**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended July 31, 2005**

** **

**or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number 0-26670**

 

----

 

**NORTH AMERICAN SCIENTIFIC,INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **51-0366422**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**20200Sunburst Street, Chatsworth, CA 91311**

(Address of principal executiveoffices)

 

**(818) 734-8600**

(Registrant’s telephone number,including area code)

 

----

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

ý Yes     o No

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

ý Yes     o No

 

The number of shares ofRegistrant’s Common Stock, $.01 par value, outstanding as of August 31, 2005was 16,750,624 shares.

 

 

----

 

**NORTHAMERICAN SCIENTIFIC, INC.**

 

**Index**

 
| **Part I –  Financial Information**                                                              | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Item 1.**                                                                                                | ** ** | **Financial Statements** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Consolidated Balance Sheets as of July 31,  2005 and October 31, 2004**                        | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Consolidated Statements of Operations  for the three and nine months ended July 31, 2005 and 2004** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Consolidated Statements of Cash Flows  for the nine months ended July 31, 2005 and 2004**           | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Condensed Notes to the  Consolidated Financial Statements**                                              | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Item 2.**                                                                                                | ** ** | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Item 3.**                                                                                                | ** ** | **Quantitative and Qualitative  Disclosures about Market Risk** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Item 4.**                                                                                                | ** ** | **Controls and Procedures** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Part II – Other  Information**                                                                 | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Item 4.**                                                                                                | ** ** | **Submission of Matters to a  Vote of Security Holders** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Item 6.**                                                                                                | ** ** | **Exhibits** | ** ** |
| ** **                                                                                                 | ** ** | ** ** | ** ** | ** ** |
| **Signatures**                                                                                             | ** ** |

 

2

----

 

**PART I – FINANCIAL INFORMATION**

 

**Item 1.****   Financial Statements**

 

**NORTHAMERICAN SCIENTIFIC, INC.**

 

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                             | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | **(Unaudited)**         | ** ** | ** **                 | ** ** |
| **Assets**                                                                                                                                                                                                             |       |                    |       |                       |       |
|                                                                                                                                                                                                                   |       |                    |       |                       |       |
| Current assets                                                                                                                                                                                                         |       |                    |       |                       |       |
| Cash and  cash equivalents                                                                                                                                                                                             |       | $                       | 2,052,000  |                       | $          | 2,334,000 |   |
| Marketable  securities                                                                                                                                                                                                 |       | 3,647,000               |       | 10,046,000                 |       |
| Accounts  receivable                                                                                                                                                                                                   |       | 6,127,000               |       | 7,132,000                  |       |
| Inventories                                                                                                                                                                                                            |       | 3,805,000               |       | 4,871,000                  |       |
| Prepaid  expenses and other current assets                                                                                                                                                                             |       | 933,000                 |       | 1,061,000                  |       |
| Total current assets                                                                                                                                                                                              |       | 16,564,000              |       | 25,444,000                 |       |
| Non-current marketable securities                                                                                                                                                                                 |       | —                  |       | 2,600,000                  |       |
| Equipment and leasehold improvements                                                                                                                                                                                   |       | 3,328,000               |       | 4,127,000                  |       |
| Goodwill                                                                                                                                                                                                               |       | 18,732,000              |       | 18,732,000                 |       |
| Intangible assets                                                                                                                                                                                                      |       | 27,779,000              |       | 29,504,000                 |       |
| Other assets                                                                                                                                                                                                           |       | 110,000                 |       | 132,000                    |       |
| Total assets                                                                                                                                                                                                           |       | $                       | 66,513,000 |                       | $          | 80,539,000 |   |
|                                                                                                                                                                                                                   |       |                    |       |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                         |       |                    |       |                       |       |
|                                                                                                                                                                                                                   |       |                    |       |                       |       |
| Current liabilities                                                                                                                                                                                                    |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                                                                       |       | $                       | 1,262,000  |                       | $          | 2,061,000 |   |
| Accrued  expenses                                                                                                                                                                                                      |       | 5,165,000               |       | 6,808,000                  |       |
| Deferred  revenue                                                                                                                                                                                                      |       | 4,871,000               |       | 6,293,000                  |       |
| Total  current liabilities                                                                                                                                                                                             |       | 11,298,000              |       | 15,162,000                 |       |
|                                                                                                                                                                                                                   |       |                    |       |                       |       |
| Commitments and contingencies                                                                                                                                                                                          |       |                    |       |                       |       |
|                                                                                                                                                                                                                   |       |                    |       |                       |       |
| Stockholders’ Equity                                                                                                                                                                                              |       |                    |       |                       |       |
| Preferred  stock, $0.01 par value, 2,000,000 shares authorized; no shares issued                                                                                                                                       |       | —                  |       | —                     |       |
| Common  stock, $0.01 par value, 40,000,000 shares authorized, 16,857,222 and  16,308,487 shares issued; 16,749,196 and 16,200,461 shares outstanding as of July 31,  2005 and October 31, 2004, respectively |       | 171,000                 |       | 163,000                    |       |
| Additional  paid-in capital                                                                                                                                                                                            |       | 120,930,000             |       | 120,220,000                |       |
| Treasury  stock, at cost – 108,026 common shares                                                                                                                                                                  |       | (129,000                | )          | (129,000                   | )          |
| Accumulated  deficit                                                                                                                                                                                                   |       | (65,757,000             | )          | (54,877,000                | )          |
| Total stockholders’  equity                                                                                                                                                                                       |       | 55,215,000              |       | 65,377,000                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                       |       | $                       | 66,513,000 |                       | $          | 80,539,000 |   |

 

See condensed notes to the consolidatedfinancial statements.

 

3

----

 

**NORTHAMERICAN SCIENTIFIC, INC.**

 

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
| ** **                                     | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Revenue                                        |       |                                 |       |                                |       |   |   |   |   |
| Product                                        |       | $                                    | 5,090,000  |                                | $          | 5,368,000 |   | $ | 16,306,000 |   | $ | 12,213,000 |   |
| Service                                        |       | 2,970,000                            |       | 2,769,000                           |       | 9,060,000 |   | 2,769,000 |   |
| Total  revenue                                 |       | 8,060,000                            |       | 8,137,000                           |       | 25,366,000 |   | 14,982,000 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Cost of revenue                                |       |                                 |       |                                |       |   |   |   |   |
| Product                                        |       | 3,056,000                            |       | 3,471,000                           |       | 11,886,000 |   | 7,309,000 |   |
| Service                                        |       | 1,621,000                            |       | 1,330,000                           |       | 3,511,000 |   | 1,330,000 |   |
| Total cost  of revenue                         |       | 4,677,000                            |       | 4,801,000                           |       | 15,397,000 |   | 8,639,000 |   |
| Gross profit                                   |       | 3,383,000                            |       | 3,336,000                           |       | 9,969,000 |   | 6,343,000 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Operating expenses                             |       |                                 |       |                                |       |   |   |   |   |
| Selling  expenses                              |       | 2,145,000                            |       | 2,238,000                           |       | 6,453,000 |   | 3,871,000 |   |
| General and  administrative expenses           |       | 2,445,000                            |       | 3,363,000                           |       | 8,018,000 |   | 8,482,000 |   |
| Research and  development                      |       | 1,543,000                            |       | 1,588,000                           |       | 4,799,000 |   | 1,909,000 |   |
| Amortization  of intangible assets             |       | 575,000                              |       | 576,000                             |       | 1,725,000 |   | 597,000 |   |
| In-process  research and development           |       | —                               |       | 9,200,000                           |       | — |   | 9,200,000 |   |
| Merger and  integration costs                  |       | —                               |       | 1,056,000                           |       | — |   | 1,056,000 |   |
| Total  operating expenses                      |       | 6,708,000                            |       | 18,021,000                          |       | 20,995,000 |   | 25,115,000 |   |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Loss from operations                           |       | (3,325,000                           | )          | (14,685,000                         | )          | (11,026,000 | ) | (18,772,000 | ) |
| Interest and other income                      |       | 23,000                               |       | 114,000                             |       | 146,000 |   | 489,000 |   |
| Loss before provision for income taxes         |       | (3,302,000                           | )          | (14,571,000                         | )          | (10,880,000 | ) | (18,283,000 | ) |
| Provision for income taxes                     |       | —                               |       | —                              |       | — |   | — |   |
| Loss from continuing operations                |       | (3,302,000                           | )          | (14,571,000                         | )          | (10,880,000 | ) | (18,283,000 | ) |
| Loss from discontinued operation               |       | —                               |       | (6,422,000                          | )          | — |   | (10,550,000 | ) |
| Net loss                                       |       | $                                    | (3,302,000 | )                                   | $          | (20,993,000 | ) | $ | (10,880,000 | ) | $ | (28,833,000 | ) |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Basic and diluted loss per share:              |       |                                 |       |                                |       |   |   |   |   |
| Continuing  operations                         |       | (0.20                                | )          | (0.94                               | )          | (0.66 | ) | (1.51 | ) |
| Discontinued  operation                        |       | —                               |       | (0.42                               | )          | — |   | (0.87 | ) |
| Net loss per  share                            |       | (0.20                                | )          | (1.36                               | )          | (0.66 | ) | (2.38 | ) |
| Weighted average number of shares  outstanding |       | 16,504,206                           |       | 15,385,708                          |       | 16,396,029 |   | 12,094,508 |   |

 

See condensed notes to the consolidatedfinancial statements.

