#### ** **

#### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

#### ** **

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

 

**For the quarterly periodended July 31, 2004**

** **

**or**

 

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

** **

**Commission File Number 0-26670**

 

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**NORTH AMERICAN SCIENTIFIC, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **51-0366422**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **20200 Sunburst Street, Chatsworth, CA 91311**                 |
| (Address of principal executive offices)                        |
|                                                            |   |                                  |
| **(818) 734-8600**                                              |
| (Registrant’s telephone number, including area code)       |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

ýYes    o  No

 

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

 

oYes     ýNo

 

The number of shares of Registrant’s Common Stock, $.01 par value,outstanding as of September 20, 2004 was 16,257,437 shares.

 

 

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**NORTH AMERICANSCIENTIFIC, INC.**

 

**EXPLANATORY NOTE FOR FILING OF FORM 10-Q/A**

 

The purpose of this amendmentNo. 1 to North American Scientific, Inc.’s Quarterly Report on Form 10-Q forthe quarterly period ended July 31, 2004, is to provide additional disclosurethat the Company’s independent registered public accounting firm has not yetcompleted their review of the interim financial statements in the Form 10-Qfiled on September 20, 2004 with the Securities and Exchange Commission asrequired by Rule 10-01(d) of Regulation S-X. Note 1 of Item 1 “Financial Statements” and Item 2 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” of thisForm 10-Q/A have been revised to include such additional disclosure.  In addition, Item 2 has been revised toinclude a disclosure on the impact of the adoption of the revenue recognitionpolicy under SOP 97-2.

 

No other sections of theoriginal Form 10-Q filed on September 20, 2004 have been omitted or amended.

 

**Index**

 
| **Part I – Financial  Information**                                                               |                                                                                            |
|--------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                                                                   |                                                                                            |   |
| **Item 1.**                                                                                            | **Financial Statements**                                                                        |   |
|                                                                                                   |                                                                                            |   |
| **Consolidated Balance Sheets  as of July 31, 2004 and October 31, 2003**                              |                                                                                            |
|                                                                                                   |                                                                                            |   |
| **Consolidated  Statements of Operations for the three and nine months ended July 31, 2004  and 2003** |                                                                                            |
|                                                                                                   |                                                                                            |   |
| **Consolidated  Statements of Cash Flows for the nine months ended July 31, 2004 and 2003**            |                                                                                            |
|                                                                                                   |                                                                                            |   |
| **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 and  Reports on Form 8-K**                                                           |   |
|                                                                                                   |                                                                                            |   |
| **Signatures**                                                                                         |                                                                                            |   |

 

2

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**PART II –FINANCIAL INFORMATION**

 

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

###### ** **

**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**Consolidated Balance Sheets**

 
|                                                                                                                                                                                                         |   | **July 31,  2004** |       | **October  31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                                                                                                                                                                                         |   | **(Unaudited)**    |       |                   |   |
| **Assets**                                                                                                                                                                                                   |   |               |       |                   |   |
|                                                                                                                                                                                                         |   |               |       |                   |   |
| Current Assets                                                                                                                                                                                               |   |               |       |                   |   |
| Cash                                                                                                                                                                                                         |   | $                  | 232,000    |                   | $      | 1,761,000 |   |
| Marketable securities                                                                                                                                                                                        |   | 14,481,000         |       | 32,587,000             |   |
| Accounts receivable                                                                                                                                                                                          |   | 6,772,000          |       | 2,167,000              |   |
| Inventories                                                                                                                                                                                                  |   | 6,529,000          |       | 692,000                |   |
| Income tax receivable                                                                                                                                                                                        |   | —             |       | 496,000                |   |
| Prepaid and other current assets                                                                                                                                                                             |   | 2,929,000          |       | 1,053,000              |   |
| Total current  assets                                                                                                                                                                                        |   | 30,943,000         |       | 38,756,000             |   |
| Non-current marketable securities                                                                                                                                                                            |   | 8,362,000          |       | 14,767,000             |   |
| Equipment and leasehold improvements                                                                                                                                                                         |   | 4,315,000          |       | 2,996,000              |   |
| Goodwill                                                                                                                                                                                                     |   | 22,932,000         |       | 3,866,000              |   |
| Intangible assets                                                                                                                                                                                            |   | 27,426,000         |       | 813,000                |   |
| Other assets                                                                                                                                                                                                 |   | 122,000            |       | 1,334,000              |   |
| Total assets                                                                                                                                                                                                 |   | $                  | 94,100,000 |                   | $      | 62,532,000 |   |
|                                                                                                                                                                                                         |   |               |       |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                |   |               |       |                   |   |
|                                                                                                                                                                                                         |   |               |       |                   |   |
| Current liabilities                                                                                                                                                                                          |   |               |       |                   |   |
| Accounts payable                                                                                                                                                                                             |   | $                  | 5,196,000  |                   | $      | 1,620,000 |   |
| Accrued expenses                                                                                                                                                                                             |   | 8,120,000          |       | 5,166,000              |   |
| Deferred revenue                                                                                                                                                                                             |   | 5,786,000          |       | —                 |   |
| Total current liabilities                                                                                                                                                                                    |   | 19,102,000         |       | 6,786,0000             |   |
| 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, 16,276,437 and 10,298,241 shares issued; 16,257,437 and  10,279,241 shares outstanding as of July 31, 2004 and October 31, 2003,  respectively |   | 166,000            |       | 103,000                |   |
| Additional paid-in capital                                                                                                                                                                                   |   | 120,818,000        |       | 74,343,000             |   |
| Treasury stock, at cost – 19,000 shares                                                                                                                                                                 |   | (129,000           | )          | (129,000               | )      |
| Accumulated deficit                                                                                                                                                                                          |   | (45,857,000        | )          | (18,571,000            | )      |
| Total stockholders’ equity                                                                                                                                                                              |   | 74,998,000         |       | 55,746,000             |   |
| Total liabilities and stockholders’ equity                                                                                                                                                              |   | $                  | 94,100,000 |                   | $      | 62,532,000 |   |

 

Seecondensed notes to the consolidated financial statements.

 

3

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**NORTH AMERICAN SCIENTIFIC, INC.**

** **

**Consolidated Statements of Operations**

**(Unaudited)**

** **
|                                                                             |   | **Three  months ended July 31,** |        | **Nine  months ended July 31,** |   |
|----------------------------------------------------------------------------------|--------|----------------------------------|-------------|---------------------------------|--------|
|                                                                             |   | **2004**                         |        | **2003**                        |   | **2004** |   | **2003** |   |
| Net Sales                                                                        |   | $                                | 8,137,000   |                            | $      | 3,011,000 |   | $ | 14,982,000 |   | $ | 11,056,000 |   |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Cost of goods sold                                                               |   | 4,801,000                        |        | 1,733,000                       |   | 8,639,000 |   | 4,988,000 |   |
| Gross profit                                                                     |   | 3,336,000                        |        | 1,278,000                       |   | 6,343,000 |   | 6,068,000 |   |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Selling expenses                                                                 |   | 2,273,000                        |        | 889,000                         |   | 3,919,000 |   | 2,463,000 |   |
| General and administrative expenses                                              |   | 3,817,000                        |        | 1,815,000                       |   | 9,602,000 |   | 5,686,000 |   |
| Research and development                                                         |   | 3,269,000                        |        | 1,661,000                       |   | 7,060,000 |   | 5,431,000 |   |
| In-process research and development                                              |   | 7,800,000                        |        | —                          |   | 7,800,000 |   | — |   |
| Impairment of goodwill and long-lived  assets                                    |   | 4,681,000                        |        | —                          |   | 4,681,000 |   | — |   |
| Merger and integration costs                                                     |   | 1,056,000                        |        | —                          |   | 1,056,000 |   | — |   |
| Costs of Parker/Hunter settlement                                                |   | 1,100,000                        |        | —                          |   | — |   | — |   |
| Recovery of legal settlement costs from  NOMOS selling shareholders’ escrow |   | (1,100,000                       | )           | —                          |   | — |   | — |   |
| Loss from operations                                                             |   | (19,560,000                      | )           | (3,087,000                      | )      | (27,775,000 | ) | (7,512,000 | ) |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Interest and other income, net                                                   |   | 114,000                          |        | 250,000                         |   | 489,000 |   | 1,534,000 |   |
| Loss before provision for income taxes                                           |   | (19,446,000                      | )           | (2,837,000                      | )      | (27,286,000 | ) | (5,978,000 | ) |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Provision for income taxes                                                       |   | —                           |        | —                          |   | — |   | — |   |
| Loss before cumulative effect of change in  accounting principle                 |   | (19,446,000                      | )           | (2,837,000                      | )      | (27,286,000 | ) | (5,978,000 | ) |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Cumulative effect of change in accounting  principle                             |   | —                           |        | —                          |   | — |   | 311,000 |   |
| Net loss                                                                         |   | $                                | (19,446,000 | )                               | $      | (2,837,000 | ) | $ | (27,286,000 | ) | $ | (6,289,000 | ) |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Basic and diluted loss per share:                                                |   |                             |        |                            |   |   |   |   |   |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Loss before cumulative effect of change in accounting principle                  |   | $                                | (1.24       | )                               | $      | (0.28 | ) | $ | (2.24 | ) | $ | (0.58 | ) |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Cumulative effect of change in accounting principle                              |   | —                           |        | —                          |   | — |   | (0.03 | ) |
| Net loss                                                                         |   | $                                | (1.24       | )                               | $      | (0.28 | ) | $ | (2.24 | ) | $ | (0.61 | ) |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Shares used in per share calculations:                                           |   |                             |        |                            |   |   |   |   |   |
|                                                                             |   |                             |        |                            |   |   |   |   |   |
| Basic and diluted                                                                |   | 15,679,214                       |        | 10,259,002                      |   | 12,193,057 |   | 10,252,661 |   |

 

Seecondensed notes to the consolidated financial statements.

