**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-K**









**x** **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the fiscal year ended October 31, 2007**


**Commission
      File Number 0-26670**









**NORTH
      AMERICAN SCIENTIFIC, INC.**


(Exact
      name of Registrant as specified in its charter)





**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **51-0366422**
              (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)





Securities
      registered pursuant to Section 12(b) of the Act:





**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered****Common
                Stock, par value $0.01 per share**
            
            **The
                NASDAQ Stock Market LLC**




Securities
      registered pursuant to Section 12(g) of the Act: **None**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o Yes x No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. o Yes x No




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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form10-K. o




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




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




The
      aggregate market value of voting stock held by non-affiliates of the Registrant
      was approximately $33.8 million (based upon the price at which the common stock
      was last sold, as of April 30, 2007, the last business day of the Registrant’s
      most recently completed second fiscal quarter).




As
      of
      January 28, 2008, approximately 92,403,471  shares
      of
      the Registrant's Common Stock, $.01 par value per share, were
      outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders
      to be held on or about April 30, 2008,
      are
      incorporated by reference into Part III of this
      Form 10-K.












**NORTH
      AMERICAN SCIENTIFIC, INC.**





**Table
      of Contents**





**Form 10-K**





**Page****PART
                I**Item
                1.
            Business
            3Item
                1A
            Risk
                Factors
            18Item
                1B
            Unresolved
                Staff Comments
            32Item
                2.
            Properties
            32Item
                3.
            Legal
                Proceedings
            32Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            34Item
                4a.
            Executive
                Officers of the Registrant
            34**PART
                II**Item
                5.
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            35Item
                6.
            Selected
                Consolidated Financial Data
            37Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            39Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            56Item
                8.
            Consolidated
                Financial Statements and Supplementary Data
            57Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            57Item
                9A.
            Controls
                and Procedures
            57Item
                9B.
            Other
                Information
            57**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance of the
                Registrant
            58Item
                11.
            Executive
                Compensation
            58Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            58Item
                13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            58Item
                14.
            Principal
                Accounting Fees and Services
            58**PART
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            59Signatures
            106




2




**Item
      1. BUSINESS**





**INTRODUCTION**





*Certain
      statements contained in this Annual Report on Form 10-K, including, without
      limitation, statements containing the words "believes," "anticipates,"
      "estimates," "expects," "projections," and words of similar import, are
      forward-looking as that term is defined by the Private Securities Litigation
      Reform Act of 1995, or 1995 Act, and releases issued by the Securities and
      Exchange Commission, or SEC. These statements are being made pursuant to the
      provisions of the 1995 Act and with the intention of obtaining the benefits
      of
      the "Safe Harbor" provisions of the 1995 Act. We caution that any
      forward-looking statements made herein are not guarantees of future performance
      and that actual results may differ materially from those in such forward-looking
      statements as a result of various factors, including, but not limited to, any
      risks detailed herein, including the "Risk Factors" section contained in this
      Item 1A, or detailed in our most recent reports on Form 10-Q and
      Form 8-K and from time to time in our other filings with the SEC and
      amendments thereto. We are not undertaking any obligation to update publicly
      any
      forward-looking statements. Readers should not place undue reliance on these
      forward-looking statements.*




We
      are a
      Delaware corporation, incorporated in 1990, that designs, develops, produces
      and
      sells innovative products for radiation therapy treatment, including Prospera®
brachytherapy seeds and SurTRAKTM needles and strands used primarily in the
      treatment of prostate cancer. In 2006 we introduced our ClearPathTM brachytherapy
      device to be used in the treatment of breast cancer. In addition, we develop
      and
      market products for other medical, environmental, research and industrial
      applications.





In
      1996,
      we began to focus our research and product development activities primarily
      on
      medical products that are useful in the diagnosis, management and treatment
      of
      diseases such as cancer. This initiative resulted in the development of our
      first two therapeutic products, iodine-based and palladium-based implantable
      brachytherapy seeds for the treatment of prostate cancer. We began manufacturing
      our Iodine-125 seed for commercial use in 1998, and introduced our Palladium-103
      seed the following year, thus becoming the first company to manufacture both
      iodine and palladium brachytherapy seeds. We market and sell our Iodine-125
      seeds under the trade name Prospera® I-125, and our Palladium-103 seeds under
      the trade name Prospera® Pd-103.





In
      October 2000, we acquired Theseus Imaging Corporation (“Theseus”), a company
      engaged in the research and development of a proprietary radiopharmaceutical
      imaging agent (referred to as “Hynic-Annexin V”). Over the following four years,
      we made substantial investments in Theseus for clinical trials and additional
      research. We shut down the operation of Theseus in September 2004 after
      determining that the cost to achieve successful development and regulatory
      approval would be substantial.





In
      August 2003, we acquired substantially all of the assets of Radiation
      Therapy Products (“RTP”), a manufacturer and distributor of equipment, including
      steppers and stabilizers, used in prostate brachytherapy procedures. We added
      RTP to our brachytherapy product portfolio to provide a more complete product
      offering to customers and prospects.




On
      May 4,
      2004, we acquired NOMOS Corporation (“NOMOS”), a developer, manufacturer and
      marketer of products and services for Intensity Modulated Radiation Therapy
      (“IMRT”) and Image Guided Radiation Therapy (“IGRT”). NOMOS was recognized as
      the pioneer of the IMRT and IGRT fields and its products are used to treat
      a
      variety of cancers at hospitals and free-standing radiation oncology
      centers. In July
      2007, we
      announced our plan to divest the NOMOS Radiation Oncology business in order to
      renew our focus on the marketing and development of innovative brachytherapy
      products for the treatment of prostate and breast cancer. We completed the
      sale
      of all significant assets, including licenses, trademarks and brand-names,
      and
      selected liabilities of NOMOS to Best Medical, Inc. for $500,000 in September,
      2007. We will continue to wind down the remaining operations of NOMOS until
      such
      time that all accounts become settled. (See Note 2 of the Notes to Consolidated
      Financial Statements).




3




On
      November 7, 2006, we announced the introduction of ClearPathTM, our unique
      multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation (APBI), at the American Society for Therapeutic Radiology and
      Oncology (ASTRO) Annual Meeting in Philadelphia. The ClearPath device is placed
      through a single incision and is designed to conform to the resection cavity,
      allowing for more conformal therapeutic radiation dose distribution following
      lumpectomy compared to other methods of APBI. ClearPath is designed to
      accommodate either high-dose, ClearPath-HDR, or low-dose rate, ClearPath-CR,
      treatment methods. We received 510(k) approval from the United States Food
      and
      Drug Administration for a low-dose rate, or continuous release, treatment
      utilizing the Company’s Prospera® brachytherapy seeds in April 2006 and approval
      for the high-dose rate treatment in November 2006. We have been gaining clinical
      experience with the first generation ClearPath-HDR in 2007, and we intend to
      launch the second generation devices in 2008, to be followed by the general
      commercial release of our ClearPath-CR.





**BRACHYTHERAPY
      TREATMENT OF CANCER**




Derived
      from ancient Greek words for short distance (brachy) and treatment (therapy),
      brachytherapy, sometimes called seed implantation, is an outpatient procedure
      used in the treatment of different kinds of cancer. Radioactive “seeds” are
      carefully placed inside of the cancerous tissue and positioned in a manner
      that
      permits the most efficient dispersion of radiation into the cancer.
      Brachytherapy has now been used for over a century. Conditions currently treated
      with brachytherapy include prostate cancer, cervical cancer, endometrial cancer,
      coronary artery disease, and recently breast cancer. Brachytherapy
      is a minimally invasive medical procedure in which high-dose-rate (HDR)
      or low-dose-rate (LDR) sealed radioactive sources are temporarily or
      permanently implanted into cancerous tissue, delivering a therapeutically
      prescribed dose of radiation that is lethal to the cancerous tissue. Brachytherapy
      has been proven to be very effective and safe, providing a good alternative
      to
      surgical removal of the malignant tissue, while reducing the risk of certain
      long-term side effects.




**Prostate
      Cancer**




The
      prostate gland, found only in men, is a small walnut-sized gland surrounding
      the
      urethra, located under the bladder and in front of the rectum. According to
      the
      American Cancer Society, prostate cancer is considered a slow growing cancer
      relative to other types of cancer. Symptoms of prostate cancer are often not
      noticed until the cancer has progressed past its early stages. Prostate cancer
      is the second most prevalent form of cancer in men in the United States and
      is
      the second most common cause of cancer death in men. The American Cancer Society
      estimates that approximately 230,000 new cases of prostate cancer are diagnosed
      in the United States annually, and approximately 30,000 deaths of men in the
      United States are attributable to the disease each year.





The
      definitive test for identifying prostate cancer is a prostate biopsy, which
      typically involves a physician obtaining transrectally a number of small
      prostate tissue specimens using a specialized needle biopsy device. A digital
      rectal examination which looks for abnormally shaped prostate glands and the
      prostate specific antigen (“PSA”) blood test are the two most commonly used
      methods to identify candidates for a prostate biopsy. When localized prostate
      cancer is identified through a prostate biopsy, physicians have several
      therapies available for the treatment of prostate cancer.




4




The
      most
      widely used methods for treating prostate cancer are radical prostatectomy
      (“RP”), the surgical removal of the prostate; external beam radiation therapy
      (“EBRT”), w hich involves
      directing a beam of radiation from outside the body at the prostate gland in
      order to destroy cancerous tissue; cryosurgery, a procedure in which tissue
      is
      frozen to destroy tumors; and brachytherapy.





**Prostate
      Brachytherapy**




*Overview*





Prostate
      Brachytherapy involves the use of LDR seeds permanently implanted into cancerous
      tissue in the prostate, delivering a therapeutically prescribed dose of
      radiation that is lethal to the cancerous tissue. In the LDR seeding procedure,
      generally 60 to 120 rice-sized, low-level radioactive seeds, containing either
      Iodine-125 or Palladium-103, are permanently implanted into the prostate by
      a
      radiation oncologist or urologist to irradiate and destroy cancerous prostatic
      tissue. Insertion of the seeds is performed under ultrasound guidance that
      allows the physicians to view the prostate for proper seed implantation. A
      template, or grid, is positioned in front of the perineum and is fixed to the
      stabilization unit along with the ultrasound probe to facilitate correct needle
      placement. Implant needles loaded with seeds are assigned to the appropriate
      template holes as indicated in a computer generated treatment plan. Each needle
      is guided through the template and then through the perineum to its
      predetermined position within the prostate under direct ultrasound
      visualization. The seeds are implanted as the needle is withdrawn from the
      prostate. Following completion of the procedure, an x-ray or CT image is viewed
      to verify seed placement.





LDR
      brachytherapy patients are generally treated on an outpatient basis and are
      permitted to go home the same day, as the entire procedure typically takes
      less
      than two hours. Most patients are able to return to their normal activities
      within two or three days following the procedure.





LDR
      brachytherapy usually results in lower incidences of impotence and incontinence
      compared to other therapies, and faster recovery times than RP. Moreover, some
      studies have shown that the disease free survival rates ten years after
      brachytherapy treatment is comparable to those after RP. Brachytherapy is most
      effective for localized tumors treated in the early stages of the disease.
      Therefore, we believe that the growing use of PSA tests will help detect
      prostate cancer at an earlier stage and enhance the attractiveness of
      brachytherapy as a treatment alternative.





The
      use
      of LDR brachytherapy has grown significantly over the past several years due
      to
      its advantages over the other primary therapies, which include RP and EBRT.
      We
      believe that the increasing use of this technique reflects the growing
      acceptance in the medical community and among patients.




*Our
      Brachytherapy Products*





We
      were
      the first company to manufacture both iodine and palladium based brachytherapy
      seeds, the two most commonly used seeds for the treatment of prostate cancer.
      These two products differ in the time each takes to decay, and, consequently,
      in
      the rate and intensity at which the radiation dose is delivered to the patient.
      Because some physicians may prefer iodine seeds and others prefer palladium
      seeds, we believe that it is advantageous to offer both in order to address
      the
      entire brachytherapy seed market.




5




*Prospera®
      I-125.* In
      January 1998, we launched our first United States Food and Drug
      Administration or FDA-approved brachytherapy source, an Iodine-125 based seed,
      used primarily for the treatment of prostate cancer. Each seed consists of
      a
      laser welded biocompatible titanium capsule approximately the size of a grain
      of
      rice, containing Iodine-125 absorbed onto four resin beads. The capsule also
      contains two inactive gold beads that serve as markers for x-ray or CT imaging
      to identify the source location within the prostate. I-125 seeds have a
      half-life of 59 days; therefore, they utilize lower activity levels to
      deliver a therapeutic dose over a longer period of time compared to the
      Palladium-103 seeds.





*Prospera®
      Pd-103.* In
      April 1999, we introduced our second FDA-approved brachytherapy source, a
      Palladium-103 based seed, also used primarily for the treatment of prostate
      cancer. Each palladium seed consists of a laser welded biocompatible titanium
      capsule containing Palladium-103 absorbed onto four resin beads. The capsule
      also contains two inactive gold beads that serve as markers for x-ray or CT
      imaging to identify the source location within the prostate. Pd-103 seeds have
      a
      half-life of 17 days; therefore, they utilize higher activity levels to
      deliver a therapeutic dose over a shorter period of time compared to the
      Iodine-125 seeds.




*SurTRAKTM* .
      The
      SurTRAK family of products includes the SurTRAK pre-plugged needle with a unique
      synthetic, micro-angled insert for improved seed delivery and precise placement,
      and the SurTRAK strand which, used in conjunction with the needle, is
      bio-resorbable and designed to hold the seeds at predetermined distances adding
      speed and precision to the prostate brachytherapy procedure.  The SurTRAK
      needle is also available pre-loaded with seeds and spacers per the physician’s
      prescription.  The entire Prospera SurTRAK family of products is available
      packed, sterile and ready for use.




The
      STP-110 Precision Stepper and RTP-6000 Precision Stabilizer equipment precisely
      positions and holds the trans-rectal ultrasound probe during the LDR
      brachytherapy procedure.  The Stepper also provides a stable platform for
      the Template Guide which is used to precisely position the needles during seed
      implantation.  Additional products that we offer include radiation
      shielding and needle loading accessories such as the Horizontal Needle Box,
      Needle Loading Shield, Needle Loading Box and Needle Loading Carousel. 
These products offer a natural complement to the brachytherapy seeds.





**Other
      Prostate Cancer Treatment Modalities in addition to
      Brachytherapy**




*Radical
      Prostatectomy*





Currently,
      the most common treatment option for prostate cancer, radical prostatectomy,
      or
      RP, is an invasive surgical procedure in which the entire prostate gland is
      removed. RP is performed under general anesthesia and typically involves a
      hospital stay of several days for patient observation and recovery.





This
      procedure is associated with relatively high rates of impotence and
      incontinence. For instance, a study published in the Journal of the American
      Medical Association in January 2000 reported that approximately 60% of men
      who had received RP reported erectile dysfunction as a result of surgery. The
      same report found that approximately 40% of the patients studied reported at
      least occasional incontinence. New bilateral nerve-sparing techniques are
      currently being used more frequently in order to address these side effects,
      but
      these techniques require a high degree of surgical skill. RP is typically more
      expensive than other common treatment modalities.




6




*External
      Beam Radiation Therapy (“EBRT”)*





EBRT
      allows patients to receive treatment on an outpatient basis and at a lower
      cost
      than RP. EBRT involves directing a beam of radiation from outside the body
      at
      the prostate gland in order to destroy cancerous tissue. The course of treatment
      usually takes seven to eight weeks to deliver the total dose of radiation
      prescribed to kill the tumor.





However,
      some studies have shown that the ten-year disease free survival rates with
      treatment through EBRT are not comparable to the disease free survival rates
      after RP or brachytherapy treatment. In addition, because the radiation beam
      travels through the body, affecting both healthy and cancerous tissue alike,
      other side effects are associated with EBRT. For instance, rectal wall damage
      caused by the radiation beam is a noted negative side effect. Data suggests
      that
      between 30% and 40% of the patients who undergo EBRT suffer problems with
      erectile dysfunction after treatment.




*Cryosurgery*





Cryosurgery,
      a procedure in which tissue is frozen to destroy tumors, is another treatment
      option for prostate cancer. Currently, this procedure is less widely used,
      although promising treatment outcomes have been reported. Cryosurgery typically
      requires a one to two day hospital stay and is associated with higher rates
      of
      impotence than brachytherapy.




*Other
      Treatments.*





Other
      treatments include hormone therapy and chemotherapy, which may be used to reduce
      the size of cancerous tumors. However, these treatments are not intended to
      ultimately cure a patient of prostate cancer. Instead, such treatment choices
      are made by physicians in an attempt to extend patients' lives if the cancer
      has
      reached an advanced stage or as ancillary treatment methods used in conjunction
      with other treatment mechanisms. Common side effects of hormone therapy are
      impotence, decreased libido and development of breasts, and common side effects
      of chemotherapy are nausea, hair loss and fatigue.





"Watchful
      waiting," while not a treatment, is recommended by some physicians in certain
      circumstances based on the severity and growth rate of the disease, as well
      as
      upon the age and life expectancy of the patient. Physicians and patients who
      choose watchful waiting are frequently seeking to avoid the negative side
      effects associated with RP or other treatment modalities. Through careful
      monitoring of PSA levels and close examination for advancing symptoms of
      prostate cancer, physicians may choose more active treatments at a later
      date.





**Prospera®
      for Ocular Melanoma**





Intraocular
      melanoma, a tumor occurring inside the eye, is a relatively rare malignancy.
      There are approximately 1,500 new cases of this form of melanoma each year
      in
      the United States. The two most common means of treating this condition are
      brachytherapy or enucleation (removal of the eye).





Our
      line
      of high activity brachytherapy seeds is also marketed and sold under the
      trademark Prospera® for use in the treatment of ocular melanoma and other solid
      tumor applications. Our Prospera® ocular melanoma seed is used with the ultimate
      goal of destroying the tumor while preserving the eye. We directly market this
      product line to ophthalmologists and medical physicists. The number of cases
      occurring annually will limit Prospera® ocular melanoma sales for this
      application, but we view it as a natural extension of our brachytherapy business
      and as a service to the oncology community.





7




**Breast
      Cancer**





Breast
      cancer is an invasive tumor, or abnormal growth, that has developed in the
      cells
      of the breast tissue. Breast cancer rates continue to increase in the U.S.
      The
      American Cancer Society estimates one in eight women in the U.S. will develop
      breast cancer in her lifetime. Furthermore, one in thirty-three women will
      die
      from the disease. However, it is possible to detect most breast cancers at
      early
      stages. *In
      situ* or early
      stage cancers have not spread to surrounding tissue or other organs. They are
      confined to the immediate area where the cancer began. Today, with early
      detection and improved treatments, more women are surviving breast
      cancer.





In
      addition to various forms of surgery, breast cancer patients often receive
      other
      forms of therapy including radiation, hormone and/or immunotherapy. Increasingly
      patients and their physicians are opting for breast conservation therapy (BCT).
      BCT is considered for women with early-stages of breast cancer and is used
      in
      situations where physicians believe their patients have an opportunity to
      preserve breast tissue. BCT has traditionally been followed by a rigorous daily
      regime of whole breast radiation. The surgical transition from radical
      mastectomy to lumpectomy is now being followed, for similar tissue sparing
      and
      cosmetic consequence by the acceptance of and often preference for accelerated
      partial breast irradiation in place of whole breast irradiation.





Accelerated
      partial breast irradiation (APBI) treats only the tissue surrounding the
      lumpectomy cavity and offers patients less invasive and more convenient
      treatment options than with whole breast external beam radiation. With localized
      treatment, the remainder of the breast and surrounding organs are spared from
      unnecessary radiation exposure inherent with whole breast irradiation. APBI
      delivery techniques are catheter based, either through single or multiple
      insertion sites, utilizing both high and low dose sources, delivered either
      from
      external sources or imbedded seeds.





**Breast
      Brachytherapy**





Approximately
      270,000 new cases of breast cancer are diagnosed in the U.S. each year. Only
      75%
      of breast cancers are discovered in early-stages, and are therefore suitable
      for
      BCT. Therefore, we estimate the total market for postlumpectomy brachytherapy
      is
      approximately 200,000 patients annually. With typical average selling prices
      of
      approximately $2,700 **,** we
      estimate the U.S. brachytherapy market potential at approximately $540 million,
      excluding the cost of radiation sources and brachytherapy seeds, used in the
      treatment. Including the revenues from radiation sources and brachytherapy
      seeds, we estimate the U.S. brachytherapy market potential at over $700 million.