 

4

----

 

**NORTHAMERICAN SCIENTIFIC, INC.**

 

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended July 31,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                            | ** **  | **2004** | ** ** |
| Cash flows from operating activities:                                        |       |                                |        |   |   |
| Net loss                                                                     |       | $                                   | (10,880,000 | ) | $ | (28,833,000 | ) |
| Loss from  discontinued operation                                            |       | —                              |        | 10,550,000 |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                |        |   |   |
| Depreciation  and amortization                                               |       | 2,546,000                           |        | 1,273,000 |   |
| Non-cash  stock-based compensation                                           |       | —                              |        | 351,000 |   |
| Provision  for doubtful accounts                                             |       | 623,000                             |        | 44,000 |   |
| Write-off of  in-process research and development                            |       | —                              |        | 9,200,000 |   |
| Changes in  assets and liabilities, net of discontinued operation:           |       |                                |        |   |   |
| Accounts  receivable                                                         |       | 383,000                             |        | (1,742,000 | ) |
| Inventories                                                                  |       | 1,066,000                           |        | (1,244,000 | ) |
| Prepaid and  other current assets                                            |       | (37,000                             | )           | (273,000 | ) |
| Accounts  payable                                                            |       | (754,000                            | )           | 1,599,000 |   |
| Accrued  expenses                                                            |       | (730,000                            | )           | (1,336,000 | ) |
| Income tax  receivable                                                       |       | —                              |        | 496,000 |   |
| Deferred  revenue                                                            |       | (1,422,000                          | )           | 1,046,000 |   |
| Net cash  used in continuing operations                                      |       | (9,205,000                          | )           | (8,869,000 | ) |
| Net cash  used in discontinued operation                                     |       | (548,000                            | )           | (6,394,000 | ) |
| Net cash  used in operating activities                                       |       | (9,753,000                          | )           | (15,263,000 | ) |
|                                                                         |       |                                |        |   |   |
| Cash flows from investing activities:                                        |       |                                |        |   |   |
| Proceeds  from sale of marketable securities                                 |       | 8,999,000                           |        | 40,886,000 |   |
| Purchase of  marketable securities                                           |       | —                              |        | (16,375,000 | ) |
| Capital  expenditures                                                        |       | (246,000                            | )           | (1,147,000 | ) |
| NOMOS  acquisition, net of cash acquired                                     |       | —                              |        | (13,248,000 | ) |
| Net cash  provided by investing activities                                   |       | 8,753,000                           |        | 10,116,000 |   |
|                                                                         |       |                                |        |   |   |
| Cash flow from financing activities:                                         |       |                                |        |   |   |
| Proceeds  from exercise of stock options and stock purchase plan             |       | 718,000                             |        | 3,618,000 |   |
| Net cash  provided by financing activities                                   |       | 718,000                             |        | 3,618,000 |   |
|                                                                         |       |                                |        |   |   |
| Net decrease in cash and cash equivalents                                    |       | (282,000                            | )           | (1,529,000 | ) |
|                                                                         |       |                                |        |   |   |
| Cash and cash equivalents at beginning of  period                            |       | 2,334,000                           |        | 1,761,000 |   |
| Cash and cash equivalents at end of period                                   |       | $                                   | 2,052,000   |   | $ | 232,000 |   |

 

See condensed notes to the consolidatedfinancial statements.

 

5

----

 

**NORTHAMERICAN SCIENTIFIC, INC.**

 

**Condensed Notes to Consolidated FinancialStatements(Unaudited)**

 

**NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Basis of Presentation*

 

The accompanying consolidated financial statements ofNorth American Scientific, Inc. (the “Company”) are unaudited, other thanthe consolidated balance sheet at October 31, 2004, and reflect allmaterial adjustments, consisting only of normal recurring adjustments, whichmanagement considers necessary for a fair statement of the Company’s financialposition, results of operations and cash flows for the interim periods.  The results of operations for the currentinterim periods are not necessarily indicative of the results to be expectedfor the entire fiscal year.

 

These consolidated financial statements have beenprepared in accordance with the rules and regulations of the Securitiesand Exchange Commission (“SEC”).  Certaininformation and footnotes normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America have been condensed or omitted pursuant to these rules andregulations.  These consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s Form 10-K,as filed with the SEC for the year ended October 31, 2004.

 

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

 

*Management’s Plans*

 

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand liquidation of liabilities in the normal course of business. However, theCompany has continued to incur substantial net losses and used substantialamounts of cash.  As of July 31,2005, the Company has an accumulated deficit of $65.8 million, cash, cashequivalents and marketable securities of $5.7 million and no long-term debt.

 

Based on the Company’s current operating plans,management believes existing cash resources and cash forecasted by managementto be generated by operations will be sufficient to meet working capital andcapital requirements through at least the next twelve months. Also, management’splans to attain profitability and generate additional cash flows includeincreasing revenues from existing and new products and services, realizing thebenefits of the integration of our historic operations and NOMOS operations anda focus on cost control. However, there is no assurance that management will besuccessful with these plans. If events and circumstances occur such that theCompany does not meet its current operating plan as expected, the Company mayneed to raise additional financing. If the Company is unable to raiseadditional financing, the Company may be required to further reduce certaindiscretionary spending or take other steps, which could have a material adverseeffect on the Company’s ability to achieve its intended business objectives.

 

6

----

 

*Use of Estimates*

 

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

 

*Accounting forStock-based Compensation*

 

The Company accounts for its stock option awards toemployees and directors using the intrinsic value method of accounting inaccordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  The Company has provided additionaldisclosures required by Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accountingfor Stock Based Compensation – Transition and Disclosure – an Amendment of FASBStatement No. 123.”

 

Had compensation cost for the Company’s stock optionsbeen recognized based upon the estimated fair value on the grant date under thefair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148,the Company’s net loss and loss per share would have been as follows:

 
| ** **                                     | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as reported                          |       | $                                    | (3,302,000 | )                                   | $          | (20,993,000 | ) | $ | (10,880,000 | ) | $ | (28,833,000 | ) |
| Add: stock-based compensation recognized       |       | —                               |       | —                              |       | — |   | 351,000 |   |
| Less: total stock-based compensation (1)       |       | (331,000                             | )          | (450,000                            | )          | (1,135,000 | ) | (2,048,000 | ) |
| Net loss, as adjusted                          |       | $                                    | (3,633,000 | )                                   | $          | (21,443,000 | ) | $ | (12,015,000 | ) | $ | (30,530,000 | ) |
| Basic and diluted loss per share, as  reported |       | $                                    | (0.20      | )                                   | $          | (1.36 | ) | $ | (0.66 | ) | $ | (2.38 | ) |
| Basic and diluted loss per share, as  adjusted |       | $                                    | (0.22      | )                                   | $          | (1.39 | ) | $ | (0.73 | ) | $ | (2.52 | ) |

 

----

**(1) Asdetermined under the fair value method.**

 

**The Company uses the Black-Scholes option-pricing model forestimating the fair value of options granted. The Black-Scholes option-pricingmodel was developed for use in estimating the fair value of traded options thathave no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions, including the expected stock pricevolatility.  The Company uses projectedvolatility rates, which are based upon historical volatility rates, trendedinto future years. Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of the Company’s options.For purposes of pro forma disclosures, the estimated fair values of the optionsare amortized over the options’ vesting periods.**

 

*Revenue Recognition*

 

The Company sells products principally for theradiation oncology community, including intensity modulated radiation therapy (“IMRT”)and image guided radiation therapy (“IGRT”) products and services, as well asbrachytherapy seeds used in the treatment of cancer.  Product revenue consists of brachytherapyseeds and accessories, non-therapeutic radiation sources, certain IMRT hardwaredevices

 

7

----

 

and software products including IMRT treatment planningand delivery systems and our IGRT system. Service revenue consists of warranty revenue from product sales andmaintenance service agreements.