 

4

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**NORTH AMERICAN SCIENTIFIC, INC.**

** **

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
|                                                                         |   | **Nine  Months Ended July 31,** |        |
|------------------------------------------------------------------------------|--------|---------------------------------|-------------|
|                                                                         |   | **2004**                        |        | **2003** |   |
| Cash flows from operating activities:                                        |   |                            |        |   |   |
| Net loss                                                                     |   | $                               | (27,286,000 | ) | $ | (6,289,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                            |        |   |   |
| Cumulative effect of change in accounting  principle                         |   | —                          |        | 311,000 |   |
| Depreciation and amortization                                                |   | 1,280,000                       |        | 698,000 |   |
| Stock-based compensation                                                     |   | 351,000                         |        | 47,000 |   |
| Provision for doubtful accounts                                              |   | 44,000                          |        | 17,000 |   |
| Gain on sale of marketable securities                                        |   | —                          |        | (600,000 | ) |
| Impairment of long-lived assets                                              |   | 4,681,000                       |        | — |   |
| Write-off of in-process research and  development                            |   | 7,800,000                       |        | — |   |
| Write-off of licenses and equipment                                          |   | 14,000                          |        | 217,000 |   |
| Changes in assets and liabilities, net of  effects of acquisition:           |   |                            |        |   |   |
| Accounts receivable                                                          |   | (1,742,000                      | )           | 375,000 |   |
| Inventories                                                                  |   | (1,244,000                      | )           | (127,000 | ) |
| Prepaid and other current assets                                             |   | (158,000                        | )      | (440,000 | ) |
| Accounts payable                                                             |   | 1,483,000                       |        | (57,000 | ) |
| Accrued expenses                                                             |   | (1,849,000                      | )           | 462,000 |   |
| Income tax receivable                                                        |   | 496,000                         |        | 1,006,000 |   |
| Deferred revenue                                                             |   | 1,046,000                       |        | — |   |
| Net cash used in operating activities                                        |   | (15,084,000                     | )           | (4,380,000 | ) |
|                                                                         |   |                            |        |   |   |
| Cash flows from investing activities:                                        |   |                            |        |   |   |
| Proceeds from sale of marketable securities                                  |   | 40,886,000                      |        | 28,434,000 |   |
| Purchase of marketable securities                                            |   | (16,375,000                     | )           | (24,766,000 | ) |
| Proceeds from sale of non-marketable  securities                             |   | —                          |        | 408,000 |   |
| Purchase of licenses                                                         |   | (75,000                         | )           | (35,000 | ) |
| NOMOS acquisition, net of cash acquired                                      |   | (13,248,000                     | )           | — |   |
| Capital expenditures                                                         |   | (1,251,000                      | )           | (376,000 | ) |
| Net cash provided by investing activities                                    |   | 9,937,000                       |        | 3,665,000 |   |
|                                                                         |   |                            |        |   |   |
| Cash flow from financing activities:                                         |   |                            |        |   |   |
| Purchase of common stock                                                     |   | —                          |        | (129,000 | ) |
| Proceeds from exercise of stock options and  stock purchase plan             |   | 3,618,000                       |        | 171,000 |   |
| Net cash provided by finance activities                                      |   | 3,618,000                       |        | 42,000 |   |
| Net decrease in cash and cash equivalents                                    |   | (1,529,000                      | )           | (673,000 | ) |
|                                                                         |   |                            |        |   |   |
| Cash and cash equivalents at beginning of  period                            |   | 1,761,000                       |        | 2,708,000 |   |
| Cash and cash equivalents at end of period                                   |   | $                               | 232,000     |   | $ | 2,035,000 |   |

 

Seecondensed notes to the consolidated financial statements.

 

5

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**NORTH AMERICAN SCIENTIFIC, INC.**

** **

**Condensed Notes to Consolidated FinancialStatements**

**(Unaudited)**

** **

**Note1 – Consolidated Financial Statements**

 

*Basis of Presentation*

* *

The accompanyingconsolidated financial statements of North American Scientific, Inc. (the“Company”) are unaudited, other than the consolidated balance sheet at October31, 2003, and reflect all material adjustments, consisting only of normalrecurring adjustments, which management considers necessary for a fairstatement of the Company’s financial position, results of operations and cashflows for the interim periods.  Theresults of operations for the current interim period are not necessarilyindicative of the results to be expected for the entire fiscal year.

 

These consolidatedfinancial statements have been prepared in accordance with the rules andregulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnotes normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles in the United States of America have been condensed oromitted pursuant to these rules and regulations.  These consolidated financial statements should be read inconjunction with the consolidated financial statements and the notes theretoincluded in the Company’s Form 10-K, as filed with the SEC for the year endedOctober 31, 2003.

 

Certainreclassifications have been made to prior period balances in order to conformto the current period presentation.

 

Our independent registeredpublic accounting firm has informed us that they will be unable to completetheir review of our interim financial statements for the quarterly period endedJuly 31, 2004 prior to the filing of this Form 10-Q.  As a result, the interim financial statements contained in ourquarterly report on Form 10-Q for the quarter ended July 31, 2004 have not beenreviewed by our independent registered public accounting firm as requiredpursuant to Rule 10-01(d) of Regulation S-X, and therefore, the filing of thisForm 10-Q is considered to be incomplete. As soon as our independent registered public accounting firm completestheir review of our third quarter 2004 financial statements, we will file anamended Form 10-Q/A.

 

*Use of Estimates*

* *

In the normalcourse of preparing the financial statements in conformity with generallyaccepted accounting principles in the United States of America, management isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those amounts.

 

*Accounting for Stock-based Compensation*

* *

The Companyaccounts for its stock option awards to employees and directors using theintrinsic value method of accounting in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations.  The Company hasprovided additional disclosures required by Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”  

 

6

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Had compensationcost for the Company’s stock options been recognized based upon the estimatedfair value on the grant date under the fair value methodology prescribed bySFAS No. 123, as amended by SFAS No. 148, the Company’s net loss and loss pershare would have been as follows:

 
|                                           |   | **Three  months ended July 31,** |        | **Nine  months ended July 31,** |   |
|------------------------------------------------|--------|----------------------------------|-------------|---------------------------------|--------|
|                                           |   | **2004**                         |        | **2003**                        |   | **2004** |   | **2003** |   |
| Net loss, as reported                          |   | $                                | (19,446,000 | )                               | $      | (2,837,000 | ) | $ | (27,286,000 | ) | $ | (6,289,000 | ) |
| Add: stock-based compensation recognized       |   | —                           |        | —                          |   | 351,000 |   | 47,000 |   |
| Less: total stock-based compensation (1)       |   | (450,000                         | )           | (539,000                        | )      | (2,048,000 | ) | (1,666,000 | ) |
| Net loss, as adjusted                          |   | $                                | (19,896,000 | )                               | $      | (3,376,000 | ) | $ | (28,983,000 | ) | $ | (7,908,000 | ) |
| Basic and diluted loss per share, as  reported |   | $                                | (1.24       | )                               | $      | (0.28 | ) | $ | (2.24 | ) | $ | (0.61 | ) |
| Basic and diluted loss per share, as  adjusted |   | $                                | (1.27       | )                               | $      | (0.33 | ) | $ | (2.38 | ) | $ | (0.77 | ) |

 

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

** **

**TheCompany uses the Black-Scholes option-pricing model for estimating the fairvalue of options granted. The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option valuation models require the input of highlysubjective assumptions, including the expected stock price volatility.  The Company uses projected volatility rates,which are based upon historical volatility rates, trended into future years.Because the Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of the Company’s options. For purposes of proforma disclosures, the estimated fair values of the options are amortized overthe options’ vesting periods.**

** **

*Revenue Recognition*

* *

The Company sellsproducts for the radiation oncology community, including brachytherapy seedsused in the treatment of cancer, as well as intensity modulated radiationtherapy (“IMRT”) and image guidance radiation therapy (“IGRT”) products andservices.  Product revenue consists ofbrachytherapy and related products sales. Software revenues consist of IMRT and IGRT product sales.

 

Productrevenue

 

The Companyapplies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition” for the sale of non-software products.  SAB 104 which supercedes SAB No. 101,“Revenue Recognition in Financial Statements”, provides guidance on therecognition, presentation and disclosure of revenue in financialstatements.  SAB No. 104 outlines thebasic criteria that must be met to recognize revenue and provides guidance forthe disclosure of revenue recognition policies.  In general, the Company recognizes revenue related to productsales when (i) persuasive evidence of an arrangement exists, (ii) delivery hasoccurred, (iii) the fee is fixed or determinable, and (iv) collectibility isreasonably assured.

 

Revenue recognitionis deferred when undelivered products or services are essential to thefunctionality of delivered products, customer acceptance is uncertain,significant obligations remain, or the fair value of undelivered elements isunknown.

 

7

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Softwarerevenue

 

The Company’ssoftware revenue is generated from the sale of advanced medical equipmentproducts.  The software element of theCompany’s products is deemed an essential element of the functionality of theproduct.  Maintenance and support areprovided with the initial product sale for a twelve month period.  The maintenance and support is renewableannually or longer, at the customer’s discretion.