Breast
      brachytherapy may utilize either high-dose-rate (HDR) or low-dose-rate (LDR)
      sources. Unlike prostate brachytherapy treatment which is administered by the
      permanent implantation of LDR souces in the prostate, breast brachytherapy
      is
      administered by temporarily placing the radiation source in the post-lumpectomy
      site. With HDR breast brachytherapy, the placement of the HDR radiation source
      (Iridium-192) directly into the post-lumpectomy site reduces the treatment
      time
      to approximately 5 days compared to 30-35 days for whole breast radiation
      therapy. HDR therapy can be used at the time of the lumpectomy or in the months
      after the procedure as with whole breast radiation therapy (WBRT). The HDR
      source can be placed and removed in a physician's office under local anesthesia
      in contrast to WBRT, which must be performed in a radiation-safe heavily
      shielded room. Clinical outcomes, including recurrence rates, for HDR radiation
      therapy are similar to those obtained with the more invasive, longer treatment
      time, WBRT. HDR therapy can also be used as an adjunct therapy in patients
      who
      have received WBRT previously. In this application, patients generally receive
      treatments over one to two days.




8




In
      the
      past, LDR therapy utilizing multi-catheter systems and seed implants have been
      associated with negative cosmetic results. These systems typically use 10-15
      injection sites to deliver local radiation therapy or exposed radiation too
      close to the surface of the skin, causing aesthetic defects including spider
      veins.





Both
      HDR
      and LDR patients may leave the hospital and perform most normal daily activities
      once the therapy has been initiated. Patients receiving LDR therapy are required
      to wear a small breast shield while the radiation source is in place. LDR
      therapy may offer an attractive alternative for patients in rural communities
      without easy access to shielded rooms. Additionally, LDR capability may be
      a
      significant benefit in international markets where LDR is more prevalent and
      the
      availability of shielded rooms is significantly less.





*ClearPath* TM.
      On
      November 7, 2006, we announced the introduction of ClearPath, our unique
      multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation (APBI), at the American Society for Therapeutic Radiology and
      Oncology (ASTRO) Annual Meeting in Philadelphia. The ClearPath systems are
      placed through a single incision and are designed to conform to the resection
      cavity, allowing for more conformal therapeutic radiation dose distribution
      following lumpectomy compared to other methods of APBI. ClearPath is designed
      to
      accommodate either high-dose, ClearPath-HDR, or low-dose rate, ClearPath-CR,
      treatment methods. We received 510(k) approval from the United States Food
      and
      Drug Administration for a low-dose rate, or continuous release, treatment
      utilizing the Company’s Prospera® brachytherapy seeds in April 2006 and approval
      for the high-dose rate treatment in November 2006. We have been gaining clinical
      experience with the first generation ClearPath-HDR in 2007, and we intend to
      launch the second generation devices in 2008, to be followed by release of
      our
      ClearPath-CR.





The
      unique design of ClearPath offers new treatment alternatives to women electing
      APBI as part of their breast conserving therapy (BCT). ClearPath offers the
      advantages of multicatheter sourcing through a single insertion site.
      ClearPath’s unique multi-channel catheter system accommodates both LDR therapy,
      using our existing Prospera I-125 seeds, or HDR treatments. The ClearPath
      systems are designed to offer physicians greater flexibility in treatment
      planning and dose optimization to the target region while minimizing exposure
      to
      nearby healthy tissue. The
      channels on the ClearPath catheter can be positioned and controlled
      independently to change their location (size of the arc) and dose of radiation.





The
      ClearPath-HDR system consists of 12 individually adjustable catheters, 6 of
      which are partially deployed in the HDR application. This feature potentially
      allows radiation oncologists to offer brachytherapy to patients who have not
      been appropriate for other available brachytherapy products because their
      cavities have been considered too close to the skin. Traditional breast
      brachytherapy has been associated with negative cosmetic outcomes largely due
      to
      the proximity of the radiation source to the skin. Recommendations are that
      the
      radiation source be 7 mm or more from the skin. The unique ability of ClearPath
      to partially deploy 6 source catheters could negate this proximity problem.
      The
      deployed catheters in ClearPath, unlike a balloon, are more conformal, neither
      compressing nor altering the shape of the surrounding tissue.





The
      combination of conformal channels and independent dosing may improve treatment
      planning for these patients and address some physician concerns with the balloon
      product. The ClearPath catheter integrates with existing HDR afterloaders and
      treatment planning software sold by Varian Medical and Nucleton and does not
      require additional capital investment by facilities with shielded rooms and
      afterloaders.




9




The
      second ClearPath design, ClearPath-CR or continuous release, utilizes a similar
      array of deployable catheters placed through a single incision. However, rather
      than undergoing 10 treatments over 5 days, the radiation oncologist will place
      a
      series of stranded low dose rate Prospera I-125 brachytherapy seeds into the
      device which will deliver a continuous low level radiation dose over a 4 to
      5
      day period. ClearPath-CR would not require patients to return to the hospital
      or
      clinic daily for treatment. Ease of placement, dose conformality, and patient
      friendliness are a few of the differentiating features of the ClearPath
      design.





**NON-THERAPEUTIC
      PRODUCTS**





By
      utilizing our expertise in the design, development and manufacturing of
      radioisotopic products, we have developed or jointly developed the following
      additional products.





**Radiation
      Calibration and Reference Source Products**





Radioactivity
      is a natural physical property of certain chemical elements. Radioisotopes
      are
      radioactive elements which emit energy characteristics specific to that isotope.
      At sites possessing or storing radioactive materials, radiation detection
      instruments are typically used to monitor the emitted radiation from a given
      sample (i.e., soil, air, water, etc.) to identify and quantify the radioisotopes
      present in that sample to help ensure safety to workers and the surrounding
      environment. In order to determine a particular instrument's efficiency, an
      accurately measured and contained amount of a radioactive isotope is required
      to
      serve as a calibration reference standard. Each type of sample being monitored
      by an instrument typically requires a radiation standard of identical form
      and
      geometry to the sample.





Our
      principal products in this category are radiation sources and standards, which
      are used in a variety of areas for calibration, measurement, analysis and
      control.




**Standards
      for Nuclear Medicine**





Nuclear
      medicine is practiced at over 5,000 United States hospitals. Consistent
      performance of imaging and calibration instrumentation is crucial to successful
      diagnostic and patient management and cannot be maintained without extensive
      calibration programs. We supply many of the required types of calibration
      standards.




**Standards
      for Calibration and Control**





We
      manufacture both catalog and customized products for commercial laboratories
      serving the environmental sector. Calibration standards are critical for
      accurate environmental analysis of unknown samples collected in the field.
      Moreover, our products have a variety of industrial uses, ranging from measuring
      the thickness of materials and gauging fluid levels to electronics stabilization
      and calibration.





We
      also
      sell radiation standards to various organizations, including certain government
      agency contractors and laboratories. These standards are often designed to
      meet
      special requirements, customized configurations or special processing
      services.





Our
      commercial customers include federal and state governmental agencies, leading
      medical equipment manufacturers, nuclear utilities and private organizations.
      Our radiation sources are also sold through a select group of representatives
      and distributors in North America and Europe. We support our products through
      a
      full product catalog, advertising, telemarketing and trade shows, and engage
      in
      direct selling to end users as well as to equipment manufacturers for inclusion
      in their product lines.




10




**INTELLECTUAL
      PROPERTY**





**Patents**




We
      believe that patents and other proprietary rights are important to our business.
      It is our policy to seek appropriate patent protection both in the United States
      and abroad for our proprietary technology and to enter into license agreements
      with various companies to obtain patent rights from them to develop and
      potentially sell products which use the compounds and technologies protected
      by
      those patents. The following chart shows our outstanding patents and their
      respective expiration dates.





**Name with Patent Number**
            
            **Subject**
            
            **Date of Issuance and**
              **Expiration
                Date**Needle
                for Imaging and Sampling
              (5,647,374)
            
            An
                instrument and method for the biopsy of tumors, such as breast lesions,
                are disclosed. A stylus comprises a tube having radioactive material
                in
                the tip capable of being imaged, the stylus contained within a needle.
                An
                image of the tip of the needle can be traced as it penetrates a human
                body, is guided toward an imaged tissue mass, and is placed within
                the
                tumor.
            
            July
                15, 1997 until December 30, 2014Stepper
                apparatus for use in the imaging/treatment of internal organs using
                an
                ultrasound probe
              (5,871,448)
            
            The
                stepper apparatus for use in imaging/treatment of prostate cancer
                with
                radioactive seeds includes a body portion, a support element for
                holding
                the ultrasound probe, a slide portion for moving the support element
                relative to the body portion, and a support element for holding a
                template
                which has a plurality of openings therethrough, through which radiation
                seed insertion needles may be positioned.
            
            February
                16, 1999 until October 14, 2017Laser
                Welded Brachytherapy Source and Method of Making the Same
              (5,997,463)
            
            A
                brachytherapy source for use in radiation treatment of the body includes
                radioactive material, and a housing. The housing is used to contain
                the
                radioactive materials, and is formed by at least one tube having
                two ends.
                The two ends of the tube are sealed by welding such that a radiation
                distribution of the brachytherapy source approximates a point source
                that
                is free of cold zones to minimize underexposure or overexposure of
                the
                body to radiation and to simplify the placement of the brachytherapy
                source in the body.
            
            December
                7, 1999 until March 26, 2018Stabilizer
                assembly for stepper apparatus and ultrasound probe
              (6,179,262)
            
            The
                stabilizer assembly is used to position a stepper assembly for an
                ultrasound probe. The stabilizer includes two spaced apart swivel
                assemblies, each swivel assembly including clamps at one end thereof
                locking the stabilizer to a table.
            
            January
                30, 2001 until October 23, 2018Radioactive
                Seeds and Method for Using Same (6,440,058)
            
            A
                system and method of treating an affected region of diseased tissue
                in a
                patient is described. A plurality of first radioactive seeds and
                a
                plurality of second radioactive seeds are implanted in the affected
                region.
            
            August
                27, 2002 until August 25, 2019




11




Radioactive
                Seed with Multiple Markers and Method for Using Same
              (6,503,186)
            
            A
                radioactive seed which discloses the orientation and the location
                of the
                seed when the seed is exposed to X-ray photography is provided. The
                seed
                contains multiple X-ray detectable markers which will disclose the
                orientation and the location of the seed when the seed is exposed
                to X-ray
                photography. The seed can also have a single marker which wraps around
                the
                external surface of the seed or wraps around a carrier body within
                the
                seed. The single marker will also disclose the orientation as well
                as the
                location of the seed.
            
            January
                7, 2003 until March 29, 2020Apparatus
                for loading radioactive seeds and spacing elements into a brachytherapy
                needle
              (6,582,354)
            
            The
                loading apparatus includes a tray assembly which receives radioactive
                seeds and spacer elements from containers thereof.
            
            June
                24, 2003 until
              July
                23, 2020Radioactive
                Seed with Multiple Markers and Method for Using Same
              (6,638,207)
            
            A
                radioactive seed which discloses the orientation and the location
                of the
                seed when the seed is exposed to X-ray photography is provided. The
                seed
                contains multiple X-ray detectable markers which will disclose the
                orientation and the location of the seed when the seed is exposed
                to X-ray
                photography. The seed can also have a single marker which wraps around
                the
                external surface of the seed or wraps around a carrier body within
                the
                seed. The single marker will also disclose the orientation as well
                as the
                location of the seed.
            
            October
                28, 2003 until October 15, 2020Thin
                Radiation Source and Method of Making the Same
              (6,787,786)
            
            Radiation
                sources and a method for producing radiation sources. Embodiments
                of the
                present invention are directed to radiation sources that can be used
                to
                calibrate nuclear imaging equipment, such as flood sources. According
                to
                embodiments of the invention, the radiation source includes a outer
                housing that contains a substrate upon which a radioactive pattern
                is
                deposited. The radioactive deposit may be placed on the surface of
                the
                substrate in the form of a deposited solution and may be fixed to
                the
                surface of the substrate by, for example, a binding agent and/or
                a sealing
                layer. The deposited solution may also include a colorant to visually
                indicate the activity distribution of the radioactive
                deposit.
            
            September
                7, 2004 until June 12, 2021Radioactive
                seed with multiple markers and method for using same
              (6,881,183)
            
            A
                radioactive seed which discloses the orientation and the location
                of the
                seed when the seed is exposed to X-ray photography is provided. The
                seed
                contains multiple X-ray detectable markers which will disclose the
                orientation and the location of the seed when the seed is exposed
                to X-ray
                photography. The single marker will also disclose the orientation
                as well
                as the location of the seed.
            
            October
                23, 2003 until October 23, 2023Apparatus
                and Method for Loading a Brachytherapy Seed Cartridge
                (6,755,775)
            
            An
                apparatus and method for loading radioactive brachytherapy seeds
                into a
                seed cartridge for use with an applicator.
            
            June
                29, 2004 until
              June
                29, 2021




12





In
      addition, as of December 31, 2007, we had 8 additional United States pending
      patent applications. We have also been issued 5 foreign patents and have 9
      foreign patent applications still pending.




**Third-Party
      License Agreements**




We
      license from third parties some of the technologies used in our core products.
      The following is a summary of our material third-party licenses.




·
            *IdeaMatrix,
                Inc**.*We
                have an exclusive license from IdeaMatrix, Inc. (a company wholly
                owned by
                our former Vice President of New Product Development - Brachytherapy,
                Richard Terwilliger) for certain brachytherapy technology pertaining
                to
                needles and strands used in the brachytherapy manufacturing process.
                This
                technology is critical to our SurTRAK line of products sold in connection
                with our brachytherapy seeds. Under this exclusive license agreement,
                we
                paid $125,000 upon execution of the license agreement on February
                17,
                2006, and we are required to pay $125,000 per year over five years.
                There
                is no annual renewal fee or royalty arising out of this license.
                The term
                of this license expires upon the last expiring patent included in
                the
                license. As part of this license agreement, we have agreed to indemnify
                Mr. Terwilliger and IdeaMatrix, Inc. for claims arising from the
                licensed
                property, including the claim raised in the Worldwide Medical Technology
                lawsuit against Mr. Terwilliger and IdeaMatrix, Inc. Please see Item
                3,
                Legal Proceedings for more information.





·
            *University
                of South Florida Research Foundation, Inc.*:
                On February 2, 2007, we entered into an exclusive license from the
                University of South Florida Research Foundation, Inc. (the “Foundation”)
                covering certain patent processes which may be used in the manufacture
                and
                distribution of our ClearPath products. Under the license agreement,
                we
                paid $23,000 in May 2007, which included a one-time license fee of
                $10,000
                and a reimbursement of legal fees incurred by the Foundation to draft
                the
                license agreement. The license requires us to pay a $75,000 fixed
                license
                fee upon the first commercial sale of products covered by the license,
                and
                additional $75,000 license fees upon achieving each of $10 million
                and $20
                million in aggregate product sales. Royalty fees of 7.5% of net sales
                of
                licensed products are due annually on the anniversary of the agreement,
                with minimum royalty payments of $50,000 on the first and second
                anniversary of the agreement, increasing to $75,000 on each anniversary
                thereafter. The term of this license expires upon the last expiring
                patent
                included in the license The license further allows us to sublicense
                the
                covered processes for additional
                fees.




We
      also
      rely upon unpatented trade secrets and improvements, unpatented know-how and
      continuing technological innovation to develop and maintain our competitive
      position. Our policy is to enter into confidentiality agreements with our
      employees, consultants and vendors, and we generally control access to our
      proprietary information.




13




**COMPETITION**




Our
      primary competitors in the brachytherapy seed business include: C.R.
      Bard, Inc. Oncura, Inc., and Core Oncology, Inc., all of whom manufacture
      and sell Iodine-125 brachytherapy seeds, as well as distribute Palladium-103
      seeds manufactured by a third party (in the case of Oncura and Core Oncology,
      we
      currently manufacture a portion of their Palladium-103 seed requirements
      pursuant to distribution agreements reached with Oncura in July 2005 and with
      Core Oncology in August 2007); and Theragenics Corporation, which manufactures
      Palladium-103 seeds, and sells Palladium-103 and Iodine-125 brachytherapy seeds
      directly and its Palladium-103 brachytherapy seeds through marketing
      relationships with third parties. Several additional companies currently sell
      brachytherapy seeds as well. Our SurTRAK strands and needles are subject to
      competition from a number of companies, including Worldwide Medical
      Technologies, Inc.





Our
      new
      ClearPath-HDR device for treatment of breast cancer is, like its competitors,
      designed to connect to a source of high-dose-rate (HDR) radiation, which is
      administered in a specially shielded room in a hospital. It faces competition
      from Hologic, Inc., SenoRx, Inc. and Cianna Medical (previously BioLucent,
      Inc.). The MammoSite RTS device from Hologic, Inc., currently the market leader,
      uses a balloon and catheter system to place the radiation source directly into
      the post-lumpectomy cavity. The Contura MLB device developed by SenoRx, Inc.
      also uses a balloon and catheter system to deliver the radiation dose. The
      SAVI
      device manufactured by Cianna Medical does not use a balloon and is comprised
      of
      an expandable bundle of 6 catheters.




In
      addition, other products using alternative technologies may be developed which
      would compete with our brachytherapy products. For example, if treatment methods
      such as cryosurgery or hormone therapy gain increased acceptance among
      healthcare providers, patients and payers, or if new technologies such as gene
      modification emerge to become leading treatment standards as alternatives to
      traditional therapies, we may lose market share for our brachytherapy seeds
      or
      may find that our products are rendered non-competitive or obsolete by such
      market shifts and technological developments.





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





We
      believe that we compete favorably in our targeted markets on the basis of price,
      diversity of product line, customer service, quality and delivery
      time.





Many
      of
      the companies named above against whom we compete are substantially larger
      than
      us and have greater technical, sales, marketing and financial resources.
      Developments by any of these or other companies or advances by medical
      researchers at universities, government research facilities or private research
      laboratories could render our products obsolete. Therefore, additional companies
      with substantially greater financial resources than we have, as well as more
      extensive experience in research and development, the regulatory approval
      process and manufacturing and marketing, may develop treatments and products
      that are similar to our products.





In
      addition to the competition from the procedures and companies noted above,
      many
      companies, both public and private, are researching new and innovative methods
      of preventing and treating cancer. Furthermore, many companies, including many
      large, well-known pharmaceutical, medical device and chemical companies that
      have significant resources available to them, are engaged in radiological
      pharmaceutical and device research. These companies are located in the United
      States, Europe and throughout the world. Significant developments by any of
      these companies could have a material adverse effect on the demand for our
      products.




14




**SALES
      AND MARKETING**





Since
      January 2003, we have developed an internal sales force to directly market
      and
      sell our brachytherapy products. At the end of fiscal year 2007, the domestic
      sales staff consisted of six business development managers. In addition, we
      had
      five customer service representatives. We recently have hired a Vice President
      of Sales, and plan to expand our sales force in our Radiation Sources business
      in fiscal year 2008 to market ClearPath, our new device for breast cancer
      treatment.





Each
      of
      our sales representatives sells products and services to customers within an
      assigned territory. The sales representatives promote customer satisfaction
      with
      periodic service calls in addition to scheduled follow-up visits. Our products
      are principally marketed directly to the end-user physicians or purchasing
      groups that act on their behalf. In addition to our sales efforts in the United
      States market, we also market our products in Europe. $0.7 million, or 4.7%,
      of
      our total revenues in fiscal year 2007 were attributable to international
      markets. Two customers, Oncura and Pinestar Technology, Inc., each accounted
      for
      over 10% of our revenue.





Our
      radiation calibration and references standards are sold directly, as well as
      through a select group of third party representatives and distributors, in
      North
      America, Europe and Asia. We support our products through a full product
      catalog, advertising, telemarketing and trade shows, and engage in direct
      selling to end users as well as to equipment manufacturers for inclusion in
      their product lines.





**GOVERNMENT
      REGULATION**





Our
      products are medical devices, and therefore, subject to regulation and oversight
      by the FDA, state and local government authorities and foreign government
      authorities. FDA and foreign regulatory requirements include registration as
      a
      manufacturer, compliance with established manufacturing practices and quality
      standards, conformance with applicable industry standards, product traceability,
      adverse event reporting and compliance with advertising and packaging
      standards.





Our
      research and development activities and marketing activities are also subject
      to
      the laws, regulations, guidelines and regulatory clearances and approvals of
      governmental authorities in the United States and other countries in which
      our
      products are or will be marketed.





*United
      States Regulatory Process*





Specifically,
      in the United States, the FDA regulates, among other things, new product
      clearances and approvals to establish the safety and efficacy of these products.
      We are also subject to other federal and state laws and regulations, including
      the Occupational Safety and Health Act and the Environmental Protection
      Act.