 

Product revenue

 

The Company applies the provisions of SEC StaffAccounting Bulletin (“SAB”) No. 104, “Revenue Recognition” for the sale ofnon-software products.  SAB 104 whichsupersedes SAB no. 101, “Revenue Recognition in Financial Statements”, providesguidance on the recognition, presentation and disclosure of revenue infinancial statements.  SAB No. 104outlines the basic criteria that must be met to recognize revenue and providesguidance for the disclosure of revenue recognition policies.  In general, the Company recognizes revenuerelated to product sales when (i) persuasive evidence of an arrangementexists, (ii) delivery has occurred, (iii) the fee is fixed ordeterminable, and (iv) collectibility isreasonably assured.

 

Revenue recognition is deferred when undeliveredproducts or services are essential to the functionality of delivered products,customer acceptance is uncertain, significant obligations remain, or the fairvalue of undelivered elements is unknown or collectibility is uncertain.

 

The Company’s software product revenue is generatedfrom the sale of advanced medical equipment products.  The software element of the Company’sproducts is deemed an essential element of the functionality of theproduct.  Maintenance and support areprovided with the initial product sale for a twelve month period, and arerenewable annually or for longer periods, at the customer’s discretion.

 

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

 

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

 

Service Revenue

 

Services revenues are derived mainly from maintenanceand support contracts and are recognized on a straight-line basis over the termof the contract. Payments for maintenance revenues are normally received inadvance and are nonrefundable.

 

8

----

 

*Recent AccountingPronouncements*

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-BasedPayment,” that addresses the accounting for share-based payment transactions inwhich a company receives employee services in exchange for (a) equityinstruments of the company or (b) liabilities that are based on the fairvalue of the company’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123R addresses all forms ofshare-based payment awards, including shares issued under employee stockpurchase plans, stock options, restricted stock and stock appreciation rights.SFAS No. 123R,eliminates the ability to accountfor share-based compensation transactions using APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, that was provided in Statement 123 asoriginally issued. Under SFAS No. 123R, companies are required to recordcompensation expense for all share based payment award transactions measured atfair value. This statement is effective for the first interim or annualreporting period of the Company’s first fiscal year beginning on or after June 15,2005. The Company will implement SFAS No. 123R in our fiscal yearbeginning November 1, 2005. The Company has not yet determined the impactof applying the various provisions of SFAS No. 123R.  Currently the Company uses the Black-Scholesoption pricing model to estimate the fair value of stock options granted toemployees and is evaluating option valuation models including the Black-Scholesto determine which model the Company will use upon the adoption of SFAS 123R.

 

In November 2004, the FASB issued SFAS No. 151“Inventory Costs”. This Statement amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material  (spoilage). In addition, this Statement requires that allocation of fixed productionoverhead to the costs of conversion be based on the normal capacity of theproduction facilities. The provisions of this Statement will be effective forfiscal years beginning after June 15, 2005. The Company will implementSFAS No. 151 in our fiscal year beginning November 1, 2005. TheCompany is currently evaluating the impact of this new standard, but believesthat it will not have a material impact on the Company’s financial position,results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 153“Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29.”  This Statement amended APB Opinion No. 29to eliminate the exception for non-monetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of non-monetaryassets that do not have commercial substance. A non-monetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The provisions of this Statementwill be effective for fiscal periods beginning after June 15, 2005. TheCompany will implement SFAS No. 153 in our fiscal period beginning August 1,2005. The Company is currently evaluating the impact of this new standard, butbelieves that it will not have a material impact upon the Company’s financialposition, results of operations or cash flows.

 

In March 2005, the FASB issued FASBInterpretation (“FIN”) No. 47, “Accounting for Conditional AssetRetirement Obligations.” FIN No. 47 clarifies that the term conditionalasset retirement asset obligation as used in FASB Statement No. 143, “Accountingfor Asset Retirement Obligations,” refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and/ or method ofsettlement. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN No. 47 iseffective no later than the end of fiscal years ending after December 15,2005 (December 31, 2005 for calendar-year companies). Retrospectiveapplication of interim financial information is permitted but is not required.The Company

 

9

----

 

will implement FIN No. 47 in its fiscal year ending October 31,2006. Management does not expect adoption of FIN No.47  to have a material impact on theCompany’s financial statements.

 

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

 

**NOTE 2**– **VARIABLE INTEREST ENTITY**

 

In October 2003,the Company entered into a Secured Loan Agreement with Prostate Centers ofAmerica (“PCA”).  Under the agreement, the Company was obligated to makeperiodic advances subject to PCA achieving certain milestones.

 

As of July 31, 2005, the Company’s advances to PCA totaledapproximately $950,000, which are evidenced by a secured note. The Company isin discussions with PCA regarding the possibility of additional advances. Thefunds which have been advanced are to be used for general working capital toprovide various brachytherapy services to ambulatory surgical centers. Thesecured note evidencing the advances already made bears interest at 6% perannum and is repayable in four installments commencing on December 1,2004, with all unpaid principal and interest due on September 1, 2005. Todate, no payments have been received and the Company is uncertain when orwhether these advances will be repaid. As of July 31, 2005, the Companyhas expensed an amount equal to the amount advanced. If the Company madeadditional advances to PCA, the Company would expense the amounts of suchadvances in the period of the advance. The Company has no equity interest inPCA.  A distributor who has agreed toprocure all of its brachytherapy seeds exclusively from the Company through October 2008has a majority interest in PCA. Based on the terms of the lending and supplyagreements with the above entities, the Company determined that PCA is avariable interest entity (“VIE”) and the Company is the primary beneficiaryunder FIN No. 46 since PCA does not have sufficient equity at risk for theentity to finance its activities.

 

FIN No. 46 requires that an enterprise consolidate a VIE if thatenterprise has a variable interest that will absorb a majority of the entity’sexpected losses if they occur. Accordingly, the Company adopted FIN No. 46in October 2003 and consolidated PCA as a VIE, regardless of the Companynot having an equity interest in PCA and its creditors having no recourseagainst the Company.  The Companyconsolidated PCA in its Radiation Sources segment, to the extent of the Company’sloan of approximately $950,000.

 

10

----

 

Included in the Company’s consolidated balance sheet at July 31,2005, and October 31, 2004 were the following net assets of PCA:

 
| ** **                           | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                 |       |                    |       |                       |       |
| Cash                                 |       | $                       | 34,000     |                       | $          | 473,000 |   |
| Accounts receivable                  |       | 54,000                  |       | 52,000                     |       |
| Prepaid and other current assets     |       | (6,000                  | )          | 10,000                     |       |
| Equipment and leasehold improvements |       | 332,000                 |       | 555,000                    |       |
| Other assets                         |       | 11,000                  |       | 33,000                     |       |
| Accounts payable                     |       | 1,000                   |       | (389,000                   | )          |
| Accrued expenses                     |       | (426,000                | )          | (717,000                   | )          |
| Net assets                           |       | $                       | —     |                       | $          | 17,000 |   |

 

Consolidation of PCA’s results of operations included the following:

 
| ** **  | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|-------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **  | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|        |       |                                 |       |                                |       |   |   |   |   |
| Net revenue |       | $                                    | —     |                                | $          | — |   | $ | — |   | $ | — |   |
| Net loss    |       | —                               |       | (418,000                            | )          | (18,000 | ) | (656,000 | ) |
|             |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |

 

**NOTE 3 – MARKETABLE SECURITIES**

 

**The Company invests excess cash in marketable securitiesconsisting primarily of commercial paper, corporate notes and bonds, U.S.Government securities and money market funds.**

 