 

The Companyrecognizes revenue in accordance with the provisions of Statement of Position97-2 (“SOP 97-2”), “Software Revenue Recognition”, as amended by Statement ofPosition 98-9 (“SOP 98-9”), “Modification of SOP 97-2, Software RevenueRecognition, with respect to Certain Transactions”.  Under the provisions of SOP 97-2, the Company recognizes softwarerevenue upon delivery and acceptance, provided all significant obligations havebeen met, persuasive evidence of an arrangement exists, fees are fixed ordeterminable, collection is probable, and the Company is not involved inproviding services that are essential to the functionality of the product.

 

The Company’ssoftware sales are generally multiple element arrangements, which could includethe product, first year annual maintenance and support, and training andinstallation.  Revenues from themultiple elements arrangements are allocated to each element based on therelative fair value of the elements.  Ifthe fair value of the element exists, the determination is based on vendorspecific objective evidence.  If suchevidence of fair value for each element of the arrangement does not exist, allrevenue from the arrangement is deferred until such time that evidence of fairvalue of each element does exist or until all elements of the arrangement aredelivered.  If in a multiple elementarrangement, fair value does not exist for one or more of the undeliveredelements, the residual method of accounting is applied.  Under the residual method, the fair value ofthe undelivered elements is deferred, and the remaining portion of thearrangement fee is recognized as revenue.

 

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

 

**Note 2 –****Variable Interest Entity**

 

**In October 2003, the Companyentered into a Secured Loan Agreement with Prostate Centers of America(“PCA”).  Under the agreement, theCompany is obligated to make periodic advances subject to PCA achieving certainmilestones.  The secured note bearsinterest at 6% per annum and is repayable in four installments commencing onDecember 1, 2004, with all unpaid principal and interest due onSeptember 1, 2005.**

** **

**As of July 31, 2004, theCompany’s advances to PCA totaled $700,000, with an obligation, contingent uponcertain milestones, to advance an additional $500,000. The Company has noequity interest in PCA.**

** **

**The funds are to be used forgeneral working capital to provide various brachytherapy services to ambulatorysurgical centers. A distributor who has agreed to procure all of itsbrachytherapy seeds exclusively from the Company for a period of five years hasa 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 beneficiary under Financial Accounting StandardsBoard Interpretation No. 46, “Consolidation of Variable InterestEntities—an interpretation of ARB No. 51” (“FIN No. 46”). FINNo. 46 is effective for a VIE created after January 31, 2003 and to aVIE in which an enterprise obtains an interest after that date.**

 

8

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**The Company has determined thatPCA is a VIE since it does not have sufficient equity at risk for the entity tofinance its activities. FIN No. 46 requires that an enterprise consolidatea VIE if that enterprise has a variable interest that will absorb a majority ofthe entity’s expected losses if they occur. Accordingly, the Company adoptedFIN No. 46 in October 2003 and consolidated PCA as a VIE, regardlessof the Company not having an equity interest in PCA and its creditors having norecourse against the Company.**

** **

**Consolidation of the PCA as ofJuly 31, 2004, and October 31, 2003 resulted in the consolidation of cash of$148,000 and $350,000, respectively, which is held by PCA.  The consolidated balance sheet of July 31,2004 also included $103,000 in accounts receivable, $493,000 of equipment andleasehold improvements, and $732,000 of accounts payable and accrued expensesfrom PCA.  Consolidation of PCA’sresults of operations for the three and nine months ended July 31, 2004resulted in a net loss of $418,000 and $656,000, respectively.**

** **

**Note 3 – MarketableSecurities**

** **

**TheCompany invests excess cash in marketable securities consisting primarily ofcommercial paper, corporate notes and bonds, U.S. Government securities andmoney market funds. **

** **

**Debtsecurities that the Company has the positive intent and ability to hold tomaturity are classified as “held-to-maturity” and reported at amortized cost.Debt securities not classified as held-to-maturity and marketable equitysecurities are classified as “available-for-sale,” and are recorded at fairvalue with unrealized gains and losses included in stockholders’ equity.**

** **

**TheCompany continually reviews its investments to determine whether a decline infair value below the cost basis is other than temporary. If a decline in fairvalue is judged to be other than temporary, the cost basis of the security iswritten down to fair value and the amount of the write-down is included in theConsolidated Statements of Operations.**

** **

**Note 4 - AccountsReceivable**

** **

Accountsreceivable consist of the following: 

 
|                                  |   | **July 31,  2004** |      | **October  31,  2003** |   |
|---------------------------------------|--------|--------------------|-----------|------------------------|--------|
| Accounts receivable                   |   | $                  | 6,919,000 |                   | $      | 2,270,000 |   |
| Less: allowance for doubtful accounts |   | (147,000           | )         | (103,000               | )      |
|                                  |   | $                  | 6,772,000 |                   | $      | 2,167,000 |   |

 

**Note 5 – Inventories**

** **

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

** **
|            |   | **July 31,  2004** |      | **October  31,  2003** |   |
|-----------------|--------|--------------------|-----------|------------------------|--------|
| Raw materials   |   | $                  | 5,982,000 |                   | $      | 639,000 |   |
| Work in process |   | 85,000             |      | 25,000                 |   |
| Finished goods  |   | 462,000            |      | 28,000                 |   |
|            |   | $                  | 6,529,000 |                   | $      | 692,000 |   |

 

9

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**Note 6 – Intangible Assets**

** **

Intangible assetsconsist of the following: 

 
|                           |   | **July 31,  2004** |       | **October  31,  2003** |   |
|--------------------------------|--------|--------------------|------------|------------------------|--------|
| Customer relationships         |   | $                  | 1,052,000  |                   | $      | 52,000 |   |
| Trade names                    |   | 7,726,000          |       | 26,000                 |   |
| Technology                     |   | 19,033,000         |       | 233,000                |   |
| Licenses and patents           |   | 98,000             |       | 592,000                |   |
|                           |   | 27,909,000         |       | 903,000                |   |
| Less: accumulated amortization |   | (483,000           | )          | (90,000                | )      |
|                           |   | $                  | 27,426,000 |                   | $      | 813,000 |   |

 

**Amortizationexpense was $434,000 and $8,000 for the three months ended July 31, 2004 and2003, and $467,000 and $20,000 for the nine months ended July 31, 2004, and2003, respectively.**

** **

**Note 7 – Net Loss perShare**

** **

Basic earnings(loss) per share is computed by dividing the net income (loss) by the weightedaverage number of shares outstanding for the period. Diluted earnings (loss)per share is computed by dividing the net income (loss) by the sum of theweighted average number of common shares outstanding for the period plus theassumed exercise of all dilutive securities by applying the treasury stockmethod unless such assumed exercises are anti-dilutive. The following tablesets forth the computation of basic and diluted earnings (loss) per share:

 
|                                           |   | **Three  months ended July 31,** |        | **Nine  months ended July 31,** |   |
|------------------------------------------------|--------|----------------------------------|-------------|---------------------------------|--------|
|                                           |   | **2004**                         |        | **2003**                        |   | **2004** |   | **2003** |   |
|                                           |   |                             |        |                            |   |   |   |   |   |
| Net loss                                       |   | $                                | (19,446,000 | )                               | $      | (2,837,000 | ) | $ | (27,286,000 | ) | $ | (6,289,000 | ) |
| Weighted average shares outstanding - basic    |   | 15,679,214                       |        | 10,259,002                      |   | 12,193,057 |   | 10,252,661 |   |
| Dilutive effect of stock options and  warrants |   | —                           |        | —                          |   | — |   | — |   |
| Weighted average shares outstanding  -diluted  |   | 15,679,214                       |        | 10,259,002                      |   | 12,193,057 |   | 10,252,661 |   |
| Basic loss per share                           |   | $                                | (1.24       | )                               | $      | (0.28 | ) | $ | (2.24 | ) | $ | (0.61 | ) |
| Diluted loss  per share                        |   | $                                | (1.24       | )                               | $      | (0.28 | ) | $ | (2.24 | ) | $ | (0.61 | ) |

 

Stock options andwarrants to purchase 3,485,081 and 2,317,897 common shares for the three monthsended July 31, 2004, and 2003, respectively, and 3,793,649 and 2,308,096 commonshares for the nine months ended July 31, 2004 and 2003, respectively, were notincluded in the computation of diluted earnings per share because their effectwould have been anti-dilutive.

 

10

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**Note 8 – Acquisition of NOMOS**

 

On May 4, 2004, the Companyacquired NOMOS Corporation (“NOMOS”). The results of NOMOS have been included in the consolidated financialstatements from the date of acquisition. NOMOS develops, markets and sellsmedical devices used in external beam radiation. As a result of theacquisition, the Company expects to benefit from a further diversified andexpanded product line in the radiation oncology medical device industry.  

 

The purchase price ofapproximately $58 million consisted of $12 million in cash, the issuance of 5.3million shares of the Company’s common stock with a fair value of approximately$38 million, the assumption of 2.0 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 $0.4 million.  The fair value of the common stock used indetermining the purchase price was $7.21 per share based on the average of theclosing price of the common stock for the period two days before and after theOctober 27, 2003 merger agreement announcement date. The stock options andwarrants, which fully vested at the acquisition date, were valued using a Black-Scholesvaluation model with the following assumptions: risk-free interest rate of4.5%, volatility factor of 60%, expected term of 1.5 years for stockoptions, contractual term of 0.5 years for warrants and no dividend yield.The acquisition was accomplished through a reverse triangular merger into awholly owned subsidiary of the Company, and is reflected in the Company’sfinancial statements, including the footnotes thereto, as the IMRT/IGRToperating segment.