The
      Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations
      govern or influence the research, testing, manufacture, safety, labeling,
      storage, record keeping, approval, distribution, use, reporting, advertising
      and
      promotion of such products. Noncompliance with applicable requirements can
      result in civil penalties, recall, injunction or seizure of products, refusal
      of
      the government to approve or clear product approval applications,
      disqualification from sponsoring, or conducting clinical investigations,
      preventing us from entering into government supply contracts, withdrawal of
      previously approved applications and criminal prosecution.





Approval
      of new medical devices is a lengthy procedure and can take a number of years
      and
      the expenditure of significant resources. There is a shorter FDA review and
      clearance process, the pre-market notification process, or the 510(k) process,
      whereby a company can market certain medical devices that can be shown to be
      substantially equivalent to other legally marketed devices. We have been able
      to
      achieve market clearance for some of our medical device products using the
      510(k) process.




15




In
      the
      United States, medical devices are classified into three different categories
      over which FDA applies increasing levels of regulation: Class I,
      Class II and Class III. Most Class I devices are exempt from
      pre-market notification 510(k); most Class II devices require pre-market
      notification 510(k) and most Class III devices require pre-market approval.
      All
      of our radiation therapy products are Class II devices and have received
      510(k) clearance.




Each
      of
      our products has its own individual indication for use statement that has been
      cleared by the FDA. Each of these indications specify that the products are
      cleared for use in prescribed radiation therapy. None of the FDA clearances
      for
      any of our products limit the scope of intended use to treating certain types
      of
      cancer.




As
      a
      registered medical device manufacturer with the FDA, we
      are
      subject to inspection to ensure compliance with their current Good Manufacturing
      Practices, or cGMP. These regulations require that we and any of our contract
      manufacturers design, manufacture and service products and maintain documents
      in
      a prescribed manner with respect to manufacturing, testing, distribution,
      storage, design control and service activities. Modifications or enhancements
      that could significantly affect the safety or effectiveness of a device or
      that
      constitute a major change to the intended use of the device require a new 510(k)
      notice for any product modification. We may be prohibited from marketing the
      modified product until the 510(k) notice is cleared by the FDA.




The
      Medical Device Reporting regulation requires that we provide information to
      the
      FDA on deaths or serious injuries alleged to be associated with the use of
      our
      devices, as well as product malfunctions that are likely to cause or contribute
      to death or serious injury if the malfunction were to recur. Labeling and
      promotional activities are regulated by the FDA and, in some circumstances,
      by
      the Federal Trade Commission.




As
      a
      medical device manufacturer, we are also subject to laws and regulations
      administered by governmental entities at the federal, state and local levels.
      For example, our facilities are licensed as medical product manufacturing
      facilities in California and are subject to periodic state regulatory
      inspections. Our customers are also subject to a wide variety of laws and
      regulations that could affect the nature and scope of their relationships with
      us.




Additionally,
      our facilities in the Los Angeles metropolitan area operate under a license
      issued by the California Department of Health which allows us to manufacture
      and
      process radioactive materials. The license for one of our facilities expires
      in
      2008, and we have filed a renewal application. The license for the other
      facility expires in 2018. We are subject to a routine inspection by the
      California Department of Health Services for compliance with good manufacturing
      practice, health and safety requirements, and other applicable regulations.
      Moreover, our use, management and disposal of certain radioactive substances
      and
      wastes are subject to regulation by several federal and state agencies depending
      on the nature of the substance or waste material. We believe that we are in
      compliance with all federal and state regulations for this purpose.





*Foreign
      Regulatory Process*





Our
      products are also regulated outside the United States as medical devices by
      foreign governmental agencies, similar to the FDA, and are subject to regulatory
      requirements, similar to the FDA's, in the foreign countries in which we plan
      to
      sell our products.




16




We
      hold a
      Quality Assurance certificate to ISO/EN 13485, the European Union standard
      for
      medical product manufacturers. This certificate is a prerequisite to applying
      the CE Mark to our products. The CE Mark is required on all medical products
      sold and used in the European Union. It is also recognized by many countries
      outside the European Union, such as Australia. The CE Mark indicates that a
      product was designed, released, produced, sold and serviced using a system
      that
      complies with the EU Council Directive 93/42/ECC for medical devices and EU
      Council 90/385/ECC for active implantable medical devices. All of our radiation
      therapy products are currently eligible to bear the CE marking.





Canada
      has a similar device classification system to the FDA, although its system
      contains four classes (Class I through Class IV). Health Canada has
      granted us Class III licenses to distribute our PROSPERA brachytherapy
      products throughout Canada. The Quality System for each facility is audited
      annually for compliance to the Canadian Medical Device Regulations. This allows
      us to sell our products in Canada.





We
      rely
      exclusively on our foreign distributors to obtain the foreign regulatory
      approvals necessary to market our products outside of the United States, Canada
      and Europe.





**MANUFACTURING**





We
      manufacture all of our brachytherapy seed products at two facilities in the
      Los
      Angeles, California metropolitan area. We manufacture certain of our
      brachytherapy accessory products, including our steppers and stabilizers, and
      our calibration and reference source products in one of our Los Angeles
      facilities. The equipment used to manufacture our products is purchased from
      a
      variety of suppliers. Additionally, we have developed an in-house capability
      to
      both build and repair certain equipment used in the manufacturing of our
      products. We consider our manufacturing equipment to be in good
      condition.




The
      principal components in our marketed products are radioisotopes. Additionally,
      we use a variety of materials for encapsulation or containment of the
      radioisotopes. Radioisotopes are available for purchase from a limited number
      of
      government or commercial facilities around the world or are manufactured by
      irradiation of target materials at commercially available sites. We also often
      process and purify these isotopes in our laboratories. Once purified, we further
      process, contain and calibrate these materials. Encapsulation and containment
      materials are available from commercial suppliers in the United States and
      internationally.





**RESEARCH
      AND DEVELOPMENT**





Research
      and development ("R&D”) expenses in continuing operations totaled $1.8
      million, $1.2 million and $0.7 million during the years ended October 31,
      2007, 2006 and 2005, respectively, primarily due to the development costs of
      ClearPath in fiscal years 2006 and 2007. Our R&D spending reflects our
      belief that to maintain our competitive position in a market characterized
      by
      rapid rates of technological advancement, we must continue to invest significant
      resources in new product development, as well as continue to enhance existing
      products.





**EMPLOYEES**





As
      of
      October 31, 2007, we had a total of 88 full-time employees. None of our
      employees are represented by a labor union. We have not experienced a work
      stoppage in our history, and we believe that our employee relations are
      good.




17




**AVAILABLE
      INFORMATION**





We
      make
      available without charge copies of our Proxy Statement, Annual Report on Form
      10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any
      amendments to those reports filed by us with the SEC and any other of our
      reports filed with or furnished to the SEC on or through our website, www.nasmedical.com ,
      as soon
      as reasonably practicable after they are filed. You may request a paper copy
      of
      materials we file with the SEC by calling us at 1-818-734-8600.





You
      also
      may read and copy materials we file with the SEC at the SEC's Public Reference
      Room at 100 F Street, NE, Washington, DC 20549. You may obtain information
      on
      the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330
      or (202) 551-8090. Our filings with the SEC are also available to you on the
      SEC’s Internet web site at www.sec.gov.




**Item
      1A. Risk Factors**





**We
      have experienced significant losses and expect to incur losses in the future.
      As
      a result, the amount of our cash, cash equivalents, and investments in
      marketable securities has materially declined. We raised additional equity
      financing in January, 2008 to fund our continuing operations, support the
      further development and launch of ClearPath and other activities. If we continue
      to incur significant losses and are unable to access sufficient working capital
      from our operations or through external financings, we will be unable to fund
      future operations and operate as a going concern.**





We
      have
      incurred substantial net losses in each of the last six fiscal years. As
      reflected in our financial statements, we have experienced net losses of $21.0
      million, $17.1 million and $55.5 million in our fiscal years ended October
      31,
      2007, 2006 and 2005, respectively. As a result, the total amount of our cash,
      cash equivalents, and investments in marketable securities has significantly
      declined from approximately  $15.0
      million at October 31, 2004 to $0.6 million at October 31, 2007, and our
      interest-bearing debt has grown to $3.3 million. In addition, our line of credit
      with Silicon Valley Bank will expire on February 1, 2008, and there is no
      assurance that it will be renewed.





The
      negative cash flow we have sustained has materially reduced our working capital.
      Although our working capital has been replenished to some extent by our January
      2008 equity financing, continued negative cash flow could materially and
      negatively impact our ability to fund future operations and continue to operate
      as a going concern. Management has taken and continues to take actions intended
      to improve our results. These actions include reducing cash operating expenses,
      developing new technologies and products, improving existing technologies and
      products, and expanding into new geographical markets. **** The
      availability of necessary working capital, however, is subject to many factors
      beyond our control, including our ability to obtain additional financing, our
      ability to increase revenues and to reduce further our losses from operations,
      economic cycles, market acceptance of our products, competitors’ responses to
      our products, the intensity of competition in our markets, and the level of
      demand for our products.





The
      amount of working capital that we will need in the future will also depend
      on
      our efforts and many factors, including:





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


·
            Continued
                scientific progress in our discovery and research
                programs;


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






18




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


·
            Levels
                of inventory and accounts receivable that we
                maintain;


·
            Level
                of capital expenditures;


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


·
            The
                time and costs involved in obtaining regulatory approvals;


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


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





We
      completed a private placement of $15.5 million of our common stock in January,
      2008; however, we may need to raise additional equity financing, reduce
      operations and take other steps to achieve positive cash flow. We also may
      be
      required to curtail our expenses or to take steps that could hurt our future
      performance, including but not limited to, the termination of major portions
      of
      our research and development activities, the premature sale of some or all
      of
      our assets or product lines on undesirable terms, merger with or acquisition
      by
      another company on unsatisfactory terms or the cessation of operations. We
      cannot assure you that we will be successful in these efforts or that any or
      some of the above factors will not negatively impact us. We believe that we
      will
      have sufficient cash to sustain us at least through the next twelve months.





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





In
      January 2008, we completed a private placement of 63,008,140 shares of our
      common stock that also included 3,150,407 shares of common stock issuable upon
      exercise of warrants. This financing resulted in significant dilution of the
      Company’s current shareholders. If we raise additional equity financing in the
      future, the percentage ownership held by existing shareholders would be further
      reduced, and existing shareholders may experience further significant dilution.
      In addition, new investors may demand rights, preferences or privileges that
      differ from, or are senior to, those of our existing shareholders, such as
      warrants in addition to the securities purchased and other protections against
      future dilutive transactions.





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





As
      of
      July 31, 2007, we did not meet the $10 million stockholders’ equity requirement
      under Maintenance Standard 1 for continued listing on the Nasdaq Global Market
      set forth in Marketplace Rule 4450(a)(3). As a result of our non-compliance,
      The
      Nasdaq Stock Market sent us a notice that our stock was subject to delisting
      from the The Nasdaq Global Market. We appealed the delisting to the Nasdaq
      Listing Qualifications Panel, and on December 11, 2007, we received formal
      notice that the Nasdaq Listing Qualifications Panel had granted our request
      for
      a transfer from the Nasdaq Global Market to the Nasdaq Capital Market, and
      continued listing on the Nasdaq Capital Market, subject to the following
      exceptions:




19




§
            On
                or before January 17, 2008, we were required to inform the Panel
                that we
                had received funds sufficient to put us in compliance with the Capital
                Market shareholders’ equity requirement of $2.5 million. Within four
                business days of the receipt of the funds, we were required to make
                a
                public disclosure of receipt of the funds and file a Form 8-K with
                pro
                forma financial information indicating that we planned to report
                proforma
                shareholders’ equity of $2.5 million or greater for the fiscal year ended
                October 31, 2007. We informed the Panel of receipt of sufficient
                funds on
                January 18, 2008. We publicly disclosed receipt of such funds in
                a press
                release dated January 22, 2008 and filed a Form 8-K with respect
                to this
                matter on January 25, 2008.





§
            On
                or before January 31, 2008, we were required to file our Annual Report
                on
                Form 10-K for the fiscal year ended October 31, 2007, which shall
                demonstrate proforma shareholder’s equity of $2.5 million or greater. This
                information is set forth below in this Report under “Subsequent
                Events – Nasdaq Delisting.”





On
      October 5, 2007, we received a notice from Nasdaq indicating that, for the
      preceding 30 consecutive days, the bid price of our common stock had closed
      below the minimum $1.00 per share requirement for continued listing. In
      accordance with the Nasdaq rules, we have until April 2, 2008, to regain
      compliance. In order to regain compliance, the bid price of our common stock
      must close at $1.00 per share or more for a minimum of 10 consecutive business
      days. If we do not regain compliance with the rule by April 2, 2008, we
      understand that the Nasdaq Staff will provide written notification to us that
      our common stock will be delisted. At that time, we may appeal the Staff’s
      determination to a Nasdaq Listing Qualifications Panel, but no assurance can
      be
      given that any such appeal would be successful.





Alternatively,
      if our common stock is delisted by Nasdaq, our common stock may be eligible
      to
      trade on the American Stock Exchange, the OTC Bulletin Board maintained by
      Nasdaq, another over-the-counter quotation system, or on the pink sheets where
      an investor may find it more difficult to dispose of or obtain accurate
      quotations as to the market value of our common stock, although there can be
      no
      assurance that our common stock will be eligible for trading on any alternative
      exchanges or markets. In addition, we would be subject to Rule 15c2-11
      promulgated by the SEC. If we fail to meet criteria set forth in the rule (for
      example, by failing to file periodic reports as required by the Exchange Act),
      various practice requirements are imposed on broker-dealers who sell securities
      governed by the rule to persons other than established customers and accredited
      investors. For these types of transactions, the broker-dealer must make a
      special suitability determination for the purchaser and have received the
      purchaser's written consent to the transactions prior to sale. Consequently,
      such rule may deter broker-dealers from recommending or selling our common
      stock, which may further affect the liquidity and price of our common
      stock.




Delisting
      from Nasdaq could adversely affect our ability to raise additional financing
      through the public or private sale of equity securities. We may need to raise
      additional financing in fiscal 2008 to fund our continuing operations, support
      the launch and further development of ClearPath, and other activities. Delisting
      from Nasdaq also would make trading our common stock more difficult for
      investors, potentially leading to further declines in our share price. It would
      also make it more difficult for us to raise additional capital.





**Success
      of our ClearPath breast brachytherapy device will be dependent upon a variety
      of
      factors.**





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




20




·
            The
                successful further development of a commercially marketable
                device;


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


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


·
            The
                successful completion of technical improvements to the
                device;


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


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


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





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





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




New
      product developments in the healthcare industry are inherently risky and
      unpredictable. These risks include:




·  
failure
      to prove feasibility;


·  
time
      required from proof of
      feasibility to routine production;


·  
timing
      and cost of regulatory
      approvals and clearances;


·  
competitors'
      responses to new
      product developments;


·  
manufacturing
      cost overruns;


·  
failure
      to obtain customer
      acceptance and payment; and


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




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




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




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




21




Our
      primary competitors in the brachytherapy seed business include: C.R.
      Bard, Inc. Oncura, and Core Oncology, all of whom manufacture and sell
      Iodine-125 brachytherapy seeds, as well as distribute Palladium-103 seeds
      manufactured by a third party (in the case of Oncura and Core Oncology, we
      currently manufacture a portion of their Palladium-103 seed requirements
      pursuant to distribution agreements reached with Oncura in July 2005 and with
      Core Oncology in August 2007); and Theragenics Corporation, which manufacturers
      Palladium-103 seeds, and sells Palladium-103 and Iodine-125 brachytherapy seeds
      directly and its Palladium-103 brachytherapy seeds through marketing
      relationships with third parties. Several additional companies currently sell
      brachytherapy seeds as well. Our SurTRAK strands and needles are subject to
      competition from a number of companies, including Worldwide Medical
      Technologies, Inc.





Our
      new
      ClearPath-HDR device for treatment of breast cancer is, like its competitors,
      designed to connect to a source of high-dose-rate (HDR) radiation, which is
      administered in a specially shielded room in a hospital. It faces competition
      from Hologic, Inc., SenoRx, Inc. and Cianna Medical (previously BioLucent,
      Inc.). The MammoSite RTS device from Hologic, Inc., currently the market leader,
      uses a balloon and catheter system to place the radiation source directly into
      the post-lumpectomy cavity. The Contura MLB device developed by SenoRx, Inc.
      also uses a balloon and catheter system to deliver the radiation dose. The
      SAVI
      device manufactured by Cianna Medical does not use a balloon and is comprised
      of
      an expandable bundle of 6 catheters.





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





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





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




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




22




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




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




Our
      2005
      agreement with Oncura, Inc. and our 2007 agreement with Core Oncology, Inc.
      for
      distribution of our Palladium-103 brachytherapy seeds are important components
      of that business. In addition, we do not have a direct sales force for our
      non-therapeutic radiation source products, and rely entirely on the efforts
      of
      agents and distributors for sales of those non-brachytherapy products. We cannot
      assure you that we will be able to maintain our existing relationships with
      our
      agents and distributors for the sale of our Palladium-103 brachytherapy seeds
      and our non-therapeutic radiation source products.




**We
      depend partially on our relationships with two large customers that each
      comprise more than 10% of our revenue. If these relationships are discontinued
      or if we are unable to develop new relationships, our revenues could decline.**




Our
      sales
      to Oncura, Inc. and Pinestar Technology, Inc. each comprised more than 10%
      of
      our revenue for 2007. We cannot assure you that we will be able to maintain
      our
      existing relationships with our large customers for the sale of our
      Palladium-103 brachytherapy seeds and our non-therapeutic radiation source
      products.





**If
      we are sued for product-related liabilities, the cost could be prohibitive
      to
      us.** ******





The
      testing, marketing and sale of human healthcare products entail an inherent
      exposure to product liability claims. Third parties may successfully assert
      product liability claims against us. Although we currently have insurance
      covering claims against our products, we may not be able to maintain this
      insurance at acceptable cost in the future, if at all. In addition, our
      insurance may not be sufficient to cover particularly large claims. Significant
      product liability claims could result in large and unexpected expenses as well
      as a costly distraction of management resources and potential negative publicity
      and reduced demand for our products.




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




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




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




23




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




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




Our
      success is materially dependent on a limited number of key employees, and,
      in
      particular, the continued services of John B. Rush, our president and chief
      executive officer, L. Michael Cutrer, our executive vice president and chief
      technology officer, Troy A. Barring, our chief operating officer, and James
      W.
      Klingler, our chief financial officer. Our future business and financial results
      could be adversely affected if the services of Messrs. Rush, Cutrer, Barring
      or
      Klingler or other key employees cease to be available. To our knowledge, none
      of
      our key employees have any plans to retire or leave in the near future.




Our
      future success and ability to grow our business will depend in part on the
      continued service of our skilled personnel and our ability to identify, hire
      and
      retain additional qualified personnel. Although some employees are bound by
      a
      limited non-competition agreement that they sign upon employment, few of our
      employees are bound by employment contracts, and it is difficult to find
      qualified personnel, particularly medical physicists and customer service
      personnel, who are willing to travel extensively. We compete for qualified
      personnel with medical equipment manufacturers, universities and research
      institutions. Because the competition for these personnel is intense, costs
      related to compensation may increase significantly.




Even
      when
      we are able to hire a qualified medical physicist, engineer or other technical
      person, there is a significant training period of up to several months before
      that person is fully capable of performing the functions we need. This could
      limit our ability to expand our business.




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




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




24




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




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




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




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




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




In
      2006,
      we licensed intellectual property which was later the subject of litigation
      brought by WorldWide Medical Technologies in U.S. District Court against both
      us
      and our former employee, Richard Terwilliger, who was previously our
      Vice-President of New Product Development. This intellectual property relates
      to
      our brachytherapy business, specifically, certain needle-loading and stranding
      technologies. While we do not believe that we have any liability in this matter,
      and are vigorously defending ourself in the litigation, we cannot predict what
      effect an adverse result from this litigation would have on our future sales
      of
      the products at issue.




**We
      use radioactive materials which are subject to stringent regulation and which
      may subject us to liability if accidents occur** .




25




We
      manufacture and process radioactive materials which are subject to stringent
      regulation. We operate under licenses issued by the California Department of
      Health which are renewable every eight years. We received a renewal of our
      licenses for our North Hollywood and Chatsworth facilities in 2007. California
      is one of the "Agreement States," which are so named because the Nuclear
      Regulatory Commission, or NRC, has granted such states regulatory authority
      over
      radioactive materials, provided such states have regulatory standards meeting
      or
      exceeding the standards imposed by the NRC. Most users of our products must
      obtain licenses issued by the state in which they reside (if they are Agreement
      States) or the NRC. Use licenses are also required by some of the foreign
      jurisdictions in which we may seek to market our products.