**Debt securities that the Company has the positive intentand ability to hold to maturity are classified as “held-to-maturity” andreported at amortized cost. Debt securities not classified as held-to-maturityand marketable equity securities are classified as “available-for-sale,” andare recorded at fair value with unrealized gains and losses included instockholders’ equity. As of July 31, 2005, all of the Company’s marketablesecurities are classified as held-to-maturity.**

 

**The Company continually reviews its investments todetermine whether a decline in fair value below the cost basis is other thantemporary. 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 ofthe write-down is included in the Consolidated Statements of Operations.**

 

11

----

 

**NOTE 4 – ACCOUNTS RECEIVABLE**

 

Accounts receivable consist of the following:

 
| ** **                            | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                  |       |                    |       |                       |       |
| Accounts receivables                  |       | $                       | 7,616,000  |                       | $          | 7,757,000 |   |
| Less: allowance for doubtful accounts |       | (1,489,000              | )          | (625,000                   | )          |
|                                  |       | $                       | 6,127,000  |                       | $          | 7,132,000 |   |

 

**NOTE 5 – INVENTORIES**

 

**Inventories are valued at the lower of cost or market asdetermined under the first-in, first-out method. Costs include materials, laborand manufacturing overhead. Inventories are shown net of applicable reservesand allowances. Inventories consist of the following:**

 
| ** **      | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-----------------|------------|-------------------------|------------|----------------------------|------------|
|            |       |                    |       |                       |       |
| Raw materials   |       | $                       | 2,486,000  |                       | $          | 4,249,000 |   |
| Work in process |       | 54,000                  |       | 47,000                     |       |
| Finished goods  |       | 1,265,000               |       | 575,000                    |       |
|            |       | $                       | 3,805,000  |                       | $          | 4,871,000 |   |

 

**NOTE 6 – NET LOSS PER SHARE**

 

Basic earnings (loss) per share is computed by dividing the net income(loss) by the weighted average number of shares outstanding for the period.Diluted earnings (loss) per share is computed by dividing the net income (loss)by the sum of the weighted average number of common shares outstanding for theperiod plus the assumed exercise of all dilutive securities by applying thetreasury stock method unless such assumed exercises are anti-dilutive. Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share:

 
| ** **                                     | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                 |       |                                |       |   |   |   |   |
| Net loss                                       |       | $                                    | (3,302,000 | )                                   | $          | (20,993,000 | ) | $ | (10,880,000 | ) | $ | (28,833,000 | ) |
| Weighted average shares outstanding - basic    |       | 16,504,206                           |       | 15,385,708                          |       | 16,396,029 |   | 12,094,508 |   |
| Dilutive effect of stock options and  warrants |       | —                               |       | —                              |       | — |   | — |   |
| Weighted average shares outstanding -diluted   |       | 16,504,206                           |       | 15,385,708                          |       | 16,396,029 |   | 12,094,508 |   |
| Basic loss per share                           |       | $                                    | (0.20      | )                                   | $          | (1.36 | ) | $ | (0.66 | ) | $ | (2.38 | ) |
| Diluted loss per share                         |       | $                                    | (0.20      | )                                   | $          | (1.36 | ) | $ | (0.66 | ) | $ | (2.38 | ) |

 

Stock options to purchase 2,764,355 and 3,485,081common shares for the three months ended July 31, 2005, and 2004,respectively, and  2,987,488 and3,793,649 common shares for the nine months ended July 31, 2005 and 2004,respectively, were not included in the computation of diluted earnings pershare because their effect would have been anti-dilutive.

 

12

----

 

**NOTE 7 –ACQUISITION**

 

On May 4, 2004, the Company acquired NOMOS Corporation(“NOMOS”). The results of NOMOS have been included in the consolidatedfinancial statements from the date of acquisition as the Company’s IMRT/IGRTbusiness segment. NOMOS develops, markets and sellsmedical devices used in external beam radiation. As a result of theacquisition, the Company has expanded its product line, which the Companybelieves will allow it to compete more effectively in the radiation oncologymarket.

 

The NOMOS acquisition purchase price of approximately$58 million consisted of $11.5 million in cash, the issuance of 5.2 millionshares of the Company’s common stock with a fair value of approximately $37.3million, the assumption of 1.4 million of stock options and warrants with afair value of $4.6 million, direct transaction costs of $3.0 million and theassumption of acquisition related liabilities of $1.6 million. The fair valueof the common stock used in determining the purchase price was $7.21 per sharebased on the average of the closing price of the common stock for the periodtwo days before and two days after the October 27, 2003 merger agreementannouncement date. The stock options and warrants, which fully vested at theacquisition date, were valued using a Black-Scholes valuation model with thefollowing assumptions: (i) risk-free interest rate of 4.5%, (ii) volatilityfactor of 60%, (iii) expected term of 1.5 years for stock options, (iv) contractualterm of 0.5 years for warrants and (v) no dividend yield. Theacquisition was accomplished through a reverse triangular merger into a whollyowned subsidiary of the Company, and is reflected in the Company’s financialstatements, including the footnotes thereto, as our IMRT/IGRT operatingsegment.

 

The following table presents unaudited pro formarevenue, net loss and loss per share giving the effect of NOMOS acquisition asif it had been completed at the beginning of each period presented:

 
| ** **                            | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                               |       | $                                    | 8,060,000  |                                | $          | 8,137,000 |   | $ | 25,366,000 |   | $ | 29,147,000 |   |
| Net loss                              |       | (3,302,000                           | )          | (20,993,000                         | )          | (10,880,000 | ) | (33,859,000 | ) |
| Net loss per share, basic and diluted |       | (0.20                                | )          | (1.36                               | )          | (0.66 | ) | (2.19 | ) |
|                                       |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |

 

The unaudited pro forma financial information abovereflects the Company’s changes in revenue recognition policy. Prior to theacquisition by the Company, NOMOS had recognized revenue of the BAT productunder SAB No. 101 as a product in which software was deemed incidental.The Company has determined that revenue recognition of the BAT product shouldbe accounted for under SOP 97-2. The Company also determined that revenuerecognition of the BAT product should be deferred from the time of shipment, asNOMOS had historically recognized revenue, to the time of acceptance orinstallation. As a result of these changes in revenue recognition, the Companyhas presented the pro forma information above to be consistent with resultspresented for the three and nine months ended July 31, 2005.

 

13

----

 

**NOTE 8**– **INTANGIBLE ASSETS**

 
| ** **                       | ** ** | **July 31, 2005**      | ** ** | **October 31, 2004**     | ** ** |
|----------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                             |       |                        |       |                          |       |   |   |   |   |
| Amortizable intangible assets    |       |                        |       |                          |       |   |   |   |   |
| Purchased  technology            |       | $                           | 24,232,000 |                          | $          | 2,187,000 |   | $ | 24,232,000 |   | $ | 884,000 |   |
| Existing  customer relationships |       | 1,952,000                   |       | 295,000                       |       | 1,952,000 |   | 120,000 |   |
| Trademark                        |       | 4,426,000                   |       | 409,000                       |       | 4,426,000 |   | 167,000 |   |
| Patents and  licenses            |       | 98,000                      |       | 38,000                        |       | 98,000 |   | 33,000 |   |
|                             |       | $                           | 30,708,000 |                          | $          | 2,929,000 |   | $ | 30,708,000 |   | $ | 1,204,000 |   |

 

Amortization expense was $575,000 and $576,000 for the three monthsended July 31, 2005 and 2004, respectively, and $1,725,000 and $597,000for the nine months ended July 31, 2005 and 2004, respectively.