 

Pursuant to the purchaseagreement, approximately 15.8% of the shares of common stock and cash otherwisepayable to the NOMOS shareholders were deposited into two separate escrowfunds.  With respect to the first escrowfund, 526,810 shares of the Company’s common stock and $1.2 million of cashwill be held for a period of two years following the acquisition date, as asource of reimbursement for losses arising from any breach by NOMOS of itsrepresentations or obligations under the purchase agreement.  With respect to the second escrow fund, 307,617shares of the Company’s common stock and $700,800 of cash will held to serve asolely as source of reimbursement for any losses incurred in connection withthe demand made against NOMOS by Parker/Hunter Incorporated (See Note 11).

 

The purchase price has beenallocated based on the estimated fair values of the assets acquired andliabilities assumed as of the date of acquisition as follows: 

 
| Cash                                    |   | $          | 1,771,000  |   |
|-----------------------------------------|--------|------------|------------|--------|
| Accounts receivable                     |   | 2,908,000  |       |
| Inventories                             |   | 4,593,000  |       |
| Equipment and leasehold improvements    |   | 1,423,000  |       |
| In-process research and development     |   | 7,800,000  |       |
| Acquired identifiable intangible assets |   | 27,500,000 |       |
| Goodwill                                |   | 22,725,000 |       |
| Other current and long term assets      |   | 508,000    |       |
| Accounts payable                        |   | (2,097,000 | )          |
| Accrued expenses                        |   | (4,410,000 | )          |
| Deferred revenue                        |   | (4,740,000 | )          |
| Total                                   |   | $          | 57,981,000 |   |

 

The amount allocated toin-process research and development (“IPR&D”) represents an estimate of thefair value of purchased in-process technology for research projects that as ofthe acquisition date, will not have reached technological feasibility and haveno alternative future use. Only those research projects that had advanced to astage of development where management believed reasonable net future cash flowforecasts could be prepared and a reasonable likelihood of technical successexisted were included in the estimated fair value. The estimated fair value ofthe IPR&D to be acquired in the merger was determined based on applying a20% discount rate to the forecast of the estimated net future cash flows foreach project, adjusted for the estimated probability of technical success foreach research project. IPR&D was expensed during the three months endedJuly 31, 2004. Ongoing in-process research and development projects aregenerally focused on developing enhancements and adding features andfunctionality that allow existing products to more effectively and efficientlytreat cancers found in disease sites, such as liver and breast, for which ourproducts, due to certain design limitations, have traditionally not been used.Strategically, this should enable the Company to expand the market for itsproducts rather than to

 

11

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simply maintain the existingrevenue base. Significant investment in research and development has been, andwill continue to be, necessary to enhance existing products, develop newproducts and to allow the combined company to generate new product sales tofurther penetrate and expand geographic markets for its products. 

 

The value assignedto IPR&D was comprised of the following projects: BAT® with optical tracking, which was releasedin the three months ended July 31, 2004 ($6.4 million), development of asignificantly enhanced treatment planning system which is expected to bereleased in fiscal 2005 ($0.6 million), and a treatment planning product,which is expected to incorporate enhanced technology with Monte Carlo basedsimulation capabilities which is expected to be released in fiscal 2006($0.5 million), and other smaller projects ($0.3 million). Eachproduct development has a risk of failure or delay in introduction that couldresult in diminished overall cash flows should the product not be introduced tothe market as currently anticipated. Continued product innovation and timelyrelease of IPR&D projects, once integrated and redefined as necessary, arebelieved to be fundamental to the success of the combined company. 

 

The amountsallocated to IPR&D, and other intangible assets for financial reportingpurposes will not result in future income tax deductions since the acquisitionis expected to be a nontaxable transaction. Thedeferred tax liabilities related to such temporary differences were offset bydeferred tax assets (primarily net operating loss carryforwards subject tochange in ownership provisions of Internal Revenue Service Code Section 382) inthe purchase price allocation. The Company provided a full valuation allowanceagainst the remaining net deferred tax assets since realization cannot besufficiently assured. The Company intends to file consolidated and combinedfederal and state income tax returns with NOMOS following the consummation ofthe merger. Goodwill is not deductible for income tax purposes. Accordingly, noprovision or benefit for income taxes were recognized in the accompanying proforma results of operations. 

 

The acquiredidentifiable intangible assets will be amortized over their useful lives asfollows: 

 
|                            |   | **Amount** |       | **Useful  Lives (in years)** |                         |
|---------------------------------|--------|------------|------------|------------------------------|------------------------------|
| Purchased technology            |   | $          | 18,800,000 |                         | 12 – no residual  value |   |
| Existing customer relationships |   | 1,000,000  |       | 10 – no  residual value |                         |
| Trademark                       |   | 7,700,000  |       | Indefinite                   |                         |
| Total                           |   | $          | 27,500,000 |                         |                         |   |

 

The followingtable presents unaudited pro forma revenue, net loss and loss per share givingthe effect of NOMOS acquisition as if it had been completed at the beginning ofeach period presented:

 
|                                                    |   | **Three  months ended July 31,** |      | **Nine  months ended July 31,** |   |
|---------------------------------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
|                                                    |   | **2004**                         |      | **2003**                        |   | **2004** |   | **2003** |   |
|                                                    |   |                             |      |                            |   |   |   |   |   |
| Revenue                                                 |   | $                                | 8,137,000 |                            | $      | 10,508,000 |   | $ | 29,221,000 |   | $ | 34,737,000 |   |
| Loss before cumulative effect of accounting  change (1) |   | (10,590,000                      | )         | (3,646,000                      | )      | (23,195,000 | ) | (6,016,000 | ) |
| Net loss(1)                                             |   | (10,590,000                      | )         | (3,646,000                      | )      | (23,195,000 | ) | (6,327,000 | ) |
| Net loss per share, basic and diluted                   |   | (0.68                            | )         | (0.23                           | )      | (1.47 | ) | (0.41 | ) |
|                                                         |        |                                  |           |                                 |        |  |  |  |  |  |  |  |  |

 

----

**(1)Excludes a $7.8 million charge for IPR&D and $1.1 million in merger andintegration costs associated with the acquisition of NOMOS.**

 

12

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The impact of thechange in revenue recognition of the BAT® from SAB 101 to SOP 97-2 for theperiods presented on revenues was an increase of $0.5 million for the threemonths ended July 31, 2003, and an increase of $1.8 million and $0.5 millionfor the nine months ended July 31, 2003 and 2004, respectively.  The impact of the change in revenuerecognition of the BAT® from SAB 101 to SOP 97-2 for the periods presented onnet loss was a decrease in net loss of $0.1 million for the three months endedJuly 31, 2003 and an a decrease in net loss of $1.0 million and $0.3 millionfor the nine months ended July 31, 2004 and 2003, respectively.

 

The unaudited pro forma financial informationabove reflects the Company’s decision to adopt the revenue recognition policyunder SOP 97-2 with respect to sales of its BAT® product.  Prior to the acquisition by the Company onMay 4, 2004, NOMOS had recognized revenue of the BAT® product under SAB101.  The Company has determined thatrevenue recognition of the BAT® product should be accounted for under SOP 97-2so it has restated the NOMOS historical financial results utilized in the proforma information above to be consistent with results presented for the threeand nine months ended July 31, 2004.  Inview of this change in revenue recognition with respect to its BAT® product,the financial results presented in the Forms 8-K/A dated July 19, 2004, shouldnot be relied upon.

 

**Note 9 – SegmentInformation**

** **

**The Company’s operations aredivided into three segments based upon a combination of factors including:product produced, manufacturing process and management oversight.  The Company’s three segments are: IMRT/IGRT,Radiation Sources, and Theseus. IMRT/IGRT develops and markets products usedduring external beam radiation therapy for the treatment of cancer.  Radiation Sources develops and marketsradioisotopic products including brachytherapy seeds and accessories used inthe treatment of cancer and non-therapeutic products used in medical,environmental, research and industrial applications.  Theseus has been developing a radiopharmaceutical imaging agentfor various medical diagnostic and monitoring functions, including themanagement of chemotherapy treatment. However, in August 2004, the Company elected to discontinue operatingTheseus, effective on or about September 15, 2004 (Note 10).**

** **

**The Company evaluates performanceand allocates resources based on 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 and are managed separatelybecause they operate with distinct manufacturing and development processes.**

** **
|                     |   | **Three  months ended July 31,** |        | **Nine  months ended July 31,** |   |
|--------------------------|--------|----------------------------------|-------------|---------------------------------|--------|
|                     |   | **2004**                         |        | **2003**                        |   | **2004** |   | **2003** |   |
| **Revenues**             |   |                             |        |                            |   |   |   |   |   |
|                     |   |                             |        |                            |   |   |   |   |   |
| IMRT/IGRT                |   | $                                | 4,977,000   |                            | $      | — |   | $ | 4,977,000 |   | $ | — |   |
| Radiation Sources        |   | 3,160,000                        |        | 3,011,000                       |   | 10,005,000 |   | 11,056,000 |   |
| Theseus                  |   | —                           |        | —                          |   | — |   | — |   |
|                     |   | $                                | 8,137,000   |                            | $      | 3,011,000 |   | $ | 14,982,000 |   | $ | 11,056,000 |   |
|                     |   |                             |        |                            |   |   |   |   |   |
| **Loss from Operations** |   |                             |        |                            |   |   |   |   |   |
|                     |   |                             |        |                            |   |   |   |   |   |
| IMRT/IGRT                |   | $                                | (10,499,000 | )                               | $      | — |   | $ | (10,499,000 | ) | $ | — |   |
| Radiation Sources        |   | (2,639,000                       | )           | (1,238,000                      | )      | (6,726,000 | ) | (1,600,000 | ) |
| Theseus                  |   | (6,422,000                       | )           | (1,849,000                      | )      | (10,550,000 | ) | (5,912,000 | ) |
|                     |   | $                                | (19,560,000 | )                               | $      | (3,087.000 | ) | $ | (27,775,000 | ) | $ | (7,512,000 | ) |