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




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




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




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




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




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




26




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




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




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




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





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





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





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




27


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




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




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





In
      addition to FDA-required market clearances and approvals, our manufacturing
      operations are required to comply with the FDA's Quality System Regulation,
      or
      QSR, which addresses the quality program requirements, such as a company's
      management responsibility for the company's quality systems, and good
      manufacturing practices, product design, controls, methods, facilities and
      quality assurance controls used in manufacturing, assembly, packing, storing
      and
      installing medical devices. Compliance with the QSR is necessary to receive
      FDA
      clearance or approval to market new products and is necessary for us to be
      able
      to continue to market cleared or approved product offerings. There
      can
      be no assurance that we will not incur significant costs to comply with these
      regulations in the future or that the regulations will not have a material
      adverse effect on our business, financial condition and results of operations.
      Our compliance and the compliance by some of our suppliers with applicable
      regulatory requirements are and will continue to be monitored through periodic
      inspections by the FDA. The
      FDA
      makes announced and unannounced inspections to determine compliance with the
      QSR's and may issue us 483 reports listing instances where we have failed to
      comply with applicable regulations and/or procedures or Warning Letters which,
      if not adequately responded to, could lead to enforcement actions against us,
      including fines, the total shutdown of our production facilities and criminal
      prosecution.




28


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




•
fines,
      injunctions and civil penalties;


•
the
      recall or seizure of our products;


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


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


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


•
      criminal prosecution.




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




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




Our
      future profitability will depend in part on our ability to establish, grow
      and
      ultimately maintain our product sales in foreign markets, particularly in Asia
      and Europe. However, we have limited experience in marketing, servicing and
      distributing our products in other countries. In 2007, less than 5% of our
      product revenues and less than 5% of our total revenues were derived from sales
      to customers outside the United States and Canada. Our foreign operations
      subject us to additional risks and uncertainties, including:




•
our
      customers' ability to obtain reimbursement for procedures using our products
      in
      foreign markets;


•
the
      burden of complying with complex and changing foreign regulatory requirements;


•
      language barriers and other difficulties in providing long-range customer
      support and service;


•
longer
      accounts receivable collection times;


•
      significant currency fluctuations, which could cause our distributors to reduce
      the number of products they purchase from us because the cost of our products
      to
      them could fluctuate relative to the price they can charge their customers;


•
reduced
      protection of intellectual property rights in some foreign countries; and


•
the
      interpretation of contractual provisions governed by foreign laws in the event
      of a contract dispute.




29


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




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





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





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





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





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


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


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


·
            Estimates
                with respect to the useful life and ultimate recoverability of our
                carrying basis of assets, including goodwill and purchased intangible
                assets, could change as a result of such assessments and
                decisions;


·
            As
                a result of our growth in past periods, our fixed costs have increased.
                With increased levels of spending and the impact of long-term commitments,
                we may not be able to quickly reduce these fixed expenses in response
                to
                short-term business changes;


·
            Acquisitions
                that result in in-process research and development expenses may be
                charged
                fully in an individual quarter;


·
            Changes
                or anticipated change in third-party reimbursement amounts or policies
                applicable to treatments using our
                products;


·
            Timing
                of the announcement, introduction and delivery of new products or
                product
                enhancements by us and by our competitors;


·
            The
                possibility that unexpected levels of cancellations of orders or
                backlog
                may affect certain assumptions upon which we base our forecasts and
                predictions of future performance;


·
            Changes
                in the general economic conditions in the regions in which we do
                business;


·
            Unfavorable
                outcome of any litigation; and


·
            Accounting
                adjustments such as those relating to reserves for product recalls,
                stock
                option expensing as required under SFAS No. 123R and changes in
                interpretation of accounting
                pronouncements




30




**Being
      a public company significantly increases our administrative
      costs.**





The
      Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the
      SEC
      and listing requirements subsequently adopted by NASDAQ in response to
      Sarbanes-Oxley, have required changes in corporate governance practices,
      internal control policies and audit committee practices of public companies.
      These rules, regulations and requirements have significantly increased our
      legal, financial, compliance and administrative costs, and have made certain
      other activities more time consuming and costly, as well as requiring
      substantial time and attention of our senior management. We expect our continued
      compliance with these and future rules and regulations to continue to require
      significant resources. These new rules and regulations also may make it more
      difficult and more expensive for us to obtain director and officer liability
      insurance in the future, and could make it more difficult for us to attract
      and
      retain qualified members for our Board of Directors, particularly to serve
      on
      our audit committee.




**Our
      publicly-filed SEC reports are reviewed by the SEC from time to time and any
      significant changes required as a result of any such review may result in
      material liability to us and have a material adverse impact on the trading
      price
      of our common stock.**




The
      reports of publicly-traded companies are subject to review by the SEC from
      time
      to time for the purpose of assisting companies in complying with applicable
      disclosure requirements and to enhance the overall effectiveness of companies
      public filings, and comprehensive reviews of such reports are now required
      at
      least every three years under the Sarbanes-Oxley Act of 2002. While we believe
      that our previously filed SEC reports comply, and we intend that all future
      reports will comply in all material respects with the published rules and
      regulations of the SEC, we could be required to modify or reformulate
      information contained in prior filings as a result of an SEC review.  Any
      modification or reformulation of information contained in such reports could
      be
      significant and result in material liability to us and have a material adverse
      impact on the trading price of our common stock.





**Market
      volatility and fluctuations in our stock price and trading volume may cause
      sudden decreases in the value of an investment in our common stock.**





The
      market price of our common stock has historically been, and we expect it to
      continue to be, volatile. The price of our common stock has ranged between
      $0.28
      and $1.75 per share in the fifty-two week period ended October 31, 2007, and
      through the date prior to this filing has been as low as $0.20 per share. The
      stock market has from time to time experienced extreme price and volume
      fluctuations, particularly in the medical device sector, which have often been
      unrelated to the operating performance of particular companies. Factors such
      as
      announcements of technological innovations or new products by our competitors
      or
      disappointing results by third parties, as well as market conditions in our
      industry, may significantly influence the market price of our common stock.
      Our
      stock price has also been affected by our own public announcements regarding
      such things as quarterly sales and earnings. Consequently, events both within
      and beyond our control may cause shares of our stock to lose their value
      rapidly.





In
      addition, sales of a substantial number of shares of our common stock by
      stockholders could adversely affect the market price of our shares. In
      connection with our January 2008 sale of common stock and accompanying warrants,
      we intend to file resale registration statements covering an aggregate of up
      to
      63,008,140 shares of common stock and 3,150,407 shares of common stock issuable
      upon exercise of warrants for the benefit of the selling security holders.
      The
      actual or anticipated resale by such investors under these registration
      statements may depress the market price of our common stock. Bulk sales of
      shares of our common stock in a short period of time could also cause the market
      price for our shares to decline.





31


**Item
      1B. UNRESOLVED STAFF COMMENTS**





None.





**Item
      2. PROPERTIES**





We
      are
      headquartered in the Los Angeles, California metropolitan area where we occupy
      two properties totaling approximately 40,000 square feet used for manufacturing
      and administration. Our leases for each of these facilities expire in November
      2008, with renewal options. We believe that our facilities are adequate,
      suitable and of sufficient capacity to support our current
      operations.





**Item
      3. LEGAL PROCEEDINGS**





In
      November 2005, we were served with a complaint filed in U.S. District Court
      in
      Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s six
      count complaint alleges breach of a confidentiality agreement, fraud, patent
      infringement, wrongful interference with contractual relations, violation of
      the
      Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
      Practices Act. WWMT alleges that we fraudulently obtained WWMT’s confidential
      information during negotiations to purchase WWMT in 2004 and that once we
      acquired that information, we allegedly learned that Richard Terwilliger, (our
      former Vice President of New Product Development) owned certain patent rights
      and that we began trying to inappropriately gain property rights by hiring
      him
      away from WWMT. We were served with this matter at approximately the same time
      Mr. Terwilliger was served with a lawsuit in state court and with an
      application seeking a preliminary injunction declaring plaintiffs to
      be the sole owners of the intellectual property at issue and preventing Mr.
      Terwilliger from effectively serving as our Vice President of New Product
      Development. We have agreed to defend Mr. Terwilliger. We have removed the
      state
      court claim against Mr. Terwilliger to federal court and the cases have
      been consolidated. The defendants have answered both complaints and
      discovery has commenced in each matter. In April 2006, WWMT had its hearing
      for
      a preliminary injunction against Mr. Terwilliger heard in U.S. District
      Court. Plaintiffs abandoned that portion of their application for
      preliminary injunction that was based on an alleged misappropriation of trade
      secrets shortly before the hearing. On August 30, 2006, Magistrate Judge
      Donna Martinez issued a ruling ordering that what remained of plaintiffs'
      motion be denied.  Specifically, the Magistrate Judge found that
      plaintiffs do not have a reasonable likelihood of success on the merits of
      their
      claim for declaratory judgment that some or all of plaintiffs are the sole
      owners of the intellectual property at issues, and she further found that
      there do not exist sufficiently serious questions going to the merits of that
      claim to make them a fair ground for litigation.  We deny liability and
      intend to vigorously defend ourself in this litigation as it
      progresses. No trial date has yet been set.





On
      April
      20, 2006, a lawsuit captioned ** *J.P.
      Morgan Trust Company, N.A. v. John Alan Friede, et al.* was
      filed in the U.S. District Court for the Southern District of New York against
      John Friede, a stockholder of the Company who was then also a director of the
      Company, Mr. Friede’s wife, and NOMOS Corporation, a subsidiary of the Company.
      With respect to NOMOS, the complaint sought repayment of at least approximately
      $5,250,000 principal amount of loans allegedly made to and still outstanding
      and
      owed by NOMOS, and other related equitable remedies plus interest, costs and
      expenses.




In
      accordance with the indemnification provisions of the merger agreement under
      which we acquired NOMOS on May 4, 2004, and the related indemnity escrow
      agreement, we made a claim for indemnification against the escrow to preserve
      our right of indemnity. The indemnity escrow account recently held approximately
      $1,225,000 of cash and 526,810 shares of our common stock.




32


As
      of
      October 23, 2007, a stipulation was entered into by all parties to dismiss
      the
      lawsuit, with prejudice, which stipulation was filed and certified by the Court
      on November 6, 2007. The plaintiff has issued a general release and discharge
      of
      claims against NOMOS and its affiliates, including the Company. Therefore,
      on
      November 15, 2007, we notified the escrow agent that we were withdrawing our
      claim of indemnification against the escrow, and authorized the escrow agent
      to
      distribute amounts held in the escrow fund in accordance with the terms of
      the
      escrow agreement.




In
      October 2007, we were served with a demand for arbitration by AnazaoHealth
      Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading services for
      our Prospera brachytherapy products pursuant to a Services Agreement dated
      as of
      June 1, 2005, as amended (the “Services Agreement”). In its demand for
      arbitration, AnazaoHealth is seeking indemnification from us under the Services
      Agreement for damages arising out of a litigation filed against AnazaoHealth
      in
      the U.S. District Court for the District of Connecticut (the “Connecticut
      Litigation”) by Richard Terwilliger, Gary Lamoureux, World Wide Medical
      Technologies, LLC, IdeaMatrix, Inc., Advanced Care Pharmacy, LLC, Advanced
      Care
      Pharmacy, Inc., and Advanced Care Medical, Inc. The plaintiffs in the
      Connecticut Litigation claim that AnazaoHealth’s provision of services in the
      brachytherapy field infringes their patent rights, and certain of the plaintiffs
      claim that our Prospera products infringes their patent rights. We deny
      liability and intend to vigorously defend ourselves in this
      arbitration.




We
      are
      subject to other legal proceedings, claims and litigation arising in the
      ordinary course of business. While the outcome of these matters is currently
      not
      determinable, management does not expect that the ultimate costs to resolve
      these matters will have a material adverse effect on our consolidated financial
      position, results of operations, or cash flows.


33




**Item
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None.





**Item
      4A. EXECUTIVE OFFICERS OF THE REGISTRANT**




**John
      B. Rush 48,** joined
      North American Scientific, Inc. in April, 2007 as President and Chief Executive
      Officer. Previously, Mr. Rush has served since 2002 as President and Chief
      Executive Officer of Sanarus Medical, a leading developer of minimally invasive
      medical devices for diagnosing and treating breast disease. Prior to joining
      Sanarus, Mr. Rush was President and Chief Executive Officer of Micro
      Therapeutics, Inc. (now owned by ev3, Inc.), a publicly traded medical device
      company focused on the treatment of cerebral and peripheral vascular disorders
      worldwide. Mr. Rush has over twenty-four years of experience in the medical
      device sector, with a background in sales, marketing and management at such
      companies as Scimed Life Systems/Boston Scientific and Cilco/CooperVision/Alcon
      Surgical.




**Troy
      A. Barring 44,** joined
      North American Scientific, Inc. as Senior Vice-President and Chief Operating
      Officer in September 2007. Previously, Mr. Barring has served since 2001 in
      a
      number of positions with Biosense Webster, a Division of Johnson and Johnson,
      including Vice President, World Wide Services, Vice President of Operations,
      and
      Senior Vice President of Research and Development and Operations. Mr. Barring
      has over 13 years of management experience in the medical device sector, with
      a
      background in manufacturing, operations, and research and development at such
      companies as Scimed Life Systems, a Division of Boston Scientific, and Sorin
      Biomedical.




**L.
      Michael Cutrer 51,** transitioned from the position of President and Chief Executive Officer, a
      position he held with the Company since 1990, to become the Company’s Executive
      Vice President and Chief Technology Officer upon the appointment of Mr. Rush
      in
      April 2007. Previously, Mr. Cutrer was a Manager of Isotope Products
      Laboratory, Inc., a radioisotope manufacturing company, where he was
      responsible for industrial product manufacturing, research and development.
      In
      November 2006, the Company announced that Mr. Cutrer planned to transition
      from
      the position of president and chief executive officer to become the Company’s
      executive vice president and chief technology officer. As chief technology
      officer, we expect that Mr. Cutrer would, in addition to other responsibilities,
      continue to play an active leadership role in the Company’s breast brachytherapy
      program.




**James
      W. Klingler 60** ,
      joined
      North American Scientific, Inc. in July 2004 as Senior Vice President and Chief
      Financial Officer. Previously, he was Vice President-Finance and Chief Financial
      Officer of Troy Group, Inc., a provider of secure check printing products and
      wireless connectivity solutions, from January 2002 to July 2004. From
      February 2001 to November 2001, he served as Senior Vice President,
      Business Operations and Chief Financial Officer of Trinagy, Inc., a
      software company that was merged into Hewlett-Packard Company. In prior
      positions, Mr. Klingler was Vice President, Finance and Administration of
      Triconex Corporation, a supplier of products, systems and services for safety,
      critical control and turbomachinery applications and a subsidiary of Invensys
      plc, from February 1999 to February 2001, and Vice President and Chief
      Financial Officer of Wilshire Technologies Inc., a company that
      manufactures polyurethane products, from October 1994 to
      February 1999.




34




**PART
      II**




**Item
      5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**





Our
      common stock is listed on the Nasdaq Global Market under the ticker symbol
      "NASI". On
      December 11, 2007, we were notified by Nasdaq that it had granted our request
      to
      transfer our listing to the Nasdaq Capital Market and continue our listing
      on
      that market, subject to certain conditions described in “Management’s Discussion
      and Analysis - Nasdaq Delisting.”  We
      anticipate that our common stock will be transferred to the Nasdaq Capital
      Market in the near future.  The
      following table sets forth, for the periods indicated, the high and low sales
      prices for our common stock, as reported on the Nasdaq Global
      Market.





**High**
            
            **Low****Fiscal
                2007**First
                Quarter
            
            
            1.25
            
            
            0.85Second
                Quarter
            
            
            1.29
            
            
            0.88Third
                Quarter
            
            
            1.75
            
            
            0.92Fourth
                Quarter
            
            
            1.13
            
            
            0.28**Fiscal
                2006**First
                Quarter
            
            
            2.58
            
            
            1.89Second
                Quarter
            
            
            2.49
            
            
            1.96Third
                Quarter
            
            
            2.16
            
            
            1.57Fourth
                Quarter
            
            
            1.85
            
            
            1.03





As
      of
      December 31, 2007, we had approximately 478 shareholders of record.





We
      have
      never paid cash dividends on our common stock and have no plans to do
      so.





35




The
      following performance graph compares the cumulative total stockholder return
      on
      our common stock, assuming the reinvestment of dividends, with the cumulative
      total return on the published Nasdaq Composite and the Nasdaq Medical Equipment
      Index, over the five year period ending October 31, 2007.





**STOCK
      PERFORMANCE GRAPH**








****
            2002
            ****
            2003
            ****
            2004
            ****
            2005
            ****
            2006
            ****
            2007
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****North
                American Scientific, Inc.
            ****
            ****
            100.00
            ****
            ****
            80.19
            ****
            ****
            57.27
            ****
            ****
            28.52
            ****
            ****
            11.52
            ****
            ****
            6.27NASDAQ
                Composite
            ****
            ****
            100.00
            ****
            ****
            145.24
            ****
            ****
            150.62
            ****
            ****
            162.33
            
            ****
            184.27
            
            ****
            223.53
            ****NASDAQ
                Medical Equipment
            ****
            ****
            100.00
            ****
            ****
            149.19
            ****
            ****
            165.33
            ****
            ****
            203.52
            ****
            ****
            220.00
            ****
            ****
            301.08




36




**Item
      6. SELECTED CONSOLIDATED FINANCIAL DATA**





The
      following data should be read in conjunction with the consolidated financial
      statements, related notes and other financial information appearing elsewhere
      herein.


**Year
                      Ended October 31,****2007****(5)**
                  
                  **2006****(5)**
                  
                  **2005****(4)(5)**
                  
                  **2004****(1),(3), (5)**
                  
                  **2003****(2)****(In
                      thousands, except for per share amounts)****Statement
                      of Operations:**Net
                      sales
                  
                  $
                  15,317
                  
                  $
                  12,594
                  
                  $
                  12,032
                  
                  $
                  12,978
                  
                  $
                  14,683Cost
                      of goods sold
                  
                  
                  10,690
                  
                  
                  8,998
                  
                  
                  8,137
                  
                  
                  7,447
                  
                  
                  6,944Gross
                      profit
                  
                  
                  4,627
                  
                  
                  3,596
                  
                  
                  3,895
                  
                  
                  5,531
                  
                  
                  7,739Operating
                      expenses
                  
                  
                  14,637
                  
                  
                  12,923
                  
                  
                  11,224
                  
                  
                  16,193
                  
                  
                  10,086Income
                      (loss) from operations
                  
                  
                  (10,010
                  )
                  
                  (9,326
                  )
                  
                  (7,329
                  )
                  
                  (10,662
                  )
                  
                  (2,347
                  )Interest
                      and other income, net
                  
                  
                  (535
                  )
                  
                  (119
                  )
                  
                  120
                  
                  
                  580
                  
                  
                  1,749Income
                      (loss) before provision (benefit) for income taxes
                  
                  
                  (10,545
                  )
                  
                  (9,445
                  )
                  
                  (7,209
                  )
                  
                  (10,082
                  )
                  
                  (598
                  )Provision
                      (benefit) for income taxes
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  257
                  
                  
                  —Income
                      (loss) from continuing operations
                  
                  
                  (10,545
                  )
                  
                  (9,445
                  )
                  
                  (7,209
                  )
                  
                  (9,825
                  )
                  
                  (598
                  )Income
                      (loss) from discontinued operations**(3)**
                  
                  
                  (10,453
                  )
                  
                  (7,685
                  )
                  
                  (48,304
                  )
                  
                  (26,482
                  )
                  
                  (8,536
                  )Cumulative
                      effect of change in accounting principle
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (306
                  )Net
                      loss
                  
                  $
                  (20,998
                  )
                  $
                  (17,130
                  )
                  $
                  (55,513
                  )
                  $
                  (36,307
                  )
                  $
                  (9,440
                  )Basic
                      and diluted earnings (loss) per share:Income
                      (loss) from continuing operations
                  
                  $
                  (0.36
                  )
                  $
                  (0.43
                  )
                  $
                  (0.44
                  )
                  $
                  (0.75
                  )
                  $
                  (0.06
                  )Income
                      (loss) from discontinued operations**(3)**
                  
                  
                  (0.36
                  )
                  
                  (0.35
                  )
                  
                  (2.92
                  )
                  
                  (2.01
                  )
                  
                  (0.83
                  )Cumulative
                      effect of change in accounting principle
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (0.03
                  )Net
                      loss
                  
                  $
                  (0.72
                  )
                  $
                  (0.78
                  )
                  $
                  (3.36
                  )
                  $
                  (2.76
                  )
                  $
                  (0.92
                  )Shares
                      used in per share calculationBasic
                  
                  
                  29,344
                  
                  
                  21,956
                  
                  
                  16,502
                  
                  
                  13,139
                  
                  
                  10,258




37




**As
                  of October 31,****2007****(4)**
              
              **2006****(4)**
              
              **2005****(4)**
              
              **2004****(1),(3)(4)**
              
              **2003****(2)****(In
                  thousands)****Balance
                  Sheet Data:**Cash,
                  cash equivalents and marketable securities
              
              $
              609
              
              $
              903
              
              $
              3,623
              
              $
              14,980
              
              $
              49,115Assets
                  held for sale**(4)**
              
              
              —
              
              
              11,377
              
              
              14,115
              
              
              60,441
              
              
              —Total
                  assets
              
              
              6,175
              
              
              27,198
              
              
              8,218
              
              
              20,098
              
              
              62,532Total
                  debt
              
              
              3,323
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  stockholders' (deficit) equity
              
              $
              (2,912
              )
              $
              17,188
              
              $
              10,801
              
              $
              65,377
              
              $
              55,746




(1)
            In
                May 2004, the Company acquired NOMOS Corporation, which has a significant
                impact on the 2004 selected financial data. The 2004 results include
                a
                $9.2 million charge for in-process research and development and $1.1
                million charge for merger and integration costs in connection with
                the
                Company’s purchase of NOMOS. These items had a $(0.78) impact on basic and
                diluted loss per share. See Note 4 to the Consolidated Financial
                Statements.




