            
            22,314,953
            
            243,603
            
            ---
            
            ---John
                B. Rush
            
            22,299,953
            
            258,603
            
            ---
            
            ---John
                M. Sabin
            
            22,291,879
            
            266,677
            
            ---
            
            ---Richard
                A. Sandberg
            
            22,116,899
            
            441,657
            
            ---
            
            ---Dr.
                Gary N. Wilner
            
            22,307,129
            
            152,427
            
            ---
            
            ---Nancy
                J. Wysenski
            
            22,120,903
            
            437,653
            
            ---
            
            ---Roderick
                A. Young
            
            22,305,929
            
            252,627
            
            ---
            
            ---





**Item
      5. Other Information**




Completion
      of Disposition of Assets




On
      September 17, 2007 North American Scientific, Inc. (“NASI”) completed the
      disposition of its NOMOS Radiation Oncology business (the “NOMOS Transaction”).
      In connection with the NOMOS Transaction, NOMOS Corporation (“NOMOS”) sold
      substantially all of its assets, including accounts receivable, contract rights,
      inventory, equipment and intellectual property, but excluding cash and certain
      other assets, to Best Medical International, Inc. (“Best”). The purchase price
      was $500,000 cash at closing, plus assumption of certain obligations and
      liabilities of NOMOS by Best, including approximately $3.1 million of
      liabilities for warranty and maintenance agreements, $0.2 million of other
      accrued liabilities, as well as the NOMOS facility lease in Cranberry Township,
      Pennsylvania. NOMOS retained certain other liabilities, including certain trade
      accounts payable and certain employee obligations.




50




Entry
      into a Material Definitive Agreement




On
      September 14, 2007, NASI and its wholly-owned subsidiary, North American
      Scientific, Inc., a California corporation (collectively, the “Company”),
      entered into a Fourth Amendment to Loan and Security Agreement (the “Fourth
      Amendment”) with Silicon Valley Bank (“Silicon Valley”). The Fourth Amendment
      amended the Loan and Security Agreement dated October 5, 2005 (the “Loan
      Agreement”). The Fourth Amendment included: (i) a forbearance by Silicon Valley
      from exercising its rights and remedies against the Company, until such time
      as
      Silicon Valley determines in its discretion to cease such forbearance, due
      to
      the defaults under the Loan Agreement resulting from the Company failing to
      comply with the tangible net worth covenant in the Loan Agreement as of July
      31,
      2007 and August 31, 2007, and (ii) a consent to a subordinated debt facility
      of
      up to $750,000 with Agility Capital LLC. In connection with the Fourth
      Amendment, Silicon Valley consented to the NOMOS Transaction and released its
      lien on the NOMOS assets. A copy of the Fourth Amendment is attached hereto
      as
      Exhibit 10.3.




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





(a)  Exhibits.


Exhibits
                  No.
              Title10.1
              Third
                  Amendment to Loan and Security Agreement dated August 24, 2007,
                  between
                  Silicon Valley Bank, North American Scientific, Inc., a Delaware
                  corporation, North American Scientific, Inc., a California corporation,
                  and NOMOS Corporation.10.2
              Agreement
                  among North American Scientific, Inc., NOMOS corporation, and Best
                  Medical
                  International, Inc., dated as of September 11, 2007, incorporated
                  by
                  reference to Exhibit 10.1 to Registrant’s Form 8-K filed September 14,
                  2007.10.3
              Fourth
                  Amendment and Forbearance to Loan and Security Agreement dated
                  September
                  14, 2007, between Silicon Valley Bank, North American Scientific,
                  Inc., a
                  Delaware corporation, and North American Scientific, Inc., a California
                  corporation.31.1
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              Certification
                  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002.




51





**SIGNATURES**




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





NORTH
                AMERICAN SCIENTIFIC, INC.September
                19, 2007
            By:
            /s/
                John B. RushName:John
              B. RushTitle: President
                and
              Chief
                  Executive Officer
                (Principal
                  Executive Officer)




September
              19,
              2007
            By:
            /s/
              James W. KlinglerName:James
              W. KlinglerTitle: Senior
                Vice President and
              Chief
                  Financial Officer
                (Principal
                  Financial Officer)





52