 

The Company’s current estimate of aggregate amortization expense forsubsequent years is as follows:

 
| **For the Years Ended July 31,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2006                                  |       | $          | 2,319,000  |   |
| 2007                                  |       | 2,342,000  |       |
| 2008                                  |       | 2,330,000  |       |
| 2009                                  |       | 2,301,000  |       |
| 2010                                  |       | 2,273,000  |       |
| Thereafter                            |       | 16,214,000 |       |
|                                  |       | $          | 27,779,000 |   |

 

**NOTE 9 –****DISCONTINUEDOPERATION**

 

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

 

Revenues and loss from the discontinued operation wereas follows:

 
| ** **  | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|-------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **  | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **  | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue |       | $                                    | —     |                                | $          | — |   | $ | — |   | $ | — |   |
| Net loss    |       | —                               |       | (6,422,000                          | )          | — |   | (10,550,000 | ) |
|             |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |

 

14

----

 

Assets and liabilities of the discontinued operationswere as follows:

 
| ** **                                          | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                                |       |                    |       |                       |       |
| Cash                                                |       | $                       | (1,000     | )                          | $          | 186,000 |   |
| Other assets                                        |       | 16,000                  |       | 16,000                     |       |
| Accounts payable                                    |       | —                  |       | (45,000                    | )          |
| Accrued expenses                                    |       | (744,000                | )          | (1,516,000                 | )          |
| Net assets  (liabilities) of discontinued operation |       | $                       | (729,000   | )                          | $          | (1,359,000 | ) |

 

**NOTE  10****– SEGMENT INFORMATION**

 

**The Company operates twosegments, Radiation Sources and IMRT/IGRT, based upon a combination of factorsincluding: product produced, manufacturing process and managementoversight.  Radiation Sources developsand market radioisotopic products including brachytherapy seeds, accessoriesand calibration sources used in the treatment of disease and used in othermedical, environmental, research and industrial applications.  IMRT/IGRT develops and markets products usingexternal beam radiation therapy for the treatment of disease.**

 

**The Company evaluates performanceand allocates resources based upon operating results and developmentmilestones.  The accounting polices ofthe reportable segments are the same as those described in Note 1 in the summaryof significant accounting policies. There are no inter-company sales or profits.**

 

**The Company’s segments arebusiness units that either offer different products or are managed separatelybecause they operate with distinct manufacturing and development processes.**

 
| ** **               | ** ** | **Three months ended July 31,** | ** ** | **Nine months ended July 31,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                     |       |                                 |       |                                |       |   |   |   |   |
| **Revenues**             |       |                                 |       |                                |       |   |   |   |   |
|                     |       |                                 |       |                                |       |   |   |   |   |
| IMRT/IGRT                |       | $                                    | 5,005,000  |                                | $          | 4,977,000 |   | $ | 16,415,000 |   | $ | 4,977,000 |   |
| Radiation Sources        |       | 3,055,000                            |       | 3,160,000                           |       | 8,951,000 |   | 10,005,000 |   |
|                     |       | $                                    | 8,060,000  |                                | $          | 8,137,000 |   | $ | 25,366,000 |   | $ | 14,982,000 |   |
|                     |       |                                 |       |                                |       |   |   |   |   |
| **Loss from Operations** | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|                     |       |                                 |       |                                |       |   |   |   |   |
| IMRT/IGRT                |       | $                                    | (2,572,000 | )                                   | $          | (12,841,000 | ) | $ | (8,053,000 | ) | $ | (12,841,000 |   |
| Radiation Sources        |       | (753,000                             | )          | (1,844,000                          | )          | (2,973,000 | ) | (5,931,000 | ) |
|                     |       | $                                    | (3,325,000 | )                                   | $          | (14,685.000 | ) | $ | (11,026,000 | ) | $ | (18,772,000 | ) |

 

15

----

 
| ** **             | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|------------------------|------------|-------------------------|------------|----------------------------|------------|
|                   |       |                    |       |                       |       |
| **Goodwill**           |       |                    |       |                       |       |
|                   |       |                    |       |                       |       |
| IMRT/IGRT              |       | $                       | 18,525,000 |                       | $          | 18,525,000 |   |
| Radiation Sources      |       | 207,000                 |       | 207,000                    |       |
| Discontinued operation |       | —                  |       | —                     |       |
|                   |       | $                       | 18,732,000 |                       | $          | 18,732,000 |   |
|                   |       |                    |       |                       |       |
| **Total assets**       |       |                    |       |                       |       |
|                   |       |                    |       |                       |       |
| IMRT/IGRT              |       | $                       | 57,580,000 |                       | $          | 61,719,000 |   |
| Radiation Sources      |       | 8,917,000               |       | 18,608,000                 |       |
| Discontinued operation |       | 16,000                  |       | 212,000                    |       |
|                   |       | $                       | 66,513,000 |                       | $          | 80,539,000 |   |

 

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

 

The following discussion and analysis providesinformation, which our management believes is relevant to an assessment andunderstanding of our financial condition and results of operations. Thediscussion should be read in conjunction with the Consolidated FinancialStatements contained herein and the notes thereto. Certain statements containedin this quarterly report on 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 isdefined by: (i) the Private Securities Litigation Reform Act of 1995 (the “1995Act”) and (ii) releases issued by the Securities and Exchange Commission (“SEC”).These statements are being made pursuant to the provisions of the 1995 Act andwith the intention of obtaining the benefits of the “Safe Harbor” provisions ofthe 1995 Act. We caution that any forward looking statements made herein arenot guarantees of future performance and that actual results may differmaterially from those in such forward looking statements as a result of variousfactors, including, but not limited to, any risks detailed herein or detailedfrom time to time in our other filings with the SEC including our most recentannual report on Form 10-K. We are not undertaking any obligation toupdate publicly any forward-looking statements. Readers should not place unduereliance on these forward-looking statements.

 

**Overview**

 

We manufacture, market and sell products principallyfor the radiation oncology community, including intensity modulated radiationtherapy (“IMRT”) and image guided radiation therapy (“IGRT”) products andservices, as well as radiation sources including brachytherapy seeds used inthe treatment of prostate cancer.  Ourbusiness is organized into two operating segments: IMRT/IGRT and Radiation Sources.  The Company discontinued Theseus Imaging (“Theseus”),our imaging subsidiary, in September 2004, which had been developing aradiopharmaceutical agent intended initially to be used for the management ofchemotherapy treatment. For comparison purposes, the results of operations forTheseus have been presented as a discontinued operation.

 

16

----

 

IMRT/IGRT develops and markets intensity modulatedradiation therapy (“IMRT”) and image guided radiation therapy (“IGRT”) productsused in external beam radiation therapy for the treatment of disease. RadiationSources develops and markets radioisotopic products including brachytherapyseeds, accessories and calibration sources used in the treatment of disease andused in other medical, environmental, research and industrial applications.

 

In May 2004, we acquired NOMOS Corporation (“NOMOS”).NOMOS was a privately held developer, manufacturer, and marketer of IMRT andIGRT products and services.  Under theterms of the merger agreement, we issued approximately 5.2 million shares ofour common stock and paid cash of approximately $11.5 million, in exchange forall of the outstanding capital stock of NOMOS. We manage this business as our IMRT/IGRT operating segment. Our resultsof operations, cash flows and balance sheet for the three and nine months endedJuly 31, 2005 include the results of NOMOS . Our2004 fiscal year financials only began to include NOMOS results from the dateof the May 2004 acquisition.

 

**Results ofOperations**

 

**Three Months Ended July 31, 2005Compared to Three Months Ended July 31, 2004**

 

**Revenue**.  Revenue was$8.1 million for the three months ended July 31, 2005, compared to $8.1million in the three months ended July 31, 2004.

 

Product revenue decreased $0.3 million, or 5%, to $5.1million for the three months ended July 31, 2005, from $5.4 million forthe three months ended July 31, 2004. The decrease in product revenue during the quarter ended July 31,2005, is attributed to the reduction of product revenues of our IMRT/IGRTbusiness ($0.2 million) along with a decrease in Radiation Sources revenues($0.1 million).  The decline in IMRT/IGRTrevenue reflects a change in product mix, with fewer of the higher pricedinstruments sold in the current period. The decline in Radiation Sourcesrevenues is due to a decline in unit volume. During this period the average selling price of our Radiation Sources’products remained constant. We anticipate improvement in unit volume during theremainder of this year due to the implementation of a new non-exclusivenational supply agreement in September and our continued pursuit ofnational accounts.

 

Service revenue increased $0.2 million, or 7%, to $3.0million for the three months ended July 31, 2005 from $2.8 million for thethree months ended July 31, 2004. This reflects the increase in time andmaterials service provided by our IMRT/IGRT business.

 

**Gross profit**.  Gross profitwas $3.4 million for the three months ended July 31, 2005, as compared to$3.3 million for the three months ended July 31, 2004.  Gross profit as a percentage of revenuesincreased from 41% to 42% during this period.