(2)
            The
                2003 results include a $0.3 million charge for the cumulative effect
                of a change in accounting principle to recognize future decommissioning
                costs of leased manufacturing facilities. This item had a $(0.03)
                impact
                on basic and diluted loss per
                share.





(3)
            In
                September 2004, the Company’s Theseus operation was shut down. The
                Statement of Operations data include Theseus as a discontinued operation.
                The 2004 results include a loss on discontinued operations of $5.2
                million
                and loss from operations of $7.3 million. Loss from operations consisted
                primarily of research and development
                expenses.




(4)
            At
                October 31, 2005, the Company recorded a $40.2 million impairment
                loss of
                NOMOS goodwill and intangible assets as a result of its evaluation
                of the
                fair value of its long-lived assets under SFAS 142 and SFAS 144.
                The
                impairment loss is included in the Loss from Discontinued Operations
                in
                the Consolidated Statements of Operations for the year ended October
                31,
                2005.




(5)
            In
                September 2007, the Company shut down the operations of its NOMOS
                segment
                and sold substantially all of its NOMOS assets to a third party.
                The
                Statement of Operations data for 2004 through 2006 have been revised
                to
                include NOMOS as a discontinued operation. The effects of revising
                these
                years resulted in a $16.4 million, $20.2 million, and $11.8 million
                decrease in revenue, a $6.3 million, $8.3 million and $3.4 million
                decrease in gross profit, and a $14.2 million, $56.9 million and
                $17.3
                million decrease in operating expenses for 2006, 2005 and 2004,
                respectively. Loss from discontinued operations increased by $7.9
                million,
                $48.7 million and $13.9 million, or $0.36, $2.95 and $1.06 per share
                in
                2006, 2005 and 2004, respectively as a result of this change. Assets
                held
                for sale represent primarily all the assets of the NOMOS operation
                sold as
                a result of this transaction at the respective Balance Sheet
                date.




38




**Item
      7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**





*The
      following discussion and analysis provides information which we believe is
      relevant to an assessment and understanding of our financial condition and
      results of operations. The discussion should be read in conjunction with the
      Consolidated Financial Statements contained herein and the notes thereto.
      Certain statements contained in this Annual Report on Form 10-K, including,
      without limitation, statements containing the words "believes," "anticipates,"
      "estimates," "expects," "intends," "projects," and words of similar import,
      are
      forward looking as that term is defined by the Private Securities Litigation
      Reform Act of 1995, or 1995 Act, and releases issued by the Securities and
      Exchange Commission, or SEC. These statements are being made pursuant to the
      provisions of the 1995 Act and with the intention of obtaining the benefits
      of
      the "Safe Harbor" provisions of the 1995 Act. We caution that any forward
      looking statements made herein are not guarantees of future performance and
      that
      actual results may differ materially from those in such forward looking
      statements as a result of various factors, including, but not limited to, any
      risks detailed herein, including the "Risk Factors" section contained in Item
      1A
      of this Form 10-K, or detailed in our most recent reports on Form 10-Q
      and Form 8-K and from time to time in our other filings with the SEC and
      amendments thereto. We are not undertaking any obligation to update publicly
      any
      forward-looking statements. Readers should not place undue reliance on these
      forward-looking statements.*





**Overview**





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





In
      November 2006, we announced the introduction of ClearPathTM, our unique
      multicatheter breast brachytherapy device for Accelerated Partial Breast
      Irradiation (APBI). Our ClearPath systems are placed through a single incision
      and are designed to conform to the resection cavity, allowing physicians to
      deliver a more conformal therapeutic radiation dose distribution following
      lumpectomy compared to other methods of APBI. The placement of the radiation
      source directly into the post-lumpectomy site reduces the treatment time to
      approximately 5 days compared to 30-35 days for whole breast radiation therapy,
      and reduces the risks associated with external beam radiation treatment.
      ClearPath is designed to accommodate either high-dose, ClearPath-HDRTM, or
      low-dose rate, ClearPath-CRTM, treatment methods. We received 510(k) approval
      from the United States Food and Drug Administration for a low-dose rate, or
      continuous release treatment utilizing our Prospera® brachytherapy seeds in
      April 2006 and approval for the high-dose rate treatment in November 2006.
      We
      have been gaining clinical experience with the first generation ClearPath-HDR
      in
      2007, and we intend to launch the second generation devices in 2008, to be
      followed by the general commercial release of our ClearPath-CR.




On
      September 17, 2007, we completed
      the sale of all significant assets, including licenses, trademarks and
      brand-names, and selected liabilities of NOMOS Corporation to Best Medical,
      Inc.
      for $500,000. We
      expect
      that the divestiture of NOMOS will allow us to better utilize financial
      resources to benefit the marketing and development of innovative brachytherapy
      products for the treatment of cancer. The financial results of NOMOS are
      reported as a discontinued operation in accompanying financial
      statements.




39




We
      have
      incurred substantial net losses since fiscal year 2000. We expect the losses
      to
      continue for at least the next fiscal year as we continue to develop our
      ClearPath product, and obtaining adequate financing is an important part of
      our
      business strategy.




**Subsequent
      Events**




*Debt
      arrangements*





*John
      Friede Note*





On
      October 30, 2007, we entered into a Loan Agreement (the “Friede Loan Agreement”)
      with Mr. John Friede (the “Lender”), a stockholder and former director of the
      Company. Subject to the terms of the Friede Loan Agreement, the Lender agreed
      to
      loan us $500,000 in two installments of $250,000 each. The loan was unsecured
      and subordinated to the loan agreements with Silicon Valley Bank and Agility
      Capital. In connection with the Friede Loan Agreement, we agreed to issue to
      the
      Lender a warrant to purchase that number of shares of our common stock as shall
      be equal to $200,000 divided by the Exercise Price, which is the per share
      closing price of our common stock on the trading day before the issuance of
      the
      warrant. On November 1, 2007, we executed the promissory note underlying the
      loan and we received the first $250,000 installment. We and the Lender amended
      the Friede Loan Agreement on November 20, 2007, prior to funding of the second
      $250,000 installment, to extend the maturity date of the Friede Loan Agreement
      from November 20, 2007 to December 20, 2007, and to reduce the borrowing
      capacity to $250,000 from $500,000. The loan and accrued interest were paid
      in
      full on December 20, 2007.





*Silicon
      Valley Bank*





On
      November 20, 2007, we entered into a Seventh Amendment and Forbearance to the
      Loan Agreement (the “Seventh Amendment”) with Silicon Valley Bank (the “Bank”).
      The Seventh Amendment included: (i) an extension of the maturity date of the
      Loan Agreement to December 20, 2007, and an extension of the maturity date
      of
      the Bridge Loan Sub-limit to the earlier of December 20, 2007 or the date we
      close a private investment public equity transaction, and (ii) a forbearance
      by
      the Bank from exercising its rights and remedies against us, until such time
      as
      the Bank determines in its discretion to cease such forbearance, due to the
      defaults under the Loan Agreement resulting from our failing to comply with
      the
      tangible net worth covenant in the Loan Agreement as of July 31, 2007, August
      31, 2007 and September 30, 2007. In connection with the Seventh Amendment,
      we
      granted a warrant to the Bank to purchase 90,909 shares of our common stock,
      at
      a warrant price of $0.55 per share, subject to adjustment as provided in such
      warrant. The warrant will expire in five years unless previously exercised.




On
      December 18, 2007, we entered into an Eighth Amendment and Forbearance to the
      Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth Amendment
      includes: (i) an extension of the maturity date of the Loan Agreement to the
      earlier of February 1, 2008 or the date we complete our private placement (See
      Securities Purchase Agreement below *)* ,
      (ii) a
      forbearance by the Bank from exercising its rights and remedies against us,
      until such time as the Bank determines in its discretion to cease such
      forbearance, due to the defaults under the Loan Agreement resulting from our
      failing to comply with the tangible net worth covenant in the Loan Agreement
      as
      of July 31, 2007, August 31, 2007, September 30, 2007 and October 31, 2007
      and
      (iii) a consent from the Bank to allow us to repay our outstanding loan from
      Mr.
      John A. Friede in the amount of $250,000. In connection with the Eighth
      Amendment, we granted a warrant to the Bank to purchase that number of shares
      of
      our common stock as shall be equal to $50,000 divided by the warrant price,
      which is equal to the lower of (i) the closing price of our common stock on
      the
      date our Board of Directors approves the issuance of this warrant or (ii) the
      closing price of our common stock on date the warrant is issued, subject **** to
      adjustment as provided in such warrant. The warrant will expire in five years
      unless previously exercised.





40




*Agility
      Capital, LLC*




On
      November 20, 2007, we executed a Second Amendment to the Agility Loan Agreement
      (the “Second Amendment”) with Agility Capital, LLC (“Agility”) to extend the
      maturity date of the Agility Loan Agreement from November 20, 2007 to December
      21, 2007. In connection with the Second Amendment, we granted a warrant to
      Agility to purchase that number of shares of our common stock as shall be equal
      to $231,250 divided by the warrant price, which is equal to the lowest of (i)
      the closing price of our common stock the day before the issue date of the
      warrant, as published in The Wall Street Journal on the issue date, or (ii)
      the
      average closing price of our common stock for the 30 days before the issue
      date,
      or (iii) the price at which we next issue our common stock or other
      equity-linked securities, other than issuances of our common stock to officers
      and employees pursuant to our 2006 Stock Plan, 2000 Employee Stock Purchase
      Plan
      and 2003 Non-Employee Directors’ Equity Compensation Plan and any other employee
      incentive plan approved by our stockholders, subject to adjustment as provided
      in the warrant. The warrant will expire in seven years unless previously
      exercised.





On
      December 20, 2007, we executed a Third Amendment to the Agility Loan Agreement
      (the “Third Amendment”) with Agility. The Third Amendment includes (i) an
      extension of the maturity date of the Loan Agreement to February 1, 2008, (ii)
      a
      loan modification and extension fee of $20,000, paid upon the execution of
      the
      amendment, and (iii) a consent from Agility to allow us to repay its outstanding
      loan from Mr. John A. Friede in the amount of $250,000. In connection with
      this
      amendment, we granted a warrant to Agility to purchase that number of shares
      of
      our common stock as shall be equal to $200,000 divided by the warrant price,
      which is equal to the lowest of (i) the closing price of our common stock the
      day before the issue date of the warrant, as published in The Wall Street
      Journal on the issue date, or (ii) the average closing price of our common
      stock
      for the 30 days before the issue date, or (iii) the price at which we next
      issue
      our common stock, subject to adjustment as provided in the warrant. The warrant
      will expire in seven years unless previously exercised.  The loan and
      accrued interest were paid in full on January 23, 2008.




*Three
      Arch Capital (et al)*




On
      December 7, 2007, we entered into a Loan Agreement (the “Three Arch Loan
      Agreement”) with Three Arch Capital, L.P., TAC Associates, L.P., Three Arch
      Partners IV, L.P. and Three Arch Associates IV, L.P. (the “Lenders”). The
      Lenders are, collectively, our largest stockholder, and Dr. Wilfred Jaeger
      and
      Roderick Young, two of our directors, are affiliates of the Lenders. The
      transaction contemplated by the Three Arch Loan Agreement was approved by a
      committee of our Board of Directors consisting only of disinterested directors.





Under
      the
      Three Arch Loan Agreement, the Lenders loaned us $1.0 million and we issued
      notes to the Lenders (the “Notes”). The Notes bear interest at an annual rate
      equal to the prime rate plus six percent (6%) and are subordinated to our
      indebtedness to Silicon Valley Bank and Agility Capital LLC. The Notes are
      due
      and payable on December 20, 2007, provided that if prior to December 20, 2007,
      Silicon Valley Bank shall have extended the maturity date under its Loan and
      Security Agreement with us (the “SVB Loan Agreement”) until after December 20,
      2007, then the Notes shall be due and payable on the earliest of (i) February
      4,
      2008, (ii) the close of our pending private investment public equity financing
      transaction (See Securities Purchase Agreement below), or (iii) the
      maturity date under the SVB Loan Agreement. In connection with the Loan
      Agreement, we have agreed to pay an aggregate of $20,000 as a loan fee to the
      Lenders and have granted the Lenders warrants to purchase, in the aggregate,
      1,025,641 shares of our common stock at a purchase price of $0.39 per share.
      The
      loan and accrued interest were paid in full on January 24, 2008.





41




*Securities
      Purchase Agreement*





On
      December 12, 2007, we entered into a Securities Purchase Agreement with Three
      Arch Partners IV, L.P. and affiliated funds (“Three Arch Partners”), SF Capital
      Partners Ltd. (“SF Capital”) and CHL Medical Partners III, L.P. and an
      affiliated fund (“CHL,” and together with Three Arch Partners and SF Capital,
      the “Investors”) providing for the private placement (the “Private Placement”)
      of 63,008,140 shares (the “Shares”) of our common stock, par value $0.01 per
      share (the “Common Stock”), and warrants to purchase 3,150,407 shares of Common
      Stock (the “Warrants,” and, together with the Shares, the “Securities”) for a
      total purchase price of $15.5 million. As described above, Three Arch Parners
      is
      our largest stockholder. SF Capital also is one of our significant stockholders.
      This transaction was approved by a committee of our Board of Directors
      consisting only of disinterested directors.





The
      purchase price is equal to $0.246 per Security, of which $0.01 is allocated
      to
      the Warrants. The purchase price represents a 40% discount to the volume
      weighted average price of the Common Stock on the Nasdaq Global Market, as
      reported by Bloomberg Financial Markets, for the 20 trading day period ending
      on
      the trading day immediately preceding the date of the Securities Purchase
      Agreement. The Warrants have an exercise price of $0.246 per share, subject
      to
      certain adjustments. The Warrants may be exercised no earlier than 180 days
      from
      the closing date of the transaction and will expire seven years from the date
      of
      issuance.





In
      order
      to close the Private Placement, we were required to obtain stockholder approval
      of the Private Placement and the amendment of our Certificate of Incorporation
      to increase the number of shares of Common Stock we are authorized to issue.
      We
      received the approval of a majority of the stockholders on January 17, 2008
      and
      closed the transaction on January 18, 2008.





The
      Investors purchased the following amounts of Securities in the offering:





Investor
            
            Shares
            
            Warrants
              (Shares issuable upon exercise)Three
                Arch Partners
            
            
            40,650,420
            
            
            2,032,521SF
                Capital
            
            
            10,162,600
            
            
            508,130CHL
            
            
            12,195,120
            
            
            609,756





Prior
      to
      the closing of the transaction, Three Arch Partners owned 5,121,638 shares
      of
      Common Stock. After the transaction was consummated, Three Arch Partners’
percentage ownership of the outstanding Common Stock increased from
      approximately 17.3% to 49.5% (and 43.9% of the Common Stock on a fully diluted
      basis).





The
      net
      proceeds to us of the Private Placement after payment of fees and expenses
      were
      approximately $14,115,000. The terms of the Private Placement were approved
      by a
      committee of our Board of Directors consisting only of disinterested directors.
      Our directors and executive officers have executed lock-up agreements
      restricting their ability to sell shares of the Common Stock for 180 days
      following the closing of the transaction. The Investors entered into such
      lock-up agreements prior to the closing of the transaction.





42




Oppenheimer
      & Company acted as sole placement agent in connection with the Private
      Placement. The placement agent received aggregate fees of $1,085,000 plus
      reimbursement for reasonable out-of-pocket fees and expenses.





Holders
      of the Shares and the shares of Common Stock issuable upon the exercise of
      the
      Warrants (the “Warrant Shares” and collectively, with the Shares, the
“Registrable Securities”) are entitled to certain registration rights as set
      forth in the Securities Purchase Agreement. Under the Securities Purchase
      Agreement, we have agreed to use our reasonable best efforts to prepare and
      file
      a registration statement on Form S-3 or other applicable form available to
      us to
      register the resale of the Registrable Securities. If we fail to file a
      registration statement or such registration statement is not declared effective
      between the time we file our next Annual Report on Form 10-K and the 180th
      date
      after the closing of the Private Placement, or, if additional registration
      statements are required to be filed to register such shares because of
      limitations imposed by the staff of the Commission on the number of shares
      that
      may be registered on behalf of selling stockholders on Form S-3, within 45
      days
      of filing each such additional registration statement (or 90 days if such filing
      is reviewed by the Commission), we will be liable for certain specified
      liquidated damages as set forth in the Securities Purchase Agreement. We have
      agreed to maintain the effectiveness of the registration statement until the
      earliest of (i) the second anniversary of the closing of the Private
      Placement, (ii) such time as all Registrable Securities have been sold
      pursuant to the registration statement or (iii) the date on which all of
      the Registrable Securities may be resold by each of the Investors without
      registration pursuant to Rule 144(k). We will pay all expenses incurred in
      connection with the registration, other than fees and expenses, if any, of
      counsel or other advisors to the Investors or underwriting discounts, brokerage
      fees and commissions incurred by the Investors, if any, in connection with
      an
      underwritten offering of the Registrable Securities .





The
      Securities Purchase Agreement contains certain customary closing conditions,
      as
      well as the requirement that we decrease the number of members of our Board
      of
      Directors (the “Board”) from nine members to seven members at or by the time of
      its next annual meeting of stockholders. Under the Securities Purchase
      Agreement, Three Arch Partners has the right to name one member to the Board
      so
      long as Three Arch Partners beneficially owns greater than 5,000,000 shares
      of
      Common Stock (including shares of Common Stock issuable upon exercise of the
      Warrants, and as appropriately adjusted for stock splits, stock dividends and
      recapitalizations). Two of the current members of the Board, Dr. Wilfred E.
      Jaeger and Roderick A. Young, have been previously designated by Three Arch
      Partners. Under the Securities Purchase Agreement, we have agreed to add two
      new
      independent members to the Board at or before our next annual meeting.





In
      connection with the issuance of the Warrants and upon closing of the
      transaction, we entered into Warrant Agreements with our transfer agent relating
      to the Warrants. The Warrant Agreement relating to the Warrants issued to SF
      Capital contains a non-waivable provision that provides that the number of
      shares issuable upon exercise of the Warrants will be limited to the extent
      necessary to assure that, following such exercise, the total number of shares
      of
      Common Stock then beneficially owned by such holder and its affiliates does
      not
      exceed 14.9% of the total number of issued and outstanding shares of our Common
      Stock (including for such purpose the shares of Common Stock issuable upon
      such
      exercise of Warrants). The Warrant Agreement relating to the Warrants issued
      to
      the other Investors does not contain this provision.





The
      sale
      of the Shares, the Warrants and the Warrant Shares have not been registered
      under the Securities Act of 1933, as amended (the “Securities Act”), or any
      state securities laws. We are relying upon the exemptions from registration
      provided by Section 4(2) of the Securities Act and Regulation D promulgated
      under that section. Each Investor has represented that it is an accredited
      investor, as such term is defined in Regulation D under the Securities Act,
      and
      that it was acquiring the Shares and Warrants for its own account and not with
      a
      view to or for sale in connection with any distribution thereof, and appropriate
      legends will be affixed to the Shares and Warrants.