 

13

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|              |   | **July 31,  2004** |       | **October  31,  2003** |   |
|-------------------|--------|--------------------|------------|------------------------|--------|
| **Goodwill**      |   |               |       |                   |   |
|              |   |               |       |                   |   |
| IMRT/IGRT         |   | $                  | 22,725,000 |                   | $      | — |   |
| Radiation Sources |   | 207,000            |       | 207,000                |   |
| Theseus           |   | —             |       | 3,659,000              |   |
| Total goodwill    |   | $                  | 22,932,000 |                   | $      | 3,866,000 |   |
|              |   |               |       |                   |   |
| **Total Assets**  |   |               |       |                   |   |
|              |   |               |       |                   |   |
| IMRT/IGRT         |   | $                  | 59,423,000 |                   | $      | — |   |
| Radiation Sources |   | 33,532,000         |       | 57,790,000             |   |
| Theseus           |   | 45,000             |       | 4,742,000              |   |
| Total assets      |   | $                  | 93,000,000 |                   | $      | 62,532,000 |   |

 

**Note 10 – Impairment ofGoodwill and Long-lived Assets**

 

**During the quarter ended July 31,2004, the Company determined that it needed to review the carrying value of itsTheseus assets for possible impairment due to ongoing discussions with variousthird parties concerning strategic alternatives for the Hynic-Annexin V productdevelopment program.  Discussions withvarious financing and potential strategic partners ceased in August 2004 whichresulted in the Company’s decision to discontinue the operations of Theseus onor about September 15, 2004.  TheCompany determined that the carrying value of its assets exceeded their fairvalue and therefore recorded a $4.7 million charge for the impairment ofgoodwill and long-lived assets of Theseus during the three months ended July31, 2004.**

** **

**The Company expects to incuradditional costs of approximately $1.1 million in severance, licensetermination fees and facility shut-down costs during the quarter ended October31, 2004.**

** **

**The impairment of goodwill andlong-lived assets consisted of the following:**

** **
| Goodwill                             |   | $       | 3,659,000 |   |
|--------------------------------------|--------|---------|-----------|--------|
| Licenses and patents                 |   | 481,000 |      |
| Equipment and leasehold improvements |   | 541,000 |      |
| Total                                |   | $       | 4,681,000 |   |

** **

**Note 11 - Litigation**

** **

In March 2004, Parker/HunterIncorporated (“Parker/Hunter”) filed a complaint against NOMOS, alleging breachby NOMOS of an investment banking fee arrangement.  NOMOS filed an answer

 

14

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denying all substantiveallegations of liability.  In May 2004,NOMOS became a wholly-owned subsidiary of the Company (See Note 8).  In August 2004, the Company paidParker/Hunter $1.1 million in settlement of all claims related to its complaintfiled against NOMOS.

 

As part of theCompany’s agreement and plan of merger with NOMOS, the Company placed intoescrow 307,617 shares of common stock and $701,000 cash of the NOMOS purchaseconsideration to cover the anticipated settlement costs of the Parker/Hunterlitigation.  The Company will seekreimbursement of the $1.1 million paid to Parker/Hunter from the escrowed fundsand the remaining balance will be distributed to the former shareholders ofNOMOS.

 

15

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**Item2.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

The following discussion andanalysis provides information, which our management believes is relevant to anassessment and understanding of our financial condition and results ofoperations. The discussion should be read in conjunction with the ConsolidatedFinancial Statements contained herein and the notes thereto. Certain statementscontained in this Form 10-Q, including, without limitation, statementscontaining 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“1995 Act”) and (ii) releases issued by the Securities and ExchangeCommission (“SEC”). These statements are being made pursuant to the provisionsof the 1995 Act and with the intention of obtaining the benefits of the “SafeHarbor” provisions of the 1995 Act. We caution that any forward lookingstatements made herein are not guarantees of future performance and that actualresults may differ materially from those in such forward looking statements asa result of various factors, including, but not limited to, any risks detailedherein or detailed from time to time in our other filings with the SECincluding our most recent report on Form 10-K. We are not undertaking anyobligation to update publicly any forward-looking statements. Readers shouldnot place undue reliance on these forward-looking statements.

 

**Overview**

** **

We manufacture,market and sell products for the radiation oncology community, includingbrachytherapy seeds and ancillary devices used primarily in the treatment ofprostate cancer, as well as intensity modulated and image guidance radiationtherapy products and services for localization and treatment of cancer.  Our business is organized into threeoperating segments: IMRT/IGRT, Radiation Sources, and Theseus. 

 

IMRT/IGRT developsand markets intensity modulated radiation therapy (“IMRT”) and image guidedradiation therapy (“IGRT”) products used in external beam radiation therapy forthe treatment of cancer. Radiation Sources develops and markets radioisotopicproducts including brachytherapy seeds, accessories and calibration sourcesused in the treatment of cancer and in medical, environmental, research andindustrial applications. Theseus was discontinued on or about September 15,2004 and had been developing radiopharmaceutical agents for various medicaldiagnostic and monitoring functions, including the management of chemotherapytreatment.  

 

From 1998 toJanuary 2003, our brachytherapy seeds were distributed under an exclusiveagreement with a third party distributor. In January 2003, the agreement terminated and we began to market andsell our brachytherapy products directly to health care providers.  Future revenues and gross profit relating toour brachytherapy products will depend on several factors, including ourability to successfully directly market and distribute our brachytherapy products,to withstand pricing pressure from competition, and to successfully enter inagreements with group purchasing organizations.

 

On May 4, 2004, weacquired NOMOS Corporation (“NOMOS”). NOMOS was a privately held developer,manufacturer, and marketer of IMRT and IGRT products and services.  This acquisition will significantly expandour product offerings to radiation oncologists.  Under the terms of the agreement and plan of merger we paidapproximately $58 million consisting of $12 million in cash, the issuance of5.3 million shares of the Company’s common stock with a fair value ofapproximately $38 million, the assumption of 2.0 million of stock options andwarrants with a fair value of $4.6 million, direct transaction costs of $3.0million and the assumption of acquisition related liabilities of $0.4 millionin exchange for all of the outstanding capital stock of NOMOS.  We manage this business as our IMRT/IGRToperating segment.

 

16

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On August 27,2004, our board of directors unanimously adopted management’s recommendation tocease operations at Theseus on or about September 15, 2004.  As result of this decision, we incurred animpairment charge of $4.7 million during the three months ended July 31, 2004.  We expect to incur an additional $1.1million in costs associated with the termination of operations during the threemonths ended October 31, 2004.

 

Our independent registeredpublic accounting firm has informed us that they will be unable to complete theirreview of our interim financial statements for the quarterly period ended July31, 2004 prior to the filing of this Form 10-Q.  As a result, the interim financial statements contained in ourquarterly report on Form 10-Q for the quarter ended July 31, 2004 have not beenreviewed by our independent registered public accounting firm as requiredpursuant to Rule 10-01(d) of Regulation S-X, and therefore, the filing of thisForm 10-Q is considered to be incomplete. As soon as our independent registered public accounting firm completestheir review of our third quarter 2004 financial statements, we will file anamended Form 10-Q/A.

 

**Resultsof Operations**

** **

**Third Quarter of Fiscal2004 Compared to Third Quarter of Fiscal 2003**

** **

**Net sales**.  Net sales increased $5.1 million, or 170%,to $8.1 million for the three months ended July 31, 2004, from $3.0 million forthe three months ended July 31, 2003. The increase in sales during the quarter ended July 31, 2004, isprimarily attributed to the acquisition of NOMOS (our IMRT/IGRT business) inMay 2004 ($5.0 million) and the acquisition of Radiation Therapy Products(“RTP”) in August of 2003 ($0.1 million). Our net sales reflect the decision to adopt the revenue recognition policyunder SOP 97-2 with respect to sales of our BAT® (B-Mode Acquisition andTargeting System) products whereby sales are recognized upon product acceptanceby the customers rather than at the time of shipment. This resulted inapproximately $1.2 million in revenue being deferred to subsequent periods.

 

**Gross profit**. Gross profit increased $2.0 million, or 161%, to $3.3 million for thethree months ended July 31, 2004, from $1.3 million for the three months endedJuly 31, 2003.  Gross profit as apercentage of sales decreased from 42% to 41% during this period.  Gross profit during the three months endedJuly 31, 2004 consisted of $2.0 million or 40% of sales from IMRT/IGRT and $1.3million or 43% of sales from Radiation Sources.  The increase in gross profit and the decrease in gross profit aspercentage of sales were both attributable to our IMRT/IGRT business acquiredin May 2004. Gross profit as a percent of sales may vary due to changes in themix of IMRT/IGRT and Radiation Sources products sold.

 

**Selling Expense**. Selling expenses increased $1.4 million, or 156% to $2.3 million for thethree months ended July 31, 2004, from $0.9 million for the three months endedJuly 31, 2003.  The increase in sellingexpense is primarily attributed to the acquisition of our IMRT/IGRT business inMay 2004.

 

**General and administrative expenses**. General and administrative (“G&A”) expenses increased $2.0 million,or 110%, to $3.8 million for the three months ended July 31, 2004, from $1.8million for the three months ended July 31, 2003. The increase is primarilyattributed to the acquisition of our IMRT/IGRT business in May 2004 ($0.9million), the inclusion of personnel costs and professional fees associatedwith Prostate Centers of America(“PCA”) ($0.7 million) as further described inNote 2, and an increase in accounting, legal and insurance costs ($0.4million).