 

Gross profit for the three months ended July 31,2005 consists of $2.2 million, or 44% of revenue, from our IMRT/IGRT businessand $1.2 million, or 39% of revenue from our Radiation Sources business.

 

**Selling Expenses**.  Sellingexpenses include salaries, commissions and other related costs associated withour sales and marketing personnel and advertising, trade shows and otherpromotional programs. Selling expenses decreased $0.1 million, or 4%, to $2.1million for the three months ended July 31, 2005, from $2.2 million forthe three months ended July 31, 2004.

 

**General and administrativeexpenses**. General and administrative (“G&A”) expenses include salaries andother related costs associated with finance, executive, human resources andinformation technology personnel and other administrative costs. G&Aexpenses decreased $0.9 million, or 27%, to $2.4 million for the three monthsended July 31, 2005, from $3.4 million for the three months ended July 31,2004.

 

17

----

 

Thedecrease is primarily attributed to: (i) $0.4 million decrease inpersonnel costs related to staff reductions in the first half of the year, (ii) $0.4million in other administrative cost reductions, and (iii) the inclusionin the prior year of $0.5 million of consolidated PCA expenses, which werepartially offset by (iv) a $0.3 million increase in the allowance for doubtfulaccounts, (v) $0.1 million of severance costs related to the restructuringof our IMRT/IGRT business.

 

 **Research and development**.  Research and development (“R&D”) expensesinclude salaries and other related costs associated with product development,third party development costs, overhead costs and material used in developmentof prototypes. Our R&D costs decreased $0.1 million, or 3%, to $1.5 millionfor the three months ended July 31, 2005, from $1.6 million for the threemonths ended July 31, 2004.

 

**Amortization of intangible assets**.  Amortizationof intangible assets was $0.6 million for the three months ended July 31,2005, unchanged from the three months ended July 31, 2004.

 

**In-process research and development**.   During thethree months ended July 31, 2004, we incurred a charge of $9.2 million forin-process research and development (“IPR&D”) related to the acquisition ofour IMRT/IGRT business.  No similarcharge was incurred in the three months ended July 31, 2005.

 

**Merger and integration costs**.   During thethree months ended July 31, 2004, we incurred merger and integrationcharges of $1.1 million in connection with the acquisition of our IMRT/IGRTbusiness. Those charges include severance and consulting costs.

 

**Interest and other income, net.** Interest and other income decreased $0.1 million, or 80%, for the threemonths ended July 31, 2005, from the three months ended July 31,2004. The decrease is attributed to a smaller portfolio of marketablesecurities.

 

**Nine Months Ended July 31,2005 Compared to Nine Months Ended July 31, 2004**

 

**Revenue**.  Revenueincreased $10.4 million, or 69%, to $25.4 million for the nine months ended July 31,2005, from $15.0 million for the nine months ended July 31, 2004.  The increase in revenue during the nine monthsended July 31, 2005, is attributed to the acquisition of our IMRT/IGRTbusiness in May 2004 ($11.4 million) offset by a decrease in RadiationSources revenues ($1.0 million).

 

Product revenue increased $4.1 million, or 33%, to$16.3 million for the nine months ended July 31, 2005, from $12.2 millionfor the nine months ended July 31, 2004. The increase in product revenue during the nine months ended July 31,2005, is attributed to the acquisition of our IMRT/IGRT business in May 2004($5.1 million) offset by a decrease in Radiation Sources revenues ($1.0million).  The decline in RadiationSources revenues is due to a decline in unit volume.  During this period the average selling priceof our Radiation Sources’ products remained constant. We anticipate improvementin unit volume during the remainder of the year due to the implementation of anew non-exclusive national supply agreement in September and our continuedpursuit of national accounts.

 

Service revenue increased $6.3 million, or 227%, to$9.1 million for the nine months ended July 31, 2005 from $2.8 million forthe nine months ended July 31, 2004, due to the acquisition of ourIMRT/IGRT business.

 

**Gross profit**.  Gross profitincreased $3.6 million, or 57%, to $10.0 million for the nine months ended July 31,2005, from $6.3 million for the nine months ended July 31, 2004.   The increase in gross profit is attributedto the acquisition of our IMRT/IGRT business ($5.0 million) offset by adecrease in Radiation Sources gross profit ($1.4 million). Gross profit as apercentage of revenues decreased from 42% to 39% during the period.

 

18

----

 

Gross profit for the nine months ended July 31,2005 consists of $7.0 million, or 42% of revenue, from our IMRT/IGRT businessand $3.0 million, or 33% of revenue, from our Radiation Sources business.

 

The decrease in gross profit of our Radiation Sourcesbusiness is attributed to (i) a decrease in unit volume of brachytherapyseeds and other radiation sources, (ii) an increase in fixed overheadcosts and (iii) an increase in low margin ancillary services that areoutsourced.  Our manufacturing processhas relatively high fixed costs and therefore, our margins are very sensitiveto changes in volume.

 

**Selling Expenses**.  Sellingexpenses include salaries, commissions and other related costs associated withour sales and marketing personnel and advertising, trade shows and otherpromotional programs. Selling expenses increased $2.6 million, or 67%, to $6.5million for the nine months ended July 31, 2005, from $3.9 million for thenine months ended July 31, 2004. The increase in selling expenses is primarily attributed to the sellingand marketing costs associated with the acquisition of our IMRT/IGRT business.

 

**General and administrativeexpenses**. General and administrative (“G&A”) expenses include salaries andother related costs associated with finance, executive, human resources andinformation technology personnel and other administrative costs. G&Aexpenses decreased $0.5 million, or 5%, to $8.0 million for the nine monthsended July 31, 2005, from $8.5 million for the nine months ended July 31,2004. The decrease is primarily attributed to: (i) $1.6 million reductionin administrative costs in our Radiation Sources business, and (ii) theinclusion in the prior year of $1.0 million of severance paid to a formerofficer of the Company and $0.7 million of consolidated PCA expenses, whichwere partially offset by (iii) a $0.6 million increase in the allowancefor doubtful accounts, (iv) $0.6 million of severance costs related to therestructuring of our IMRT/IGRT business, and (v) $1.6 million additionaladministrative expense associated with the acquisition of our IMRT/IGRTbusiness.

 

**Research and development**.  Research and development(“R&D”) expenses include salaries and other related costs associated withproduct development, third party development costs, overhead costs and materialused in development of prototypes. Our R&D costs increased $2.9 million, or151%, to $4.8 million for the nine months ended July 31, 2005, from $1.9million for the nine months ended July 31, 2004.  The increase is primarily attributed to theacquisition of our IMRT/IGRT business.

 

**Amortization of intangible assets**.  Amortizationof intangible assets increased to $1.7 million, or 189%, for the nine monthsended July 31, 2005 from $0.6 million for the nine months ended July 31,2004.  The increase is attributed to theamortization of purchased intangibles acquired in the purchase of our IMRT/IGRTbusiness.

 

**In-process research and development**.   During thenine months ended July 31, 2004, we incurred a charge of $9.2 million forin-process research and development (“IPR&D”) related to the acquisition ofour IMRT/IGRT business. No similar charge was incurred in the nine months endedJuly 31, 2005.

 

**Merger and integration costs**.   During thenine months ended July 31, 2004, we incurred merger and integrationcharges of $1.1 million in connection with the acquisition of our IMRT/IGRTbusiness. The charges include severance and consulting costs.

 

**Interest and other income, net.** Interest and other income decreased $0.3 million, or 70%, to $0.1million for the nine months ended July 31, 2005, from $0.5 million for thenine months ended July 31, 2004. The decrease is attributed to our smallerportfolio of marketable securities

 

19

----

 

**Liquidityand Capital Resources**

 

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand liquidation of liabilities in the normal course of business. However, wehave continued to incur substantial net losses and use substantial amounts ofcash.

 

We believe that our existing cash resources andforecasted operating cash flow under our current operating plan will besufficient to meet our working capital requirements for at least the nexttwelve months. Our plan is to return to profitability and to generate positivecash flows by increasing revenues from existing and new products and services,realizing the benefits of the integration of our historic operations and NOMOSoperations and focusing on cost control. However, there is no assurance that wewill be successful with these plans. If events and circumstances occur suchthat we do not meet our current operating plan as expected, we may need toraise additional financing. If we are unable to raise additional financing, wemay be required to further reduce certain discretionary spending or take othersteps, which could have a material adverse effect on our ability to achieve ourintended business objectives. We expect that we will be able to satisfy ourlonger term liquidity needs for research and development, capital expenditures,and acquisitions through a combination of cash generated by operations, futurepublic offerings and private placements of our common stock, and bank lines ofcredit.