43




*Amendment
      to Bylaws*





On
      December 5, 2007, our Board of Directors amended our bylaws (the “Bylaws”),
      effective immediately. Section 6 of the Bylaws now enables the Board of
      Directors to authorize the issuance of uncertificated shares of our capital
      stock. The purpose of the amendments to Section 6 are to satisfy the requirement
      of The Nasdaq Stock Market, Inc. that shares of our capital stock be eligible
      by
      January 1, 2008 for a Direct Registration Program operated by a clearing
      agency registered under Section 17A of the Securities Exchange Act of 1934.





*Nasdaq
      Delisting*




On
      December 11, 2007, we received formal notice that the Nasdaq Listing
      Qualifications Panel had granted our request for a transfer from the Nasdaq
      Global Market to the Nasdaq Capital Market, and continued listing on the Nasdaq
      Capital Market, subject to the following exception:





§
            On
                or before January 17, 2008, we were required to inform the Panel
                that we
                have received funds sufficient to put it in compliance with the Capital
                Market shareholders’ equity requirement of $2.5 million. Within four
                business days of the receipt of the funds, we were required to make
                a
                public disclosure of receipt of the funds and file a Form 8-K with
                pro
                forma financial information indicating that we planned to report
                proforma
                shareholders’ equity of $2.5 million or greater for the fiscal year ended
                October 31, 2007. We informed the Panel of receipt of sufficient
                funds on
                January 18, 2008. We publicly disclosed receipt of such funds in
                a press
                release dated January 22, 2008 and filed a Form 8-K with respect
                to this
                matter on January 25, 2008.





§
            On
                or before January 31, 2008, we were required to file our Annual Report
                on
                Form 10-K for the fiscal year ended October 31, 2007, which shall
                demonstrate proforma shareholder’s equity of $2.5 million or greater. This
                information is set forth below in this Report under “Subsequent
                Events –
                Nasdaq
                Delisting.”





On
      October 5, 2007, we received a notice from Nasdaq indicating that, for the
      preceding 30 consecutive days, the bid price of our common stock had closed
      below the minimum $1.00 per share requirement for continued listing. In
      accordance with the Nasdaq rules, we have until April 2, 2008, to regain
      compliance. In order to regain compliance, the bid price of our common stock
      must close at $1.00 per share or more for a minimum of 10 consecutive business
      days. If we do not regain compliance with the rule by April 2, 2008, we
      understand that the Nasdaq Staff will provide written notification to us that
      our common stock will be delisted. At that time, we may appeal the Staff’s
      determination to a Nasdaq Listing Qualifications Panel, but no assurance can
      be
      given that any such appeal would be successful.





The
      following shows our reported stockholders’ equity at October 31, 2007 and
      proforma stockholders’ equity assuming the private placement transaction had
      been completed on October 31, 2007.





44




**At
                October 31, 2007****As
                Reported**
            
            **Proforma**Stockholders'
                (deficit) equityPreferred
                stock, $.01 par value, 2,000,000 shares authorized; no shares
                issued
            
            
            —
            
            
            —Common
                stock, $.01 par value, 100,000,000 (Reported) and 150,000,000 (Proforma)
                shares authorized; 29,601,352 (Reported) and 92,609,492 (Proforma)
                shares
                issued; and 29,395,331 (Reported) and 92,403,471 (Proforma) shares
                outstanding
            
            
            300,000
            
            
            930,000Additional
                paid-in capital
            
            
            145,533,000
            
            
            159,018,000Treasury
                stock, at cost - 206,021 Reported and Proforma common
                shares
            
            
            (227,000
            )
            
            (227,000
            )Accumulated
                deficit
            
            
            (148,518,000
            )
            
            (148,518,000
            )Total
                stockholders' (deficit) equity
            
            $
            (2,912,000
            )
            $
            11,203,000





**Critical
      Accounting Policies**





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





*Use
      of Estimates*





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





*Cash
      and Cash Equivalents*





The
      Company considers all highly liquid investments purchased with an original
      or
      remaining maturity of three months or less to be cash equivalents.





*Inventories*





Inventories
      are valued at the lower of cost or market as determined under the first-in,
      first-out method. Costs include materials, labor and manufacturing
      overhead.





45




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





*Fair
      Value of Financial Instruments*





The
      carrying amounts of cash and cash equivalents, receivables, accounts payable
      and
      accrued expenses approximate fair value because of their short maturities.
      The
      Company determines the fair value of its marketable securities based on quoted
      market prices.





*Marketable
      Securities*





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





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





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





*Accounts
      Receivable and Allowance for Doubtful Accounts*




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





*Equipment
      and Leasehold Improvements*





Equipment
      and leasehold improvements are stated at cost. Maintenance and repair costs
      are
      expensed as incurred, while improvements are capitalized. Gains or losses
      resulting from the disposition of assets are included in income. Depreciation
      and amortization are computed using the straight-line method over the estimated
      useful lives as follows:





Furniture,
                fixtures and equipment
            
            3-7
                yearsLeasehold
                improvements
            
            Lesser
                of the useful life or term of lease




46




*Intangible
      Assets*





License
      agreements are amortized on a straight-line basis over periods ranging up to
      fifteen years. The amortization periods of patents are based on the lives of
      the
      license agreements to which they are associated or the approximate remaining
      lives of the patents, whichever is shorter. Purchased intangible assets with
      finite lives are carried at cost less accumulated amortization and are amortized
      on a straight-line basis over periods ranging from three to twelve
      years.





The
      Company reviews for impairment whenever events and changes in circumstances
      indicate that such assets might be impaired. If the estimated future cash flows
      (undiscounted and without interest charges) from the use of an asset are less
      than the carrying value, a write-down is recorded to reduce the related asset
      to
      its estimated fair value.





*Long-Lived
      Assets*





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” long-lived assets, such as property, plant, and equipment,
      and purchased intangibles subject to amortization, are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. Recoverability of assets to be held and used
      is
      measured by a comparison of the carrying amount of an asset to the estimated
      undiscounted future cash flows expected to be generated by the asset. If the
      carrying amount of an asset exceeds its estimated future cash flows, an
      impairment charge is recognized equal to the amount by which the carrying amount
      of the asset exceeds the fair value of the asset. Assets to be disposed of
      are
      separately presented in the consolidated balance sheet and reported at the
      lower
      of the carrying amount or fair value less costs to sell, and are no longer
      depreciated.





*Revenue
      Recognition*





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





*Research
      and Development Costs*





Research
      and development ("R&D") expenses are comprised primarily of the following
      types of costs incurred in performing R&D activities: salaries and benefits,
      allocated overhead, occupancy costs, clinical trial and related clinical
      manufacturing costs, contract services and other outside costs, and costs to
      acquire in-process research and development projects and technologies which
      have
      no alternative future use. Research and development costs are expensed as
      incurred.





47




*Stock-based
      Compensation*





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





The
      Company adopted SFAS 123(R) using the modified prospective transition method
      as
      of and for the fiscal year ended October 31, 2006. In accordance with the
      modified prospective transition method, the Company’s financial statements for
      prior periods have not been restated to reflect, and do not include, the impact
      of SFAS 123(R). Share-based compensation expense recognized is based on the
      value of the portion of share-based payment awards that is ultimately expected
      to vest. Share-based compensation expense recognized in the Company’s Condensed
      Consolidated Statement of Operations during the fiscal year ended October 31,
      2006 includes compensation expense for share-based payment awards granted prior
      to, but not yet vested as of, October 31, 2005 based on the grant date fair
      value estimated in accordance with the pro forma provisions of SFAS 123 and
      new
      stock option grants made during the fiscal year ended October 31, 2006. A total
      of.2,349,470 and 1,303,000 stock option grants were awarded to employees for
      the
      years ended October 31, 2007 and 2006, respectively, and a total of 115,000
      and
      150,000 stock option grants were awarded to directors for the years ended
      October 31, 2007 and 2006.





**Results
      of Operations**




**Fiscal
      2007 vs. Fiscal 2006**




**Total
                Revenue**
            
            **Year
                Ended October 31,****2007**
            
            **2006**
            
            **%
                Change****($
                millions)**Radiation
                Sources
            
            $
            15.3
            
            $
            12.6
            
            
            21.6
            %




Total
      revenue increased 21.6% to $15.3 million for the year ended October 31, 2007
      from $12.6 million for the year ended October 31, 2006. The increase in revenue
      is due to a 23.6% increase in sales of our brachytherapy seeds and accessories,
      with increased product sales partially offset by a decline in average selling
      prices, and a 16.4% increase in sales of our non-therapeutic products, primarily
      due to growth in flood source products and industrial products.





**Gross
      profit**




**Year
                  Ended October 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              4.6
              
              $
              3.6
              
              
              28.7
              %As
                  a percent of total revenue
              
              
              30.2
              %
              
              28.6
              %
              
              1.6
              %





48




Gross
      profit increased $1.0 million, or 28.7%, to $4.6 million for the year ended
      October 31, 2007 from $3.6 million for the year ended October 31, 2006. Gross
      profit as a percent of sales increased 1.6% points from the year ended October
      31, 2006 to the year ended October 31, 2007. The increase in our gross profit
      is
      primarily due to the increase in sales, and the increase in gross profit as
      a
      percent of sales is primarily due to reduced material usage costs in therapeutic
      products, partially offset by a decline in average selling prices.




**Selling
      and marketing expenses**




**Year
                  Ended October
                  31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Selling
                  and marketing expenses
              
              $
              3.8
              
              $
              2.8
              
              
              37.7
              %As
                    a percent of total revenue
              
              
              24.9
              %
              
              22.0
              %
              
              2.9
              %




Selling
      and marketing expenses, comprised primarily of salaries, commissions and
      marketing costs, increased $1.0 million, or 37.7%, to $3.8 million for the
      year
      ended October 31, 2007, from $2.8 million for the year ended October 31, 2006.
      The increase in selling and marketing expenses is primarily attributed to higher
      sales commissions related to the increased sales of brachytherapy products,
      and
      increased marketing spending on our ClearPath device.




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




**Year
                  Ended October 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**General
                  and administrative expenses
              
              $
              9.0
              
              $
              9.0
              
              
              0.5
              %As
                  a percent of total revenue
              
              
              58.8
              %
              
              71.2
              %
              
              (12.4
              )%




G&A
      increased 0.5%, to $9.0 million for the year ended October 31, 2007, from $9.0
      million for the year ended October 31, 2006. The increase in G&A is
      primarily attributed to an increase in personnel expenses, partially offset
      by a
      decrease in the stock compensation expense as a result of the implementation
      of
      SFAS 123(R), which requires the expensing of stock options, and reduced bad
      debt
      expense resulting from improved collections.





**Research
      and development (“R&D”)**


**Year
                  Ended October 31,****2007**
              
              **2006**
              
              **%
                  Change****($
                  millions)**Research
                  and development expenses
              
              $
              1.8
              
              $
              1.2
              
              
              53.4
              %As
                  a percent of total revenue
              
              
              11.6
              %
              
              9.2
              %




49




R&D
      increased $0.6 million or 53.4%, to $1.8 million for the year ended October
      31,
      2007, from $1.2 million for the year ended October 31, 2006. The increase in
      R&D spending is primarily due to increased spending on product development
      for our ClearPathTM breast brachytherapy device.





**Interest
      and other income, net.** Interest
      expense was $0.5 million for the fiscal year ended October 31, 2007, compared
      to
      $0.1 million for the fiscal year ended October 31, 2006. The interest expense
      in
      both fiscal years resulted from the interest on short-term and long-term debt
      and amortization of warrants. The increase was attributable to an increase
      in
      the outstanding balance of the short-term and long-term debt and the number
      of
      warrants.





**Loss
      from discontinued operations.** The loss
      from discontinued operations of $10.5 million for the fiscal year ended October
      31, 2007 resulted from the divestiture of NOMOS in September, 2007, and includes
      a loss on disposal of $7.1 million and a loss from operations of $3.4 million
      (See Note 2 to the financial statements). The loss from discontinued operations
      of $7.7 million for the fiscal year ended October 31, 2006 includes a loss
      from
      operations of $8.0 million from NOMOS and a gain of $0.3 million from the
      discontinued Theseus operation.




**Fiscal
      2006 vs. Fiscal 2005**


**Total
                  Revenue**
              
              **Year
                  Ended October 31,****2006**
              
              **2005**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              12.6
              
              $
              12.0
              
              
              4.7
              %




Total
      revenue increased 4.7% to $12.6 million for the year ended October 31, 2006
      from
      $12.0 million for the year ended October 31, 2005. The increase in our Radiation
      Sources business reflects a 4.8% increase in sales of our brachytherapy seeds
      and accessories, with increased product sales partially offset by a decline
      in
      average selling prices, and a 4.4% increase in sales of our non-therapeutic
      products.





**Gross
      profit**




**Year
                  Ended October 31,****2006**
              
              **2005**
              
              **%
                  Change****($
                  millions)**Radiation
                  Sources
              
              $
              3.6
              
              $
              3.9
              
              
              (7.7)
              %As
                  a percent of total revenue
              
              
              28.6
              %
              
              32.4
              %
              
              (3.8)
              %




50




Gross
      profit decreased $0.3 million, or 7.7%, to $3.6 million for the year ended
      October 31, 2006 from $3.9 million for the year ended October 31, 2005. Gross
      profit as a percent of sales decreased from 32.4% in the year ended October
      31,
      2005 to 28.6% in year ended October 31, 2006. The decrease in our gross profit
      and our gross profit as a percent of sales is primarily due to start-up costs
      of
      in-house stranding in our brachytherapy business.





**Selling
      and marketing expenses**




**Year
                  Ended October 31,****2006**
              
              **2005**
              
              **%
                  Change****($
                  millions)**Selling
                  and marketing expenses
              
              $
              2.8
              
              $
              2.2
              
              
              28.2
              %As
                  a percent of total revenue
              
              
              22.0
              %
              
              18.0
              %
              
              4.0
              %




Selling
      and marketing expenses, comprised primarily of salaries, commissions and
      marketing costs, increased $0.6 million, or 28.2%, to $2.8 million for the
      year
      ended October 31, 2006, from $2.2 million for the year ended October 31, 2005.
      The increase in selling and marketing expenses is primarily attributed to
      increased marketing expenses related to our ClearPath device and trade show
      expenses.





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




**Year
                  Ended October 31,****2006**
              
              **2005**
              
              **%
                  Change****($
                  millions)**General
                  and administrative expenses
              
              $
              9.0
              
              $
              8.0
              
              
              11.6
              %As
                  a percent of total revenue
              
              
              71.2
              %
              
              66.8
              %
              
              4.4
              %




G&A
      increased $1.0 million, or 11.6%, to $9.0 million for the year ended October
      31,
      2006, from $8.0 million for the year ended October 31, 2005. The increase in
      G&A is primarily attributed to $0.9 million of stock compensation expense as
      a result of the implementation of SFAS 123(R) which requires the expensing
      of
      stock options.




**Research
      and development (“R&D”)**




**Year
                  Ended October 31,****2006**
              
              **2005**
              
              **%
                  Change****($
                  millions)**Research
                  and development expenses
              
              $
              1.2
              
              $
              0.7
              
              
              77.1
              %As
                  a percent of total revenue
              
              
              9.2
              %
              
              5.4
              %
              
              3.8
              %


51


R&D
      increased $0.5 million, or 77.1%, to $1.2 million for the year ended October
      31,
      2006, from $0.7 million for the year ended October 31, 2005. The increase in
      R&D spending is primarily due to increased spending on product development
      for our ClearPathTM breast brachytherapy device.





**Interest
      and other income, net.** Interest
      expense was $0.1 million for the fiscal year ended October 31, 2006, compared
      to
      interest income of $0.1 million for the fiscal year ended October 31, 2005.
      The
      interest expense in fiscal 2006 resulted from the short-term and long-term
      debt
      and amortization of warrants, and the interest income in fiscal 2005 was due
      to
      a portfolio of marketable securities.





**Loss
      from discontinued operations.** The loss
      from discontinued operations of $7.7 million for the fiscal year ended October
      31, 2006 includes a loss from operations of $8.0 million from NOMOS and a gain
      of $0.3 million from the discontinued Theseus operation. The loss from
      discontinued operations of $48.3 million for the fiscal year ended October
      31,
      2005 includes: (i) a $40.2
      million impairment charge recorded in our fiscal fourth quarter ended October
      31, 2005 to write-down the goodwill and intangible assets acquired in the NOMOS
      acquisition in May, 2004 ($40.0 million), and the RTP acquisition in August,
      2003 ($0.2 million), (ii) a loss from operations of $8.0 million from NOMOS
      and
      (iii) a gain
      of
      $0.4 million from the discontinued Theseus operation.





**Liquidity
      and Capital Resources**





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





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business.  We have incurred net losses of $21.0
      million, $17.1 million and $55.5 million for the years ended October 31, 2007,
      2006 and 2005, respectively, and have used cash in operations of $12.3 million,
      $15.9 million and $11.9 million for the years ended October 31, 2007, 2006
      and
      2005, respectively.  As of October 31, 2007, we had an accumulated deficit
      of $148.5 million; cash, cash equivalents and marketable securities of $0.6
      million, and $3.3 million of interest-bearing debt.





Based
      on
      the Company’s current operating plans, management believes that the Company’s
      existing cash resources and cash forecasted by management to be generated by
      operations, funds to be raised by the Company through an equity financing,
      as
      well as the Company’s anticipated available lines of credit, will be sufficient
      to meet working capital and capital requirements through at least the next
      twelve months. In this regard, we raised additional equity financing in the
      gross amount of $15.5 million in the first quarter of fiscal 2008 to fund our
      continuing operations, support the further development of ClearPath and other
      activities. However, there is no assurance that the Company will be successful
      with its plans.  If events and circumstances occur such that the Company
      does not meet its current operating plans, the Company is unable to raise
      sufficient additional equity or debt financing, or the Company’s line of credit
      (which presently expires on February 1, 2008) are insufficient or not available,
      the Company may be required to further reduce expenses or take other steps
      which
      could have a material adverse effect on our future performance, including but
      not limited to, the premature sale of some or all of our assets or product
      lines
      on undesirable terms, merger with or acquisition by another company on
      unsatisfactory terms, or the cessation of operations.




52




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




The
      following sections discuss the effects of changes in our balance sheets, cash
      flows, and commitments on our liquidity and capital resources.




**Balance
      Sheet and Cash Flows**




Cash,
      cash equivalents and investments in marketable securities . 
      At October 31, 2007, we had cash, cash equivalents and investments in marketable
      securities aggregating approximately $0.6 million, a decrease of approximately
      $8.7 million from $9.3 million at October 31, 2006. The decrease was primarily
      attributed to cash used in continuing operations of $9.0 million, and cash
      used
      in discontinued operations of $3.3 million, partially offset by proceeds from
      lines of credit of $3.3 million and proceeds from exercise of stock options
      and
      the purchase of shares related to our employee stock purchase plan of $0.1
      million.





We
      raised
      additional equity financing in the gross amount of $15.5 million in the first
      quarter of fiscal 2008, and received approximately $14.1 million in cash, net
      of
      offering expenses.





We
      expect
      that cash used in operating activities may fluctuate in future periods as a
      result of a number of factors, including fluctuations in our operating results,
      accounts receivable collections, inventory management, research and development
      expenses, and the timing of payments.




During
      the year ended October 31, 2007, we received $0.1 million from the exercise
      of
      stock options and the purchase of shares related to our employee stock purchase
      plan.  Proceeds from the exercise of stock options and the employee stock
      purchase plan will vary from period to period based upon, among other factors,
      fluctuations in the market value of our stock relative to the exercise price
      of
      such options.




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




Equipment
      and leasehold improvements . 
      Equipment and leasehold improvements (“Fixed Assets”) decreased approximately
      $0.4 million to $0.9 million at October 31, 2007, from $1.3 million at October
      31, 2006.  The decrease in Fixed Assets reflects capital expenditures of
      $0.2 million offset by $0.6 million in depreciation expense.




Accounts
      payable and accrued expenses. Accounts payable and accrued expenses decreased approximately $0.2 million
      to
      $6.0 million as of October 31, 2007, from $6.2 million at October 31, 2006,
      primarily due to a reduction in accrued expenses.




53





**Liquidity
      and Capital Resource Requirements**




We
      have
      operating lease obligations for facilities and equipment under non-cancelable
      operating lease agreements. Future minimum lease payments are subject to annual
      adjustment for increases in the Consumer Price Index.  We also have
      purchase commitments to suppliers under blanket purchase orders.