 

**Research and development**. Research and development (“R&D”) expenses increased $1.6 million, or97%, to $3.3 million for the three months ended July 31, 2004, from $1.7million for the three months ended July 31, 2003.  The increase is primarily attributed to the acquisition of ourIMRT/IGRT business in May 2004 ($1.8 million), offset by a decrease in costs ofour Hynic-Annexin V program. 

 

**In-process research and development**. During the three months ended July 31, 2004, we incurred a charge of$7.8 million for in-process research and development (“IPR&D”) related tothe acquisition of our IMRT/IGRT business (See Note 8).

 

**Impairmentof goodwill and long-lived assets.**  Since we acquired Theseus in October 2000,it has incurred over $30 million in operating losses, and the projectedexpenditures in the development of Hynic-Annexin V are expected to have acontinued significant negative impact on our earnings and cash flow.  We believe that successful completion andreceipt of required regulatory approvals allowing marketing will not occurearlier than 2007, and additional related costs could be at least $50million.  As a result, during thequarter ended July 31, 2004, we determined that we needed to review thecarrying value of the Theseus assets for possible impairment due to ongoingdiscussions with various third parties concerning strategic alternatives forthe Hynic-Annexin V product development program.  Discussions with various financing and potential strategicpartners ceased in August 2004 which resulted in our decision to discontinuethe operations of Theseus on or about September 15, 2004.  We determined that the carrying value of theTheseus assets exceeded their fair value and therefore recorded a $4.7 millioncharge for the impairment of goodwill and long-lived assets of Theseus duringthe three months ended July 31, 2004. In addition, we expect to incur additional costs of approximately $1.1million in severance, license termination fees and facility shut-down costs forTheseus during the quarter ended October 31, 2004.

 

**Merger and integration costs**. During the three months ended July 31, 2004, we incurred merger andintegration charges of $1.1 million in connection with the acquisition of ourIMRT/IGRT business. The charge includes the severance and consulting costs.

 

17

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**Interest and other income, net.** Interest and other income decreased $136,000, or 54%, to $114,000 forthe three months ended July 31, 2004, from $250,000 for the three months endedJuly 31, 2003. The decrease is attributed to smaller portfolio of marketablesecurities.

 

**Provision for Income Taxes**. We did not recognize a tax benefit for results of operations for thethree months ended July 31, 2004 and 2003, due to the uncertainty of ourability to fully recognize the benefit of our deferred tax assets.

 

**Nine Months Ended July31, 2004 Compared to Nine Months Ended July 31, 2003**

** **

**Net sales**.  Net sales increased $3.9 million, or 36%, to$15.0 million for the nine months ended July 31, 2004, from $11.1 million forthe nine months ended July 31, 2003. The increase in net sales is primarily attributed to our IMRT/IGRTbusiness acquired in May 2004 ($5.0 million) and the acquisition of RTP inAugust of 2003 ($0.3 million), offset by a decrease in our other RadiationSources business ($1.4 million).  Thedecrease in Radiation Sources is due to a decline in unit volume that weattribute to our transition from selling our brachytherapy products through adistributor to selling them directly to our customers during the nine monthsended July 31, 2003.  Our net salesreflect the decision to adopt the revenue recognition policy under SOP 97-2with respect to sales of our BAT® (B-Mode Acquisition and Targeting System)products whereby sales are recognized upon product acceptance by the customersrather than at the time of shipment. This resulted in approximately $1.2million in revenue being deferred to subsequent periods.

 

**Gross profit.** Gross profit increased $0.2 million, or 5%, to $6.3 million for the ninemonths ended July 31, 2004, from $6.1 million for the nine months ended July31, 2003.  Gross profit as a percent ofsales decreased from 55% to 42% during this period.  The increase in gross profit is primarily attributed to theacquisition of our IMRT/IGRT business in May 2004 ($2.0 million), offset by adecrease in gross profit from the sale of Radiation Sources ($1.7 million). Thedecrease in gross profit as a percentage of sales is due to both the lowermargin on IMRT/IGRT (40% of sales) and a lower gross profit margin in RadiationSources (43% of sales).  The decrease ingross profit dollars and as a percentage of sales of Radiation Sources wasprimarily due to reduced economies of scale due to a reduction in brachytherapyunit volume and an increase in the volume of lower margin ancillaryservices.  This decline in unit volumeis attributed to our transition from selling through a distributor to sellingdirect during the second fiscal quarter of 2003.Gross profit as a percent of sales mayvary due to changes in the mix of IMRT/IGRT and Radiation Sources productssold.

 

**Selling Expenses.** Selling expenses increased $1.4 million, or 59% to $3.9 million for thenine months ended July 31, 2004, from $2.5 million for the nine months endedJuly 31, 2003. The increase is attributable to sales and marketing costs of ourIMRT/IGRT business acquired in May 2004.

 

**General and administrative expenses**. G&A expenses increased $3.9 million, or 69% to $9.6 million for thenine months ended July 31, 2004, from $5.7 million for the nine months endedJuly 31, 2003.  The increase isattributed to our business segments as follows: $0.9 million attributed to theacquisition of our IMRT/IGRT, $2.7 million to Radiation Sources and $0.3million to Theseus. The increase in G&A attributable to Radiation Sourcesis due primarily to severance and non-cash stock compensation expenseassociated with the resignation of our former chief financial officer ($1.0million), the inclusion of expenses associated with PCA ($0.7 million), anincrease in personnel costs ($0.9 million), and accounting, legal and insurancecosts ($0.4 million).

 

**Research and development.** R&D expenses increased $1.6 million, or 30%, to $7.1 million for thenine months ended July 31, 2004, from $5.4 million for the nine months endedJuly 31, 2003.  The increase isprimarily attributed to our IMRT/IGRT business acquired in May 2004.

 

**In-process research and development**. During the nine months ended July 31, 2004, we incurred a charge of $7.8million for in-process research and development (“IPR&D”) related to theacquisition of our IMRT/IGRT business (See Note 8).

 

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**Impairmentof goodwill and long-lived assets.**  Since we acquired Theseus in October 2000,it has incurred over $30 million in operating losses, and the projectedexpenditures in the development of Hynic-Annexin V are expected to have acontinued significant negative impact on our earnings and cash flow.  We believe that successful completion andreceipt of required regulatory approvals allowing marketing will not occurearlier than 2007, and additional related costs could be at least $50 million.  As a result, during the quarter ended July31, 2004, we determined that we needed to review the carrying value of theTheseus assets for possible impairment due to ongoing discussions with variousthird parties concerning strategic alternatives for the Hynic-Annexin V productdevelopment program.  Discussions withvarious financing and potential strategic partners ceased in August 2004 whichresulted in our decision to discontinue the operations of Theseus on or aboutSeptember 15, 2004.  We determined thatthe carrying value of the Theseus assets exceeded their fair value andtherefore recorded a $4.7 million charge for the impairment of goodwill andlong-lived assets of Theseus during the three months ended July 31, 2004.  In addition, we expect to incur additionalcosts of approximately $1.1 million in severance, license termination fees andfacility shut-down costs for Theseus during the quarter ended October 31, 2004.

 

**Merger and integration costs**. During the nine months ended July 31, 2004, we incurred merger andintegration costs of $1.1 million in connection with the acquisition of ourIMRT/IGRT business. The charge includes severance and consulting costs.

 

**Interest and other income**. Interest and other income decreased $1.0 million, or 68%, to $0.5million for the nine months ended July 31, 2004, from $1.5 million for the ninemonths ended July 31, 2003. The decrease in interest and other income reflectsa one-time gain of $0.6 million from the sale of our remaining shares ofRadioMed Corporation, a privately held company, which occurred during the ninemonths ended July 31, 2003, and lower interest income as a result of a generaldecline in our available marketable securities.  

 

**Provision for Income Taxes**. We did not recognize a tax benefit for results of operations for thenine months ended July 31, 2004 and 2003, due to the uncertainty of our abilityto fully recognize the benefit of our deferred tax assets.

 

**Cumulative effect of change inaccounting principle**. During the nine months ended July 31, 2003, we adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations,” for recording future decommissioning costsrelated to our leased manufacturing and research facilities.  Under SFASNo. 143, a future retirement obligation is recorded at present value bydiscounting the Company’s estimated future asset retirement obligation. In adopting this pronouncement, we recognized a charge of $311,000 which isreported in the caption “Cumulative effect of change in accounting principle.”

 

**CriticalAccounting Policies**

** **

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make judgments, assumptions and estimates that affect the amountsreported in the Consolidated Financial Statements. Note 1 to the ConsolidatedFinancial Statements included in the Company’s Form 10-K for the year endedOctober 31, 2003, describes the significant accounting policies and methodsused in the preparation of the Consolidated Financial Statements. Estimates areused for, but not limited to, the accounting for revenue recognition, allowancefor doubtful accounts, goodwill and long-lived asset impairments, losscontingencies, and taxes. Estimates and assumptions about future events andtheir effects cannot be determined with certainty. We base our estimates onhistorical experience and on various other assumptions believed to beapplicable and reasonable under the circumstances. These estimates may changeas new events occur, as additional information is obtained and as our operatingenvironment changes. These changes have historically been minor and have beenincluded in the consolidated financial statements as soon as they became known.The following critical accounting policies are impacted significantly byjudgments, assumptions and estimates used in the preparation of theConsolidated Financial Statements and actual results could differ materiallyfrom the amounts reported based on these policies.

 

*Revenue Recognition*

* *

We sell productsfor the radiation oncology community, including brachytherapy seeds used in thetreatment of cancer, as well as intensity modulated radiation therapy (“IMRT”)and image guidance radiation therapy (“IGRT”) products and services.  Product revenue consists of brachytherapyand related products sales.  Softwarerevenues consist of IMRT and IGRT product sales.