 

At July 31, 2005, we had cash, and cashequivalents, and investments in marketable securities aggregating approximately$5.7 million, a decrease of approximately $9.3 million from $15.0 million at October 31,2004. The decrease was primarily attributed to $9.2 million used in continuingoperations, $0.5 million used in our discontinued operation and $0.2 millionused for capital expenditures, offset by $0.7 million in cash received from theexercise of stock options and the employee stock purchase plan.

 

Cash flows used in operating activities decreased $5.5million, or 36%, to $9.8 million for the nine months ended July 31, 2005from $15.3 million for the nine months ended July 31, 2004.  The decrease in cash used in operatingactivities primarily reflects a reduction of cash used in our discontinuedoperation ($5.8 million). We expect that cash used in operating activities mayfluctuate in future periods as a result of a number of factors, includingfluctuations in our operating results, accounts receivable collections,inventory management, research and development expenses, and the timing ofpayments.

 

Cash flows provided by investing activities decreased$1.4 million, or 13%, to $8.8 million for the nine months ended July 31,2005, from $10.1 million for the nine months ended July 31, 2004.  The decrease primarily reflects a greaterneed to draw down our balance of marketable securities to fund operations($15.5 million) partially offset by the net cash expended for the NOMOSacquisition in 2004 ($13.2 million) and a decrease in spending on capitalexpenditures ($0.9 million).

 

Cash provided by financing activities decreased $2.9million, or 80%, to $0.7 million for the nine months ended July 31, 2005,from $3.6 million for the nine months ended July 31, 2004.  The decrease reflects a reduction in theproceeds from the exercise of employee stock options.

 

As of July 31, 2005, we have $4.1 million inoperating lease obligations for facilities and equipment under non-cancelableoperating lease agreements.

 

**CriticalAccounting Policies**

 

The preparation of financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States of America requires management to make judgments, assumptions andestimates that affect the amounts reported in the Consolidated FinancialStatements included in the Company’s Form 10-K for the year ended October 31,2004, and accompanying notes. Note 1 to the

 

20

----

 

Consolidated Financial Statements describes thesignificant accounting policies and methods used in the preparation of theConsolidated 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 bedetermined with certainty. We base our estimates on historical experience andon various other assumptions believed to be applicable and reasonable under thecircumstances. These estimates may change as new events occur, as additionalinformation is obtained and as our operating environment changes. These changeshave historically been minor and have been included in the consolidatedfinancial statements as soon as they became known. The following criticalaccounting policies are impacted significantly by judgments, assumptions andestimates used in the preparation of the Consolidated Financial Statements andactual results could differ materially from the amounts reported based on thesepolicies.

 

*Revenue Recognition*

 

We sell products principally for the radiationoncology community, including IMRT and IGRT products and services, as well asbrachytherapy seeds used in the treatment of cancer.  Product revenueconsists of brachytherapy, non-therapeutic sources, certain IMRT hardware devicesand software products including IMRT treatment planning and delivery systemsand our IGRT system.  Service revenueconsists of warranty revenue from product sales and maintenance serviceagreements.

 

Product revenue

 

We apply the provisions of SEC Staff AccountingBulletin (“SAB”) No. 104, “Revenue Recognition” for the sale ofnon-software products.  SAB No. 104 which supersedes SAB No. 101,“Revenue Recognition in Financial Statements”, provides guidance on therecognition, presentation and disclosure of revenue in financialstatements.  SAB No. 104 outlines the basic criteria that must be metto recognize revenue and provides guidance for the disclosure of revenuerecognition policies.  In general, we recognize revenue related to productsales when (i) persuasive evidence of an arrangement exists, (ii) deliveryhas occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured.

 

Revenue recognition is deferred when undeliveredproducts or services are essential to the functionality of delivered products,customer acceptance is uncertain, significant obligations remain, or the fairvalue of undelivered elements is unknown or collectibility is uncertain.

 

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

 

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

 

Our software sales are generally multiple elementarrangements, which could include the product, first year annual maintenanceand support, and training and installation.  Revenues from the multipleelement arrangements are allocated to each element based on the relative fairvalue of the elements.  If the fair value of the element exists, thedetermination is based on vendor specific objective evidence.  If such

 

21

----

 

evidence of fair value for each element of the arrangementdoes not exist, all revenue from the arrangement is deferred until such timethat evidence of fair value of each element does exist or until all elements ofthe arrangement are delivered.  If in a multiple element arrangement, fairvalue does not exist for one or more of the undelivered elements, the residualmethod of accounting is applied.  Under the residual method, the fairvalue of the undelivered elements is deferred, and the remaining portion of thearrangement fee is recognized as revenue.

 

Service revenue

 

Service revenues are derived mainly from maintenanceand support contracts and are recognized on a straight-line basis over the termof the contract. Payments for maintenance revenues are normally received inadvance and are nonrefundable.

 

*Allowance for Doubtful Accounts and SalesReturns*

 

The allowance for doubtful accounts is based on ourassessment of the collectibility of specific customer accounts and the aging ofthe accounts receivable. We regularly review the allowance by consideringfactors such as historical experience, age of the accounts receivable balancesand current economic conditions that may affect a customer’s ability to pay. Ifthere was a deterioration of a major customer’s credit worthiness or actualdefaults are higher than our historical experience, our estimates of therecoverability of amounts due us could be overstated which could have anadverse impact on our financial results.

 

A reserve for sales returns is established based onhistorical trends in product return rates and is recorded as a reduction of ouraccounts receivable. If the actual future returns were to deviate from thehistorical data on which the reserve had been established, our revenue could beadversely affected. To date, product returns have not been considered materialto our results of operations.

 

*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 level or one level below an operating segment) on an annualbasis and between annual tests if an event occurs or circumstances change thatwould more likely than not reduce the fair value of a reporting unit below itscarrying value. These events or circumstances could include a significantchange in the business climate, legal factors, operating performanceindicators, competition, sale or disposition of a significant portion of areporting unit. Management has established September 30 as the Company’sannual testing date for impairment of goodwill, which is a change from ourprevious annual testing date of August 31. Application of the goodwillimpairment test requires management to make various judgments, including theidentification of reporting units, assignment of assets and liabilities toreporting units, assignment of goodwill to reporting units, and determinationof the fair value of each reporting unit. The fair value of each reporting unitis estimated using a discounted cash flow methodology. This requiressignificant judgments including estimation of future cash flows, which isdependent on internal forecasts, estimation of the long-term rate of growth forour business, the useful life over which cash flows will occur, anddetermination of our weighted average cost of capital. Changes in theseestimates and assumptions could materially affect the determination of fairvalue and/or goodwill impairment for each reporting unit.

 

*Research and Development Costs*

 

We account for research and development costs inaccordance with several accounting pronouncements, including SFAS 2, Accountingfor Research and Development Costs, and SFAS 86, Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed. SFAS 86 specifiesthat costs

 

22

----

 

incurred internally in researching and developing a computersoftware product should be charged to expense until technological feasibilityhas been established for the product. Once technological feasibility isestablished, all software costs should be capitalized until the product isavailable for general release to customers. Judgment is required in determiningwhen technological feasibility of a product is established. We have determinedthat technological feasibility for our software products is reached shortlybefore the products are released to manufacturing. Costs incurred aftertechnological feasibility is established are not material, and accordingly, weexpense all research and development costs when incurred.

 

*Loss Contingencies*

 

We record liabilities related to pending litigationwhen an unfavorable outcome is probable and we can reasonably estimate theamount 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 unfavorableoutcome and an estimate of the amount of the loss. Significant judgment isrequired in both the determination of the probability and as to whether anexposure can be reasonably estimated. When we determine that it is probablethat a loss has been incurred, the effect is recorded promptly in theconsolidated financial statements. Although the outcome of these claims cannotbe predicted with certainty, we do not believe that any of our existing legalmatters will have a material adverse effect on our financial condition orresults of operations.