**Payments
                  due by period****ContractualObligations**
              
              **Total**
              
              **Less
                  than 1**
                **year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **More
                  than**
                **5
                  years**Operating
                  leases
              
              $
              400,000
              
              $
              380,000
              
              $
              20,000
              
              $
              —
              
              $
              —License
                  fees
              
              
              825,000
              
              
              175,000
              
              
              375,000
              
              
              275,000
              
              
              —Purchase
                  commitments
              
              
              146,000
              
              
              146,000
              
              
              —
              
              
              —
              
              
              —$
              1,371,000
              
              $
              701,000
              
              $
              395,000
              
              $
              275,000
              
              $
              —




Based
      on
      our current operating plans, we believe that the existing cash resources, cash
      forecasted by our plans to be generated by operations, and our anticipated
      available bank lines of credit will be sufficient to meet working capital and
      capital requirements through at least the next twelve months.




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




•
            Our
                future operating results;


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


•
            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 or
                products.




If
      we
      should require additional financing due to continued operating losses or other
      unanticipated developments, additional financing may not be available when
      needed or, if available, we may not be able to obtain this financing on
      favorable terms.  If additional funds are raised by issuing equity
      securities, dilution to existing stockholders would result. Insufficient funds
      may require us to further
      reduce expenses or take other steps which could have a material adverse effect
      on our future performance, including but not limited to, the premature sale
      of
      some or all of our assets or product lines on undesirable terms, merger with
      or
      acquisition by another company on unsatisfactory terms, or the cessation of
      operations.





54




**Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* (FIN 48).  FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with FASB Statement No. 109, *Accounting
      for Income Taxes.* FIN 48 also prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return that results in a tax benefit.
      Additionally, FIN 48 provides guidance on de-recognition, income statement
      classification of interest and penalties, accounting in interim periods,
      disclosure and transition. This interpretation is effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      effect that the application of FIN 48 will have on its results of
      operations and financial condition.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. SFAS No. 157 applies under other accounting
      pronouncements that require or permit fair value measurements, and does not
      require any new fair value measurements. The application of SFAS No. 157,
      however, may change current practice within an organization. SFAS No. 157 is
      effective for all fiscal years beginning after November 15, 2007, with earlier
      application encouraged. The Company does not believe that SFAS No. 157 will
      have
      a material impact on the Company’s financial position, results of operations or
      cash flows.




In
      September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for
      Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
      Statements No. 87, 88, 106 and 132(R)”(“SFAS 158”). SFAS 158 requires us to
      (a) recognize a plan’s funded status in the statement of financial
      position, (b) measure a plan’s assets and its obligations that determine
      its funded status as of the end of the employer’s fiscal year and
      (c) recognize changes in the funded status of a defined postretirement plan
      in the year in which the changes occur through other comprehensive income.
      SFAS
      No. 158 is effective for fiscal years ending after December 15, 2006. The
      Company does not sponsor a defined benefit pension or post-retirement plans
      such
      employee related benefits. As such, SFAS No. 158 will not have a material impact
      on the Company’s financial position, results of operations or cash
      flows.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value. The standard’s objective is to reduce both complexity in accounting
      for financial instruments and the volatility in earnings caused by measuring
      related assets and liabilities differently. The standard requires companies
      to
      provide additional information that will help investors and other users of
      financial statements to more easily understand the effect of the company’s
      choice to use fair value on its earnings. It also requires companies to display
      the fair value of those assets and liabilities for which the company has chosen
      to use fair value on the face of the balance sheet. The new standard does not
      eliminate disclosure requirements included in other accounting standards,
      including requirements for disclosures about fair value measurements included
      in
      SFAS 157, “Fair Value Measurements,” and SFAS 107, “Disclosures about Fair Value
      of Financial Instruments.” SFAS 159 is effective as of the start of fiscal years
      beginning after November 15, 2007. Early adoption is permitted. We are in
      the process of evaluating this standard and therefore have not yet determined
      the impact that the adoption of SFAS 159 will have on our financial position,
      results of operations or cash flows.




55




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
      Combinations” (“SFAS 141 (R)”). The objective of SFAS 141 (R) is to improve
      reporting by creating greater consistency in the accounting and financial
      reporting of business combinations, resulting in more complete, comparable
      and
      relevant information for investors and other users of financial statements.
      SFAS
      141 (R) requires the acquiring entity in a business combination to recognize
      all
      (and only) the assets acquired and liabilities assumed in the transaction;
      establishes the acquisition-date fair value as the measurement objective for
      all
      assets acquired and liabilities assumed; and requires the acquirer to disclose
      to investors and other users all of the information they need to evaluate and
      understand the nature and financial effect of the business combination. SFAS
      141
      (R) includes both core principles and pertinent application guidance,
      eliminating the need for numerous EITF issues and other interpretative guidance,
      thereby reducing the complexity of existing GAAP. SFAS 141 (R) is effective
      as
      of the start of fiscal years beginning after December 15, 2008. Early
      adoption is not allowed. The Company is in the process of evaluating this
      standard and therefore has not yet determined the impact that the adoption
      of
      SFAS 141 (R) will have on its financial position, results of operations or
      cash
      flows.




In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements” (“SFAS 160”). SFAS 160 improves the
      relevance, comparability, and transparency of financial information provided
      to
      investors by requiring all entities to report non-controlling (minority)
      interests in subsidiaries in the same way—as equity in the consolidated
      financial statements. Moreover, SFAS 160 eliminates the diversity that currently
      exists in accounting for transactions between an entity and non-controlling
      interests by requiring they be treated as equity transactions. SFAS 160 is
      effective as of the start of fiscal years beginning after December 15,
      2008. Early adoption is not allowed. The Company is in the process of evaluating
      this standard and therefore have not yet determined the impact that the adoption
      of SFAS 160 will have on our financial position, results of operations or cash
      flows.




**Related
      Party Transactions**





On
      February 17, 2006 we entered an exclusive license agreement with IdeaMatrix,
      Inc. (a company wholly owned by our former Vice President of New Product
      Development (Brachytherapy), Richard Terwilliger), for certain brachytherapy
      technology pertaining to needles and strands, used in the brachytherapy
      manufacturing process. This technology is critical to our SurTRAK line of
      products, sold in connection with our brachytherapy seeds. Under this exclusive
      license agreement, we paid $125,000 upon execution of the license agreement
      on
      February 17, 2006, and we are required to pay $125,000 per year over five years.
      There is no annual renewal fee or royalty arising out of this license. The
      term
      of this license expires upon the last expiring patent included in the license.
      As part of this license agreement, we have agreed to indemnify Mr. Terwilliger
      and IdeaMatrix, Inc. for claims arising from the licensed property, including
      the claim raised in the Worldwide Medical Technology lawsuit against Mr.
      Terwilliger and IdeaMatrix, Inc. Please see Item 3, Legal Proceedings, for
      additional information.





The
      Company also has borrowed funds from, and received additional equity investments
      from, related parties. See, under “Subsequent Events - Debt Arrangements” each
      of “John Friede Note,” “Three Arch Capital (et al)” and “Securities Purchase
      Agreement.”




**Item
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Our
      financial instruments include cash and cash equivalents. At October 31,
      2007, the carrying values of our financial instruments approximated their fair
      values based on current market prices and rates. These securities are subject
      to
      interest rate risk and will decline in value if interest rates increase. Due
      to
      the short duration of our investment portfolio, changes in interest rates are
      not expected to have a material effect on our near-term financial condition
      or
      results of operations.





56




Our
      policy is to not enter into derivative financial instruments. We do not have
      any
      significant foreign currency exposure. In addition, we do not enter into any
      futures or forward contracts and therefore do not have significant market risk
      exposure with respect to commodity prices.




**Item
      8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      information required by this Item is presented in the consolidated financial
      statements listed in Item 15(a) of Part IV of this Form 10-K Annual
      Report and are incorporated herein by reference.




**Item
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None





**Item
      9A. CONTROLS AND PROCEDURES**





**(a)**  **Evaluation
      of disclosure controls and procedures.**





As
      required by Rule 13a-15(b) under the Exchange Act, we have carried out an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer ("CEO") and our Chief Financial Officer
      ("CFO"), of the effectiveness, as of the end of the period covered by this
      report, of the design and operation of our "disclosure controls and procedures"
      as defined in Rule 13a-15(e) promulgated by the SEC under the Exchange Act.
      Based upon that evaluation, our CEO and our CFO concluded that our disclosure
      controls and procedures, as of the end of such period, were adequate and
      effective to ensure that information required to be disclosed by us in the
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the Commission's
      rules and forms.





**** **(b)** **Changes
      in internal controls.**





There
      were no changes in our internal controls over financial reporting during the
      quarter ended October 31, 2007, that have materially affected or are reasonably
      likely to materially affect our internal control over financial
      reporting.





**Item
      9B. OTHER INFORMATION.**





None.




57


**PART
      III**





**Item
      10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE OF THE
      REGISTRANT**





Other
      than the information with respect to our executive officers, which is set forth
      in Item 4A of Part I, the information required under this Item is incorporated
      by reference to our definitive proxy statement pursuant to Regulation 14A
      to be filed with the Commission no later than 120 days after the close of
      our fiscal year ended October 31, 2007.





We
      have a
      written Code of Ethics that applies to our Chief Executive Officer, Chief
      Financial Officer, and Corporate Controller.





**Item
      11. EXECUTIVE COMPENSATION**





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2007.





**Item
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2007.





**Item
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2007.





**Item
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES**





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2007.




58




**PART
      IV**





**Item
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





**(a)** **The
      following documents are filed as a part of this Annual Report on
      Form 10-K:**




**Page**1.
            Financial
                Statements of the CompanyReport
                of Independent Registered Public Accounting Firm – Singer Lewak Greenbaum
                & Goldstein LLP
            
            62Consolidated
                Balance Sheets
            
            63Consolidated
                Statements of Operations
            
            64Consolidated
                Statements of Changes in Stockholders' Equity
            
            65Consolidated
                Statements of Cash Flows
            
            66Notes
                to Consolidated Financial Statements
            
            672.
            Financial
                Statement ScheduleSchedule
                II—Valuation and Qualifying Accounts
            
            105All
                other schedules are omitted because they are not applicable or the
                required information is shown in the financial statements or notes
                thereto.3.
            Exhibits.Reference
                is made to Item 15(b) of this Annual Report on
                Form 10-K.





**(b)** **Exhibits**





**Exhibit No.**
            
            **Description**3.1*
            
            Amended
                and Restated Certificate of Incorporation of the
                Registrant.3.2
            
            Bylaws
                of the Registrant, (as amended December 5, 2007), incorporated by
                reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,
                filed on December 11, 2007.10.1
            
            Lease
                Agreement dated November 30, 1995 between Registrant and Abraham
                Stricks,
                incorporated by reference to Exhibit 10.2 of the Registrant's Form
                10-
                KSB, filed January 29, 1998.10.2+
            
            North
                American Scientific, Inc. Amended and Restated 1996 Stock Option
                Plan (as
                amended through April 6, 2001), incorporated by reference to
                Exhibit 4.4 of the Registrant's Registration Statement on Form S-8
                (Registration No. 333-61688), filed May 25, 2001.10.3+
            
            The
                North American Scientific, Inc. 2000 Employee Stock Purchase Plan,
                incorporated by reference to Exhibit 4.4 of the Registrant's Registration
                Statement on Form S-8 (Registration No. 333-34200), filed April 6,
                2000.10.4+
            
            The
                Theseus 1998 Employee, Director and Consultant Stock Plan, incorporated
                by
                reference to Exhibit 4.4 of the Registrant's Registration Statement
                on
                Form S-8 (Registration No. 333-64892), filed July 11,
                2001.10.5
            
            Rights
                Agreement, incorporated by reference to Exhibit 99.1 of the Registrant's
                Form 8-A, filed October 16, 1998.10.6
            
            Restated
                Agreement and Plan of Merger, dated as of September 22, 2000, among
                the
                Registrant, NASI Acquisition Corp., a wholly-owned subsidiary of
                the
                Registrant, Theseus Imaging Corporation, Dr. Allan M.Green, Robert
                Bender,
                Sally Hansen and Irwin Gruverman, incorporated by reference to Exhibit
                2.1
                of the Registrant's Form 8-K filed October 19, 2000.10.7
            
            License
                Agreement, effective as of April 1, 1998, by and between The Board
                of
                Trustees of Leland Stanford Junior University and Theseus Imaging
                Corporation, a wholly-owned subsidiary of the Registrant (confidential
                treatment granted for certain portions thereof), incorporated by
                reference
                to Exhibit 10.8 to the Registrant's Form 10-K filed January 29,
                2001.10.8
            
            License
                Agreement, effective as of July 20, 2001, by and between AnorMED
                Inc. and
                North American Scientific, Inc. (confidential treatment granted for
                certain portions thereof), incorporated by reference to Exhibit 10.1
                to
                the Registrant's Form 10-Q, filed March 5, 2002.10.9+
            
            Employment
                Agreement, dated October 13, 2000, by and between Dr. Allan M. Green
                and
                the Company, incorporated by reference to Exhibit 10.12 to the
                Registrant's Form 10-K filed January 17,
                2002.




59




10.10+
            
            Employment
                Agreement, dated April 1, 2002, by and between L. Michael Cutrer
                and theRegistrant,
                incorporated by reference to Exhibit 10.1 to the Registrant's
                Form 10-Q filed August 28, 2002.10.11+
            
            Employment
                Agreement, dated April 7, 1998, by and between Alan I. Edrick and
                theRegistrant,
                as amended on September 29, 1999, incorporated by reference to
                Exhibit 10.13 to the Registrant's Form 10-K filed January 17,
                2002.10.12+
            
            Employment
                Agreement, dated February 20, 2003, by and between Elliot Lebowitz,
                Ph.D.
                and theRegistrant,
                incorporated by reference to Exhibit 10.1 to the Registrant's
                Form 10-Q filed March 7, 2003.10.13+
            
            The
                North American Scientific, Inc. 2003 Non-Employee Directors' Equity
                Compensation Plan, incorporated by reference to Exhibit 4.4 to the
                Registrant's Registration Statement on Form S-8 (Registration No.
                333-106197), filed June 17, 2003.10.14
            
            Agreement
                and Plan of Merger by and among the Registrant, AM Capital, Inc.
                and NOMOS
                Corporation, dated as of October 26, 2003, incorporated by reference
                to
                Exhibit 2 to the Registrant's Form 8-K filed October 27,
                2003.10.15
            
            First
                Amendment to Agreement and Plan of Merger by and among the Registrant,
                AM
                Capital I, Inc. and NOMOS Corporation, incorporated by reference
                to
                Exhibit 2.2 to the Registrant's Registration Statement on Form S-4
                (Registration No. 333-110766), filed November 26, 2003.10.16+
            
            Employment
                Agreement dated May 5, 2004, by and between John W. Manzetti. and
                theRegistrant,
                incorporated by reference to the Registrant's Registration Statement
                on
                Form S-4 (Registration #333-110766), filed November  26,
                2003.10.17
            
            Second
                Amendment to Agreement and Plan of Merger by and among the Registrant,
                AM
                Capital I, Inc. and NOMOS Corporation, incorporated by reference
                to
                Exhibit 2 to the Registrant's Form 8-K filed March 5,
                2004.10.18
            
            The
                First Amendment dated as of April 28, 2004, to the Rights Agreement,
                dated
                as of October 12, 1998 by and between the Registrant and U.S. Stock
                Transfer Corporation, incorporated by reference to Exhibit 10 to
                the
                Registrant’s Form 8-K filed April 30, 2004.10.19
            
            Agency
                Agreement dated as of March 17, 2004, by and between the Registrant
                and
                NOMOS Corporation, incorporated by reference to Exhibit 10 to the
                Registrant’s Form 8-K filed March 22, 2004.10.20
            
            Lease
                Agreement dated August 22, 2002, by and between NOMOS Corporation
                and
                Cranberry 200 Venture, L.P., incorporated by reference to Exhibit
                10.20 to
                the Registrant’s Form 10-K filed March 11, 2005.10.21
            
            Amendment
                to Lease Agreement dated August 22, 2002, by and between NOMOS Corporation
                and Cranberry 200 Venture, L.P., incorporated by reference to Exhibit
                10.21 to the Registrant’s Form 10-K filed March 11, 200510.22
            
            Secured
                Loan Agreement dated as of October 15, 2003 by and between the Registrant
                and Prostate Centers of America, incorporated by reference to Exhibit
                10.22 to the Registrant’s Form 10-K filed March 11,
                200510.23
            
            Settlement
                Agreement dated as of August 4, 2004, by and among the Registrant,
                NOMOS
                Corporation and Parker/Hunter, Incorporated, incorporated by reference
                to
                Exhibit 10.23 to the Registrant’s Form 10-K filed March 11,
                200510.24
            
            Loan
                Agreement and Security Agreement, dated October 5, 2005, between the
                Registrant, the Subsidiaries and Silicon Valley Bank.,incorporated
                by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed October
                11, 2005.10.25
            
            Amendment
                toLoan
                Agreement and Security Agreement, dated January 12, 2006, between
                the
                Registrant, the Subsidiaries and Silicon Valley Bank, incorporated
                by
                reference to Exhibit 10.25 of Form 10-K filed on January 18,
                2006.10.26
            
            Loan
                and Security Agreement, dated March 28, 2006, by and among the Registrant,
                certain subsidiaries and Partners for Growth II, L.P., incorporated
                by
                reference to the Registrant’s Current Report on Form 8-K filed on April 3,
                2006.10.27
            
            North
                American Scientific, Inc. 2006 Stock Plan, incorporated by reference
                to
                Appendix A to the Registrant’s Definitive Proxy Statement filed on April
                5, 2006.10.28
            
            Securities
                Purchase Agreement dated June 6, 2006 between the Registrant and
                the
                investors, incorporated by reference to the Registrant’s Current Report on
                Form 8-K filed on June 7, 2006.




60




10.29
            
            Form
                of Warrant Agreement between the Registrant and Three Arch Partners,
                incorporated by reference to the Registrant’s Current Report on Form 8-K
                filed on June 7, 2006.10.30
            
            Form
                of Warrant Agreement between the Registrant and certain other investors,
                incorporated by reference to the Registrant’s Current Report on Form 8-K
                filed on June 7, 2006.10.31
            
            Second
                Amendment to Rights Agreement, dated June 5, 2006 by and between
                the
                Registrant and U.S. Stock Transfer Corporation, incorporated by reference
                to the Registrant’s Current Report on Form 8-K filed on June 7,
                2006.10.32
            
            Second
                Amendment toLoan
                Agreement and Security Agreement, dated October 31, 2006, between
                theRegistrant,
                the Subsidiaries and Silicon Valley Bank incorporated by reference
                to theRegistrant’s
                Current Report on Form 8-K filed on November 3, 2006.10.33+
            
            First
                Amended and Restated Employment Agreement between the Registrant
                and L.
                Michael Cutrer dated December 21, 2006, incorporated by reference
                to the
                Registrant’s Current Report on Form 8-K filed on December 28,
                2006.10.34+
            
            Employment
                Agreement between the Registrant and John B. Rush, dated March 22,
                2007,
                incorporated by reference to the Registrant’s Current Report on Form 8-K/A
                filed on December 7, 2007.10.35
            
            Third
                Amendment to Rights Agreement, dated as of April 30, 2007, by and
                between
                theRegistrantand U.S. Stock Transfer Corporation, incorporated by reference to
                Exhibit
                10.1 to theRegistrant’s
                Current Report on Form 8-K filed on May 4, 2007.10.36
            
            Third
                Amendment toLoan
                Agreement and Security Agreement, dated as of August 24, 2007, between
                theRegistrant,
                the Subsidiaries and Silicon Valley Bank,incorporated by reference to Exhibit 10.1 to theRegistrant’s
                Quarterly Report on Form 10-Q, filed on September 19,
                2007.10.37+
            
            Summary
                of Employment Arrangement between the Registrant and Troy A. Barring,
                dated September 4, 2007, incorporated by reference to Item 5.02 of
                the
                Registrant’s Current Report on Form 8-K filed on September 10,
                2007.10.38
            
            Agreement
                among North American Scientific, Inc., NOMOS Corporation, and Best
                Medical
                International, Inc., dated as of September 11, 2007, incorporated
                by
                reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed
                on September 14, 2007.10.39
            
            Fourth
                Amendment toLoan
                Agreement and Security Agreement, dated as of September 14, 2007,
                between
                theRegistrant,
                the Subsidiaries and Silicon Valley Bank,incorporated by reference to Exhibit 10.3 to theRegistrant’s
                Quarterly Report on Form 10-Q.,filed on September 19, 2007.10.40*
            
            Loan
                Agreement and Security Agreement, dated as of September 21, 2007,
                between
                the Registrant, the Subsidiaries and Agility Capital
                LLC.10.41*
            
            Fifth
                Amendment toLoan
                Agreement and Security Agreement, dated as of October 3, 2007, between
                theRegistrant,
                the Subsidiaries and Silicon Valley Bank.10.42
            
            First
                Amendment toLoan
                Agreement and Security Agreement, dated as of October 18, 2007, between
                theRegistrant,
                the Subsidiaries and Agility Capital LLC,incorporated by reference to Exhibit 10.1 to theRegistrant’s
                Current Report on Form 8-K filed on October 24, 2007.10.43
            
            WarrantAgreement, dated as of September 21, 2007, between theRegistrant,
                the Subsidiaries and Agility Capital LLC,incorporated by reference to Exhibit 10.2 to theRegistrant’s
                Current Report on Form 8-K filed on October 24, 2007.10.44*
            
            Sixth
                Amendment toLoan
                Agreement and Security Agreement, dated as of October 29, 2007, between
                theRegistrant,
                the Subsidiaries and Silicon Valley Bank.10.45*
            
            Loan
                Agreement and Subordinated Note, dated as of October 30, 2007, between
                the
                Registrant and John A. Friede.14
            
            Code
                of Ethics incorporated by reference to Exhibit 14 to the Registrant’s Form
                10-K filed January 23, 2004.21.1*
            
            Subsidiaries
                of the Registrant.23.1*
            
            Consent
                of Singer Lewak Greenbaum & Goldstein LLP.31.1*
            
            Certification
                of Chief Executive Officer.31.2*
            
            Certification
                of Chief Financial Officer.32.1*
            
            Certification
                pursuant to Rule 13a-14b under the Exchange Act and 18 U.S.C
                -1350.