 

19

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Product revenue

 

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

 

Revenuerecognition is deferred when undelivered products or services are essential tothe functionality of delivered products, customer acceptance is uncertain,significant obligations remain, or the fair value of undelivered elements isunknown.

 

Software revenue

 

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

 

We recognize revenuein accordance with the provisions of Statement of Position 97-2 (“SOP 97-2”),“Software Revenue Recognition”, as amended by Statement of Position 98-9 (“SOP98-9”), “Modification of SOP 97-2, Software Revenue Recognition, with respectto Certain Transactions”.  Under theprovisions of SOP 97-2, we recognize software revenue upon delivery andacceptance, 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 salesare generally multiple element arrangements, which could include the product,first year annual maintenance and support, and training and installation.  Revenues from the multiple elementarrangements 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 objective evidence.  If such evidence of fair value for eachelement of the arrangement does not exist, all revenue from the arrangement isdeferred until such time that evidence of fair value of each element does existor 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

 

Service revenuesare derived mainly from maintenance and support contracts and are recognized ona straight-line basis over the term of the contract. Payments for maintenance revenuesare normally received in advance and are nonrefundable. 

 

*Allowance for Doubtful Accounts and Sales Returns*

* *

The allowance fordoubtful accounts is based on our assessment of the collectibility of specificcustomer accounts and the aging of the accounts receivable. We regularly reviewthe allowance by considering factors such as historical experience, age of theaccounts receivable balances and current economic conditions that may affect acustomer’s ability to pay.  If therewere a deterioration of a major customer’s

 

20

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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 forsales returns is established based on historical trends in product return ratesand is recorded as a reduction of our accounts receivable. If the actual futurereturns were to deviate from the historical data on which the reserve had beenestablished, our revenue could be adversely affected. To date, product returnshave not been material to our results of operations.

 

*Goodwill*

* *

Our methodologyfor allocating the purchase price related to purchase acquisitions isdetermined through established valuation techniques.  Goodwill is measured as the excess of the cost of the acquisitionover the amounts assigned to identifiable assets acquired less assumedliabilities.  We perform goodwillimpairment tests on an annual basis and between annual tests in certaincircumstances. In response to changes in industry and market conditions, we maystrategically realign our resources and consider restructuring, disposing of,or otherwise exiting businesses, which could result in an impairment ofgoodwill.

 

*Impairment of Long-lived Assets*

* *

We assess theimpairment of long-lived assets, which include equipment and leaseholdimprovements and identifiable intangible assets, whenever events andcircumstances indicate that such assets might be impaired.  In the event the expected undiscountedfuture cash flow attributable to the asset is less than the carrying amount ofthe asset, an impairment loss equal to the excess of the asset’s carrying valueover its fair value is recorded.  

 

*Loss Contingencies*

* *

We recordliabilities related to pending litigation when an unfavorable outcome isprobable and we can reasonably estimate the amount of the loss.  We are subject to various legal proceedingsand claims, either asserted or unasserted, that arise in the ordinary course ofbusiness. We evaluate, among other factors, the degree of probability of anunfavorable outcome and an estimate of the amount of the loss. Significantjudgment is required in both the determination of the probability and as towhether an exposure can be reasonably estimated. When we determine that it isprobable that a loss has been incurred and the amount can be reasonablyestimated, the effect is recorded promptly in the consolidated financialstatements. Although the outcome of these claims cannot be predicted withcertainty, we do not believe that any of our existing legal matters will have amaterial adverse effect on our financial condition or results of operations. 

 

*Income Taxes*

* *

We account forincome taxes using the liability method. Deferred taxes are determined based onthe differences between the financial statement and tax bases of assets andliabilities, using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Valuation allowances are established whennecessary to reduce deferred tax assets to the amounts expected to berealized.  In addition, we are subjectto examination of our income tax returns by the Internal Revenue Service andother tax authorities.  We regularly assessthe likelihood of adverse outcomes resulting from these examinations.

 

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**Liquidity and Capital Resources**

** **

To date, ourshort-term liquidity needs have generally consisted of operating capital tofinance growth in inventories, trade accounts receivable, new product researchand development, capital expenditures, acquisitions and strategic investmentsin related businesses.  We havesatisfied these needs primarily through a combination of cash generated byoperations, public offerings and from private placements of our commonstock.  We do not currently have a lineof credit or similar arrangement with a bank. 

 

The followingsections discuss the effects of changes in our balance sheets, cash flows, andcommitments on our liquidity and capital resources.

 

**Balance Sheet and Cash Flows**

** **

Cash, cashequivalents, and investments in marketable securities. At July 31, 2004, we had cash and cash equivalents, and investments inmarketable securities aggregating approximately $23.1 million, a decrease ofapproximately $26.0 million from $49.1 million at October 31, 2003. Thedecrease was primarily attributed to net cash payments of $13.2 million for theacquisition of NOMOS, $15.1 million used in operating activities, and $1.3million used for capital expenditures, partially offset by $3.6 million in cashreceived from the exercise of stock options and the employee stock purchaseplan.

 

We expect thatcash used in operating activities may fluctuate in future periods as a resultof a number of factors, including fluctuations in our operating results,accounts receivable collections, inventory management, research and developmentexpenses, the impact of the NOMOS integration and the timing of payments. 

 

During the quarterended July 31, 2004, we received $3.3 million from the exercise of stockoptions and the purchase of shares related to our employee stock purchaseplan.  Proceeds from the exercise ofstock options and the employee stock purchase plan will vary from period toperiod based upon, among other factors, fluctuations in the market value of ourstock relative to the exercise price of such options.

 

The primaryobjectives for our investment portfolio are liquidity and safety ofprincipal.  Investments are made toachieve the highest rate of return, consistent with these two objectives.  We invest excess cash in securities withvarying maturities to meet projected cash needs.

 

Equipment andleasehold improvements.  Equipment and leaseholdimprovements (“Fixed Assets”) increased approximately $1.3 million to $4.3million at July 31, 2004, from $3.0 million at October 31, 2003.  The increase in Fixed Assets reflectscapital expenditures of $1.2 million and the acquisition of NOMOS equipment andleasehold improvements of $1.4 million offset by $0.8 million in depreciationexpense and a write down for impairment of $0.5 million (See Note 9).  Included in the $1.2 million of capitalexpenditures are $0.5 million in equipment and leasehold improvements of PCA.

 

Other assets. At July 31, 2004, other assets were approximately $0.1 million, adecrease of approximately $1.2 million from $1.3 million at October 31,2003.  The decrease in other assets wasdue to the reclassification of capitalized transaction costs of the NOMOSacquisition as part of the purchase price allocation (See Note 8).  

 

Accounts payableand accrued expenses.  Accounts payable and accruedexpenses increased approximately $5.3 million to $12.1 million as of July 31,2004, from $6.8 million at October 31, 2003. The increase was a result of anassumption of liabilities as part of the purchase price allocation associatedwith the NOMOS acquisition (See Note 8).

 

Deferred revenue. Deferred revenue increased approximately $5.8 million from October 31,2003 to July 31, 2004. The increase was attributable to our IMRT/IGRT businessacquired in May 2004.  Deferred

 

22

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revenue consists of unearnedservice revenue and from the deferral of software product revenue wherecustomer acceptance has not been received or for new products where acceptanceby our customers has not been clearly established.

 

**Liquidity and CapitalResource Requirements**

** **

We have operatinglease obligations for facilities and equipment under non-cancelable operatinglease agreements. Future minimum lease payments are subject to annualadjustment for increases in the Consumer Price Index.  We have also entered into contractual arrangements with thirdparties for (i) services associated with our Hynic-Annexin V developmentprogram, (ii) services related to the acquisition of NOMOS, (iii) contingentobligations to PCA, and (iv) commitments to suppliers under blanket purchaseorders.  

 
|                        |   | **Payments  by Due Date** |      |
|-----------------------------|--------|---------------------------|-----------|
| **Contractual Obligations** |   | **Total**                 |      | **Less than 1  year** |   | **1-3 years** |   | **3-5 years** |   | **More than  5 years** |   |
|                        |   |                      |      |   |   |   |   |   |   |   |   |
| Operating leases            |   | $                         | 4,913,000 |   | $ | 1,038,000 |   | $ | 636,000 |   | $ | 1,476,000 |   | $ | 1,763,000 |   |
| Theseus commitments         |   | 560,000                   |      | 560,000 |   | — |   | — |   | — |   |
| Purchase commitments        |   | 1,930,000                 |      | 1,930,000 |   |   |   |   |   |   |   |
|                        |   | $                         | 7,400,000 |   | $ | 3,528,000 |   | $ | 636,000 |   | $ | 1,476,000 |   | $ | 1,763,000 |   |

 

We believe ourcurrent cash and marketable securities will be sufficient to support ouroperations and planned expansion for at least the next twelve months. On August27, 2004, our board of directors unanimously adopted management’srecommendation to cease operations at Theseus on or about September 15,2004.  As result of this decision, weplan to redirect capital resources that would have been invested in Theseustowards the development of other product lines and working capital requirementsof our IMRT/IGRT and Radiation Sources businesses.

 

However, the amount of capital that we will need in the future willdepend on many factors including:

 

•      Levels of sales and marketing that will be required to launch futureproducts and achieve and maintain a competitive position in the marketplace forboth existing and new products;

 

•      Market acceptance of our products;

 

•      Levels of inventory and accounts receivable that we maintain;

 

•      Competitors’ responses to our products;

 

•      Level of capital expenditures; and

 

•      Acquisition or development of other businesses, technologies orproducts.