 

*Income Taxes*

 

We account for income taxes using the liabilitymethod. Deferred taxes are determined based on the differences between thefinancial statement and tax bases of assets and liabilities, using enacted taxrates in effect for the year in which the differences are expected to reverse.Valuation allowances are established when necessary to reduce deferred taxassets to the amounts expected to be realized. In addition, we are subject toexamination of our income tax returns by the Internal Revenue Service and othertax authorities. We regularly assess the likelihood of adverse outcomesresulting from these examinations.

 

**RecentAccounting Pronouncements**

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standard (“SFAS”) No. 123 (Revised 2004), “Share-BasedPayment,” that addresses the accounting for share-based payment transactions inwhich a Company receives employee services in exchange for (a) equityinstruments of the Company or (b) liabilities that are based on the fairvalue of the Company’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123R addresses all forms ofshare-based payment awards, including shares issued under employee stockpurchase plans, stock options, restricted stock and stock appreciation rights.SFAS No. 123R eliminates the ability to account for share-basedcompensation transactions using APB Opinion No. 25, “Accounting for StockIssued to Employees”, that was provided in Statement 123 as originally issued.Under SFAS No. 123R companies are required to record compensation expensefor all share based payment award transactions measured at fair value. Thisstatement is effective for the first interim or annual reporting period of theCompany’s first fiscal year beginning on or after June 15, 2005. We willimplement SFAS No. 123R in our fiscal year beginning November 1,2005. We have not yet determined the impact of applying the various provisionsof SFAS No. 123R. Currently we use the Black-Scholes option pricing modelto estimate the fair value of stock options granted to employees and areevaluating option valuation models including the Black-Scholes to determinewhich model we will use upon the adoption of SFAS 123R.

 

In November 2004, the FASB issued SFAS No. 151“Inventory Costs”. This Statement amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material  (spoilage). In addition, this Statement requires that allocation of fixed productionoverhead to the costs of conversion be based on

 

23

----

 

the normal capacity of the production facilities. Theprovisions of this Statement will be effective for fiscal years beginning afterJune 15, 2005. We will implement SFAS No. 151 in our fiscal yearbeginning November 1, 2005.. We are currentlyevaluating the impact of this new standard, but we do not believe that it willhave a material impact on our financial position, results of operations or cashflows.

 

In December 2004, the FASB issued SFAS No. 153“Exchanges of Non-monetary Assets - an amendment of APB Opinion No.  29”.  This Statementamended APB Opinion No. 29 to eliminate the exception for non-monetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of non-monetary assets that do not have commercial substance. Anon-monetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Theprovisions of this Statement will be effective for fiscal periods beginningafter June 15, 2005. We will implement SFAS No. 153 in our fiscalperiod beginning August 1, 2005. We are currently evaluating the impact ofthis new standard, but we do not believe that it will have a material impactupon our financial position, results of operations or cash flows.

 

In March 2005, the FASB issued FASBInterpretation (“FIN”) No. 47, “Accounting for Conditional AssetRetirement Obligations.” FIN No. 47 clarifies that the term conditionalasset retirement asset obligation as used in FASB Statement No. 143, “Accountingfor Asset Retirement Obligations,” refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and/ or method ofsettlement. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN No. 47 iseffective no later than the end of fiscal years ending after December 15,2005 (December 31, 2005 for calendar-year companies). Retrospectiveapplication of interim financial information is permitted but is not required.We will implement FIN No. 47 in our fiscal year ending October 31,2006. Management does not expect adoption of FIN No.47  to have a material impact on theCompany’s financial statements.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections”, an amendment to Accounting Principles Bulletin(APB) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”. Though SFAS No. 154carries forward the guidance in APB No.20 and SFAS No.3 with respect to accountingfor changes in estimates, changes in reporting entity, and the correction oferrors, SFAS No. 154 establishes new standards on accounting for changesin accounting principles, whereby all such changes must be accounted for byretrospective application to the financial statements of prior periods unlessit is impracticable to do so. SFAS No. 154 is effective for accountingchanges and error corrections made in fiscal years beginning after December 15,2005, with early adoption permitted for changes and corrections made in yearsbeginning after May 2005. We will implement SFAS No. 154 in ourfiscal year beginning November 1, 2006. We are currently evaluating the impact of this new standard, but we donot believe that it will have a material impact upon our financial position,results of operations or cash flows.

 

**Item 3.****    Quantitative andQualitative Disclosures about Market Risk**

 

Information about market risks for the three and ninemonths ended July 31, 2005, does not differ materially from that discussedunder Item 7A of the registrant’s Annual Report on Form 10-K for thefiscal year ended October 31, 2004.

 

24

----

 

**Item 4.****    Controls and Procedures**

 

(a)  Evaluation of Disclosure Controls andProcedures

 

As required by Rule 13a-15(b) under theSecurities and Exchange Act of 1934 (the “Exchange Act”), we have carried outan evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer (“CEO”) and our ChiefFinancial Officer (“CFO”), of the effectiveness, as of the end of the fiscalquarter covered by this report, of the design and operation of our “disclosurecontrols and procedures” as defined in Rule 13a-15(e) promulgated bythe SEC under the Exchange Act. Based upon that evaluation, our CEO and our CFOconcluded that our disclosure controls and procedures, as of the end of suchfiscal quarter, were adequate and effective to ensure that information requiredto be disclosed by us in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Commission’s rules and forms and that such information isaccumulated and communicated to our management, including our CEO and CFO, asappropriate to all timely decisions regarding required disclosure.

 

(b)  Changes in Internal Controls

 

There has been no change in our internal control overfinancial reporting during the quarter or nine months ended July 31, 2005,that has materially affected or is reasonably like to materially affect ourinternal control over financial reporting.

 

25

----

 

**PART II– OTHER INFORMATION**

 

**The Company was not required to report the informationpursuant to Items 1 through 6 of Part II of Form 10-Q except asfollows:**

 

**Item 4.****    Submission of Matters to aVote of Security Holders**

 

On August 5, 2005 we held our 2005 Annual Meetingof Stockholders.  The following personswere elected as directors to hold office until the 2006 Annual Meeting ofShareholders: Irwin J. Gruverman, L. Michael Cutrer, John A. Friede, Dr. JonathanP. Gertler, John M. Sabin, Richard A. Sandberg, Dr. Gary N. Wilner, andNancy J. Wysenski. There were no broker non-votes. The number of shares castfor, withheld and abstained with respect to each of the nominees were asfollows:

 
| **Nominee**                  | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Abstained** | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|---------------|------------|
|                         |       |       |       |         |       |          |       |
| Irwin J. Gruverman           |       | 13,696,948 |       | —       |       | 986,831       |       |
| L. Michael Cutrer            |       | 13,517,077 |       | —       |       | 1,166,702     |       |
| John A. Friede               |       | 13,662,405 |       | —       |       | 1,021,374     |       |
| Dr. Jonathan P. Gertler |       | 13,495,692 |       | —       |       | 1,188,087     |       |
| John M. Sabin                |       | 13,700,176 |       | —       |       | 983,603       |       |
| Richard A. Sandberg          |       | 13,700,676 |       | —       |       | 983,103       |       |
| Dr. Gary N. Wilner      |       | 13,499,758 |       | —       |       | 1,184,021     |       |
| Nancy J. Wysenski            |       | 13,701,156 |       | —       |       | 982,623       |       |

 

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

 

(a)          Exhibits.

 
| ** ** | **Exhibits No.** | ** ** | **Title**                                                                                                                             |
|------------|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|
|       |             |       |                                                                                                                                  |
|       | 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 |

 

26

----

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                   | NORTH AMERICAN SCIENTIFIC, INC. |
|------------------------|---------------------------------|
|                   |                            |
|                   |                            |
| September 7, 2005 | By:                             | /s/ L. Michael Cutrer |   |
|                   |                            | Name: | L.  Michael Cutrer |
|                   |                            | Title: | President  and |
|                   |                            |   | Chief Executive Officer |
|                   |                            |   | (Principal Executive Officer) |
|                   |                            |
|                   |                            |
| September 7, 2005 | By:                             | /s/ James W. Klingler |   |
|                   |                            | Name: | James  W. Klingler |
|                   |                            | Title: | Senior Vice President and |
|                   |                            |   | Chief Financial Officer |
|                   |                            |   | (Principal Financial Officer) |
|                        |                                 |  |  |  |

 

27

----