 

If we should require additionalfinancing due to unanticipated developments, additional financing may not beavailable when needed or, if available, we may not be able to obtain thisfinancing on terms favorable to our stockholders or us.  Insufficient funds may require us to delay,scale back or eliminate

 

23

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some or all of our research anddevelopment programs.  If additionalfunds are raised by issuing equity securities, dilution to existingstockholders would result.

 

**Recent AccountingPronouncements**

** **

In December 2003,the SEC issued SAB No. 104.  SAB No. 104 revises or rescinds portions ofthe interpretive guidance included in Topic 13 of the codification of staffaccounting bulletins in order to make this interpretive guidance consistentwith current authoritative accounting and auditing guidance and SEC rules andregulations.  It also rescinds the Revenue Recognition in FinancialStatements Frequently Asked Questions and Answers document issued inconjunction with Topic 13.  Selected portions of that document have beenincorporated into Topic 13.  The adoption of SAB No. 104 did not have amaterial impact on our financial position, results of operations or cash flows.

 

InDecember 2003, the FASB revised Statement of Financial AccountingStandards No. 132 (revised 2003), “Employers’ Disclosures about Pensionsand Other Postretirement Benefits” (“Revised Statement 132”). Revised Statement132 revises employers’ required disclosures about pension plans and otherpostretirement benefit plans. It does not change the measurement or recognitionof those plans required by FASB Statements No. 87, “Employers’ Accountingfor Pensions,” No. 88, “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits” andNo. 106, “Employers’ Accounting for Postretirement Benefits Other ThanPensions”. Revised Statement 132 requires disclosures in addition to those inthe original FASB Statement No. 132. Revised Statement 132 is effectivefor financial statements with fiscal years ending after December 15, 2003. The interim-perioddisclosures required by Revised Statement 132 are effective for interim periodsbeginning after December 15, 2003. Revised Statement 132 is not applicableand therefore did not have a material impact on our financial position, resultsof operations or cash flows.

 

InMarch 2004, the EITF reached a consensus on Issue 03-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments”(“EITF 03-1”). EITF 03-1 requires disclosures on investments in an unrealizedloss position. The disclosures are designed to help financial statement usersanalyze a company’s unrealized losses and to enable them to better understandthe basis for any management conclusion that the impairment is temporary.Quantitative and qualitative disclosures for investments accounted for underFASB Statement No. 115, “Accounting for Certain Investments in Debt andEquity Securities,” are effective for the first annual reporting period endingafter December 15, 2003. All new disclosures related to cost methodinvestments are effective for the annual reporting periods ending afterJune 15, 2004. Comparative information for the periods prior to the periodof initial application is not required. The adoption of EITF 03-1 did not havea material impact on our financial position, results of operations or cashflows.

 

In June 2004, theFASB issued Staff Position No. 106-2 (“FSP 106-2), “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003.” FSP 106-2 provides guidance on the accounting,disclosure, effective date and transition related to the Prescription Drug Act.FSP 106-2 is expected to be effective for the first interim period beginningafter June 15, 2004. We do not anticipate FSP 106-2’s recognition, measurementand disclosure provisions will have a significant impact on our financialposition, results of operations or cash flows.

 

###### **Item 3.**   Quantitative and Qualitative Disclosures aboutMarket Risk

###### ** **

Information aboutmarket risks for the three months ended July 31, 2004, does not differmaterially from that discussed under Item 7A of our Annual Report on Form 10-Kfor the fiscal year ended October 31, 2003.

 

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

###### ** **

(a)  Evaluation of Disclosure Controls andProcedures 

 

As required byRule 13a-15(b) under the Securities and Exchange Act of 1934 (the“Exchange Act”), we have carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officer(“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as ofthe end of the fiscal quarter covered by this report, of the design andoperation of our “disclosure controls and procedures” as defined inRule 13a-15(e) promulgated by the SEC under the Exchange Act. Based uponthat evaluation, our CEO and our CFO concluded that our disclosure controls andprocedures, as of the end of such fiscal quarter, were adequate and effectiveto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Commission’s rules and forms.

 

(b)  Changes in Internal Controls 

 

There have been nosignificant changes in our internal controls over financial reporting or inother factors that could significantly affect our internal controls overfinancial reporting subsequent to the date of the evaluation referred to above.

 

**PARTII – OTHER INFORMATION**

** **

**The Company was not required toreport the information pursuant to Items 1 through 6 of Part II of Form 10-Qexcept as follows:**

** **

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

###### ** **

On May 3, 2004, weheld a special meeting of stockholders to vote on (i). the approval of theagreement and plan of merger, by and among the Company, AM Capital I, Inc., andNOMOS (the “Merger Agreement”)and the issuance of shares of the Company’scommon stock under the Merger Agreement and other transactions contemplated bythe Merger Agreement (“NOMOS Acquisition”); (ii). the approval of an amendmentto the Amended and Restated 1996 Stock Option Plan to permit the issuance ofreplacement stock options in connection with the merger or consolidation (“ReplacementOptions”); and (iii). the approval of an amendment to the Amended and Restated1996 Stock Option Plan to increase the maximum number of shares available underthe plan from 4.0 million shares to 4.6 million shares (“Increase Shares of1996 Option Plan”).  The results of thevotes were as follows:

 
| **Proposal**                        |   | **For**   |   | **Withheld** |   | **Abstained** |   |
|-------------------------------------|--------|-----------|--------|--------------|--------|---------------|--------|
| NOMOS Acquisition                   |   | 7,149,174 |   | 558,813      |   | 6,551         |   |
|                                |   |      |   |         |   |          |   |
| Replacement Options                 |   | 6,624,178 |   | 1,082,772    |   | 7,512         |   |
|                                |   |      |   |         |   |          |   |
| Increase Shares of 1996 Option Plan |   | 3,959,555 |   | 3,744,540    |   | 10,367        |   |

 

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On June 4, 2004, we held our2004 Annual Meeting of Stockholders. The following persons were elected as directors to hold office until the2005 Annual Meeting of Shareholders: Irwin J. Gruverman, L. Michael Cutrer,Donald N. Ecker, Dr. Jonathan P. Gertler, John A. Friede, Mitchell H. Saranow,Dr. Gary N. Wilner, John W. Manzetti and Nancy J. Wysenski. The number ofshares cast for, withheld and abstained with respect to each of the nomineeswere as follows:

 
| **Nominee**             |   | **For**   |   | **Withheld** |   | **Abstained** |   |
|-------------------------|--------|-----------|--------|--------------|--------|---------------|--------|
| Irwin J. Gruverman      |   | 9,418,322 |   | 561,291      |   | —        |   |
| L. Michael Cutrer       |   | 9,421,422 |   | 558,191      |   | —        |   |
| Donald N. Ecker         |   | 9,869,007 |   | 110,606      |   | —        |   |
| Dr. Jonathan P. Gertler |   | 9,888,207 |   | 91,406       |   | —        |   |
| John A. Friede          |   | 9,420,822 |   | 558,791      |   | —        |   |
| Mitchell H. Saranow     |   | 9,342,073 |   | 637,540      |   | —        |   |
| Dr. Gary N. Wilner      |   | 9,342,073 |   | 637,540      |   | —        |   |
| John W. Manzetti        |   | 9,421,822 |   | 557,791      |   | —        |   |
| Nancy J. Wysenski       |   | 9,886,007 |   | 93,606       |   | —        |   |

 

The stockholders also voted toapprove the ratification of the selection of PricewaterhouseCoopers LLP as ourindependent accountants for the fiscal year ended October 31, 2004.  A total of 6,874,301 shares were for theadoption of the proposal, 3,031,752 were cast against the proposal, and 73,560shares were abstained.

 

**Item6.****    Exhibits and Reports on Form8-K**

 

(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 |

 

(b)   Reports on Form 8-K.

 

On May 3,2004, we furnished a report on Form 8-K to announce that our shareholders hadapproved the acquisition of NOMOS in a special meeting.

 

On May 17,2004, we furnished a report on Form 8-K to announce that we had completed ouracquisition of NOMOS.  We also announcedthat in a special meeting on May 3, 2004, our shareholders had approved aproposal to issue replacement options in connection with our acquisition ofNOMOS, and a proposal to increase the maximum number of shares available underour Amended and Restated 1996 Stock Option Plan from 4.0 million shares to 4.6million shares.

 

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On May 27,2004, we furnished a report on Form 8-K for the purpose of furnishing our pressrelease and announcing our financial results for the quarter ended April 30,2004.

 

On July 20,2004 we furnished a report on Form 8-K for the purpose of amending our Form 8-Kfiled on May 3, 2004, to provide historical financial information of NOMOS thatwas acquired on May 4, 2004.

 

On July 20,2004 we furnished a report on Form 8-K for the purpose of amending our Form 8-Kfiled on May 3, 2004, to provide unaudited historical financial information ofNOMOS and to provide pro forma information related to the acquisition of NOMOS.

 

 

**SIGNATURES**

** **

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

 

 
|                | NORTH AMERICAN  SCIENTIFIC, INC. |
|---------------------|----------------------------------|
|                |                             |
|                |                             |   |
| September 21,  2004 | By:                              | /s/ L.  Michael Cutrer |   |
|                |                             | Name: | L. Michael Cutrer |
|                |                             | Title: | President and  Chief Executive Officer |
|                |                             |   | (Principal  Executive Officer) |
|                |                             |   |   |
|                |                             |   |
| September  21, 2004 | By:                              | /s/ James W.  Klingler |   |
|                |                             | Name: | James W. Klingler |
|                |                             | Title: | Senior Vice  President and  Chief Financial Officer |
|                |                             |   | (Principal  Financial Officer) |
|                     |                                  |  |  |  |

 

27

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