+ Compensation
      plan or agreement


* Filed
      herewith




61




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


North
      American Scientific, Inc.


Chatsworth,
      California





We
      have
      audited the consolidated balance sheets of North American Scientific, Inc.
      and
      subsidiaries (collectively, the “Company”) as of October 31, 2007 and 2006, and
      the related consolidated statements of operations, stockholders’ equity
      (deficit) and cash flows for each of the three years in the period ended October
      31, 2007. Our audits also included the financial statement schedule of North
      American Scientific, Inc. listed in Item 15(a). These financial statements
      and
      financial statement schedule are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of North American Scientific,
      Inc. and subsidiaries as of October 31, 2007 and 2006, and the results of their
      operations and their cash flows for each of the three years in the period ended
      October 31, 2007, in conformity with U.S. generally accepted accounting
      principles. Also, in our opinion, the related financial statement schedule,
      when
      considered in relation to the basic consolidated financial statements taken
      as a
      whole, present fairly in all material respects the information set forth
      therein.





/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


January
      25, 2008




62




**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Balance Sheets**





**October 31,****2007**
            
            **2006****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            609,000
            
            $
            903,000Marketable
                securities, held to maturity
            
            
            —
            
            
            8,420,000Accounts
                receivables, net of reserves
            
            
            2,296,000
            
            
            2,618,000Inventories,
                net of reserves
            
            
            1,546,000
            
            
            1,284,000Prepaid
                expenses and other current assets
            
            
            724,000
            
            
            830,000Assets
                held for sale
            
            
            —
            
            
            11,377,000Total
                current assets
            
            
            5,175,000
            
            
            25,432,000Equipment
                and leasehold improvements, net
            
            
            891,000
            
            
            1,318,000Intangible
                assets, net
            
            
            110,000
            
            
            138,000Other
                assets
            
            
            —
            
            
            310,000Total
                assets
            
            $
            6,176,000
            
            $
            27,198,000**Liabilities
                and Stockholders' (Deficit) Equity**Current
                liabilitiesLines
                of credit, net of discount
            
            $
            3,241,000
            
            $
            —Warrant
                derivative
            
            
            173,000
            
            
            —Accounts
                payable
            
            
            2,564,000
            
            
            2,406,000Accrued
                expenses
            
            
            3,110,000
            
            
            3,790,000Liabilities
                related to assets held for sale
            
            
            —
            
            
            3,814,000Total
                liabilities
            
            
            9,088,000
            
            
            10,010,000Commitments
                and contingencies (Note 12)Stockholders'
                (deficit)equityPreferred
                stock, $.01 par value, 2,000,000 shares authorized; no shares
                issued
            
            
            —
            
            
            —Common
                stock, $.01 par value, 100,000,000 (2007) and 40,000,000 (2006) shares
                authorized; 29,601,352 (2007) and 29,447,270 (2006) shares issued;
                and
                29,395,331 (2007) and 29,336,144 (2006) shares outstanding
            
            
            300,000
            
            
            298,000Additional
                paid-in capital
            
            
            145,533,000
            
            
            144,543,000Treasury
                stock, at cost – 206,021 (2007) and 111,126 (2006) common
                shares
            
            
            (227,000
            )
            
            (133,000
            )Accumulated
                deficit
            
            
            (148,518,000
            )
            
            (127,520,000
            )Total
                stockholders' (deficit) equity
            
            
            (2,912,000
            )
            
            17,188,000Total
                liabilities and stockholders' (deficit) equity
            
            $
            6,176,000
            
            $
            27,198,000





The
      accompanying notes are an integral part of the consolidated financial
      statements.




63




**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Statements of Operations**





**For the Years Ended October 31,****2007**
            
            **2006**
            
            **2005**Revenue
                -Product
            
            $
            15,317,000
            
            $
            12,594,000
            
            $
            12,032,000Cost
                of revenues -Product
            
            
            10,690,000
            
            
            8,998,000
            
            
            8,137,000Gross
                profit
            
            
            4,627,000
            
            
            3,596,000
            
            
            3,895,000Selling
                expenses
            
            
            3,819,000
            
            
            2,772,000
            
            
            2,162,000General
                and administrative expenses
            
            
            9,010,000
            
            
            8,964,000
            
            
            8,033,000Research
                and development
            
            
            1,780,000
            
            
            1,160,000
            
            
            655,000Amortization
                of intangible assets
            
            
            28,000
            
            
            28,000
            
            
            44,000Write-down
                of goodwill and intangible assets
            
            
            —
            
            
            —
            
            
            330,000Total
                operating expenses
            
            
            14,637,000
            
            
            12,923,000
            
            
            11,224,000Loss
                from operations
            
            
            (10,010,000
            )
            
            (9,326,000
            )
            
            (7,329,000
            )Interest
                and other (expense) income, net
            
            
            (535,000
            )
            
            (119,000
            )
            
            120,000Loss
                before provision (benefit) for income taxes
            
            
            (10,
                545,000
            )
            
            (9,445,000
            )
            
            (7,209,000
            )Provision
                (benefit) for income taxes
            
            
            —
            
            
            —
            
            
            —Loss
                from continuing operations
            
            
            (10,545,000
            )
            
            (9,445,000
            )
            
            (7,209,000
            )Loss
                from discontinued operation (including a loss on disposal of $7,107,000
                in
                2007)
            
            
            (10,453,000
            )
            
            (7,685,000
            )
            
            (48,304,000
            )Net
                loss
            
            $
            (20,998,000
            )
            $
            (17,130,000
            )
            $
            (55,513,000)
            )Basic
                and diluted loss per share:Continuing
                operations
            
            $
            (0.36
            )
            $
            (0.43
            )
            $
            (0.44
            )Discontinued
                operations
            
            
            (0.36
            )
            
            (0.35
            )
            
            (2.92
            )Net
                loss
            
            $
            (0.72
            )
            $
            (0.78
            )
            $
            (3.36
            )Weighted
                average number of common shares outstanding -Basic
                and diluted
            
            
            29,344,269
            
            
            21,956,565
            
            
            16,502,071





The
      accompanying notes are an integral part of the consolidated financial
      statements.




64




**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Statements of Changes in Stockholders' (Deficit) Equity**


**Additional**
                    
                    
                    
                    
                    
                    
                    
                    **Total****Common Stock**
                    
                    **Paid-in**
                    
                    **Treasury Stock**
                    
                    **Accumulated**
                    
                    **Stockholders'****Shares**
                    
                    **Amount**
                    
                    **Capital**
                    
                    **Shares**
                    
                    **Amount**
                    
                    **Deficit**
                    
                    **(Deficit) Equity**Balance
                        at October 31, 2004
                    
                    
                    16,308,487
                    
                    $
                    163,000
                    
                    $
                    120,220,000
                    
                    
                    108,026
                    
                    $
                    (129,000
                    )
                    $
                    (54,877,000
                    )
                    $
                    65,377,000Common
                        stock issued upon exercise of stock options
                    
                    
                    687,013
                    
                    
                    9,000
                    
                    
                    755,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    764,000Common
                        stock issued under employee stock purchase plan
                    
                    
                    59,742
                    
                    
                    1,000
                    
                    
                    172,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    173,000Shares
                        issued for NOMOS acquisition
                    
                    
                    1,427
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —Net
                        loss
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (55,513,000
                    )
                    
                    (55,513,000
                    )Balance
                        at October 31, 2005
                    
                    
                    17,056,669
                    
                    
                    173,000
                    
                    
                    121,147,000
                    
                    
                    108,026
                    
                    
                    (129,000
                    )
                    
                    (110,390,000
                    )
                    
                    10,801,000Common
                        stock issued upon exercise of stock options
                    
                    
                    2,186
                    
                    
                    —
                    
                    
                    2,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    2,000Common
                        stock issued under employee stock purchase plan
                    
                    
                    96,481
                    
                    
                    2,000
                    
                    
                    161,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    163,000Common
                        stock issued in private placement
                    
                    
                    12,291,934
                    
                    
                    123,000
                    
                    
                    21,811,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    21,934,000Purchase
                        of treasury stock
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    3,100
                    
                    
                    (4,000
                    )
                    
                    —
                    
                    
                    (4,000
                    )Issuance
                        of warrants
                    
                    
                    —
                    
                    
                    —
                    
                    
                    526,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    526,000Stock
                        compensation expense
                    
                    
                    —
                    
                    
                    —
                    
                    
                    896,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    896,000Net
                        loss
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (17,130,000
                    )
                    
                    (17,130,000
                    )Balance
                        at October 31, 2006
                    
                    
                    29,447,270
                    
                    
                    298,000
                    
                    
                    144,543,000
                    
                    
                    111,126
                    
                    
                    (133,000
                    )
                    
                    (127,520,000
                    )
                    
                    17,188,000Common
                        stock issued under employee stock purchase plan
                    
                    
                    154,082
                    
                    
                    2,000
                    
                    
                    137,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    139,000Purchase
                        of treasury stock
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    94,895
                    
                    
                    (94,000
                    )
                    
                    —
                    
                    
                    (94,000
                    )Issuance
                        of warrants
                    
                    
                    —
                    
                    
                    —
                    
                    
                    174,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    174,000Stock
                        compensation expense
                    
                    
                    —
                    
                    
                    —
                    
                    
                    679,000
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    679,000Net
                        loss
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (20,998,000
                    )
                    
                    (20,998,000
                    )Balance
                        at October 31, 2007
                    
                    
                    29,601,352
                    
                    $
                    300,000
                    
                    $
                    145,533,000
                    
                    
                    206,021
                    
                    $
                    (227,000
                    )
                    $
                    (148,518,000
                    )
                    $
                    (2,912,000
                    )


The
      accompanying notes are an integral part of the consolidated financial
      statements.




65




**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Statements of Cash Flows**




**For
                the Years Ended October 31,****2007**
            
            **2006**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (20,998,000
            )
            $
            (17,130,000
            )
            $
            (55,513,000
            )Loss
                from discontinued operations
            
            
            10,
                453,000
            
            
            7,684,000
            
            
            48,304,000Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            594,000
            
            
            628,000
            
            
            811,000Amortization
                of warrants
            
            
            606,000
            
            
            236,000
            
            
            —Provision
                for doubtful accounts
            
            
            (163,000
            )
            
            218,000
            
            
            705,000Provision
                for inventory reserve
            
            
            191,000
            
            
            (88,000
            )
            
            106,000Share-based
                compensation expense
            
            
            679,000
            
            
            895,000
            
            
            —Write-down
                of intangible assets
            
            
            —
            
            
            —
            
            
            329,000Loss
                on sale of equipment
            
            
            24,000
            
            
            —
            
            
            —Changes
                in assets and liabilities, net of acquisitions and discontinued
                operations:Accounts
                receivable
            
            
            485,000
            
            
            (914,000
            )
            
            (1,094,000
            )Inventories
            
            
            (453,000
            )
            
            (542,000
            )
            
            69,000Prepaid
                expenses and other assets
            
            
            (189,000
            )
            
            (432,000
            )
            
            451,000Accounts
                payable
            
            
            157,000
            
            
            243,000
            
            
            148,000Accrued
                expenses
            
            
            (417,000
            )
            
            (417,000
            )
            
            (490,000
            )Net
                cash used in continuing operations
            
            
            (9,031,000
            )
            
            (9,619,000
            )
            
            (6,174,000
            )Net
                cash used in discontinued operations
            
            
            (3,287,000
            )
            
            (6,302,000
            )
            
            (5,785,000
            )Net
                cash used in operating activities
            
            
            (12,318,000
            )
            
            (15,921,000
            )
            
            (11,959,000
            )Cash
                flows from investing activities:Proceeds
                from sale of marketable securities
            
            
            8,420,000
            
            
            2,573,000
            
            
            11,653,000Proceeds
                from sale of fixed assets
            
            
            15,000
            
            
            —
            
            
            —Purchases
                of marketable securities
            
            
            —
            
            
            (10,000,000
            )
            
            —Capital
                expenditures
            
            
            (177,000
            )
            
            (380,000
            )
            
            (202,000
            )Net
                cash provided by (used in) continuing operations
            
            
            8,258,000
            
            
            (7,807,000
            )
            
            11,451,000Net
                cash provided by (used in) discontinued operations
            
            
            398,000
            
            
            (94,000
            )
            
            (133,000
            )Net
                cash provided by (used in) investing activities
            
            
            8,656,000
            
            
            (7,901,000
            )
            
            11,318,000Cash
                flows from financing activities:Net
                proceeds from lines of credit
            
            
            3,323,000
            
            
            —
            
            
            —Net
                proceeds from sale of common stock
            
            
            —
            
            
            21,934,000
            
            
            —Net
                proceeds from stock options and stock purchase plan
            
            
            139,000
            
            
            165,000
            
            
            937,000Purchase
                of common stock as treasury stock
            
            
            (94,000
            )
            
            (4,000
            )
            
            —Net
                cash provided by financing activities
            
            
            3,368,000
            
            
            22,095,000
            
            
            937,000Net
                increase (decrease) in cash and cash equivalents
            
            
            (294,000
            )
            
            (1,727,000
            )
            
            296,000Cash
                and cash equivalents at beginning of period
            
            
            903,000
            
            
            2,630,000
            
            
            2,334,000Cash
                and cash equivalents at end of period
            
            $
            609,000
            
            $
            903,000
            
            $
            2,630,000





Supplemental
      disclosure:


In
      the
      fiscal year ended October 31, 2007 and
      2006, the Company issued warrants with an estimated fair value totaling $347,000
      and $526,000 to a bank and a debt provider as consideration for entering into
      and amending Loan and Security Agreements. See Note 12 to the Financial
      Statements.





There
      were no cash flows from investing activities from discontinued operations for
      all fiscal years.





In
      the
      fiscal year ended October 31, 2007 and 2006, the Company paid interest expense
      of $68,000 and $164,000, respectively. No interest was paid in 2005. In the
      fiscal years ended October 31, 2007, 2006 and 2005, the Company paid $13,000,
      $21,000 and $14,000 to Federal and state taxing authorities for income taxes,
      respectively.





The
      accompanying notes are an integral part of the consolidated financial
      statements.




66





**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Notes
      to Consolidated Financial Statements**





**NOTE
      1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





*Business*





North
      American Scientific, Inc. (the "Company"), a Delaware corporation, designs,
      develops and manufactures and sells radioisotopic
      products including brachytherapy seeds and accessories used in the treatment
      of
      cancer and non-therapeutic products used in medical, environmental, research
      and
      industrial applications.  The Company’s NOMOS operations (“NOMOS”), which
      developed and marketed products used during external beam radiation therapy
      for
      the treatment of cancer, was discontinued in September 2007. (See Note 2). 
The Company’s Theseus operation, which had been developing a radiopharmaceutical
      imaging agent for various medical diagnostic and monitoring functions was
      discontinued in 2004. (See
      Note 2).





*Management’s
      Plans*





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business.  We have incurred net losses of $21.0
      million, $17.1 million and $55.5 million for the years ended October 31, 2007,
      2006 and 2005, respectively, and have used cash in operations of $12.3 million,
      $15.9 million and $11.9 million for the years ended October 31, 2007, 2006
      and
      2005, respectively.  As of October 31, 2007, we had an accumulated deficit
      of $148.5 million, cash, cash equivalents and marketable securities of $0.6
      million, and $3.3 million of interest-bearing debt.





Based
      on
      the Company’s current operating plans, management believes that the Company’s
      existing cash resources and cash forecasted by management to be generated by
      operations, funds to be raised by the Company through an equity financing,
      as
      well as the Company’s anticipated available lines of credit, will be sufficient
      to meet working capital and capital requirements through at least the next
      twelve months. In this regard, the Company raised additional financing in the
      first quarter of fiscal 2008 to fund our continuing operations, support the
      further development and launch of ClearPath and other activities. However,
      there
      is no assurance that the Company will be successful with its plans. . If
      events and circumstances occur such that the Company does not meet its current
      operating plans or the Company’s line of credit (which presently expires on
      February 1, 2008) is insufficient or not available, the Company may be required
      to further reduce expenses or take other steps which could have a material
      adverse effect on our future performance, including but not limited to, the
      premature sale of some or all of our assets or product lines on undesirable
      terms, merger with or acquisition by another company on unsatisfactory terms,
      or
      the cessation of operations.




67




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




*Principles
      of Consolidation*





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. All significant inter-company accounts and transactions have
      been
      eliminated in consolidation.





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





*Use
      of Estimates*





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





*Cash
      and Cash Equivalents*





The
      Company considers all highly liquid investments purchased with an original
      or
      remaining maturity of three months or less to be cash equivalents.





*Inventories*





Inventories
      are valued at the lower of cost or market as determined under the first-in,
      first-out method. Costs include materials, labor and manufacturing
      overhead.





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





*Fair
      Value of Financial Instruments*





The
      carrying amounts of cash and cash equivalents, receivables, accounts payable,
      and accrued expenses approximate fair value because of their short maturities.
      The Company determines the fair value of its marketable securities based on
      quoted market prices.





*Marketable
      Securities*





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




68


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





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





*Accounts
      Receivable and Allowance for Doubtful Accounts*




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





*Equipment
      and Leasehold Improvements*





Equipment
      and leasehold improvements are stated at cost. Maintenance and repair costs
      are
      expensed as incurred, while improvements are capitalized. Gains or losses
      resulting from the disposition of assets are included in income. Depreciation
      and amortization are computed using the straight-line method over the estimated
      useful lives as follows:





Furniture,
                fixtures and equipment
            3-7
                yearsLeasehold
                improvements
            Lesser
                of the useful life or term of lease





*Intangible
      Assets*





License
      agreements are amortized on a straight-line basis over periods ranging up to
      fifteen years. The amortization periods of patents are based on the lives of
      the
      license agreements to which they are associated or the approximate remaining
      lives of the patents, whichever is shorter. Purchased intangible assets with
      finite lives are carried at cost less accumulated amortization and are amortized
      on a straight-line basis over periods ranging from three to twelve
      years.





The
      Company reviews for impairment whenever events and changes in circumstances
      indicate that such assets might be impaired. If the estimated future cash flows
      (undiscounted and without interest charges) from the use of an asset are less
      than the carrying value, a write-down is recorded to reduce the related asset
      to
      its estimated fair value.




69


*Long-Lived
      Assets*





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” long-lived assets, such as property, plant, and equipment,
      and purchased intangibles subject to amortization, are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. Recoverability of assets to be held and used
      is
      measured by a comparison of the carrying amount of an asset to the estimated
      undiscounted future cash flows expected to be generated by the asset. If the
      carrying amount of an asset exceeds its estimated future cash flows, an
      impairment charge is recognized equal to the amount by which the carrying amount
      of the asset exceeds the fair value of the asset. Assets to be disposed of
      are
      separately presented in the consolidated balance sheet and reported at the
      lower
      of the carrying amount or fair value less costs to sell, and are no longer
      depreciated.





Included
      in the Loss from Discontinued Operations at October 31, 2007, the Company
      recorded a $6.7 million impairment charge and $0.5 million in closing costs
      relating the disposition of certain NOMOS assets and liabilities. The impairment
      charge includes $5.5 million charge for impairment of NOMOS long-lived assets
      and a $1.2 million charge for the decrease in the carrying value of NOMOS
      inventory.




*Revenue
      Recognition*





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





*Research
      and Development Costs*





Research
      and development ("R&D") expenses are comprised primarily of the following
      types of costs incurred in performing R&D activities: salaries and benefits,
      allocated overhead, occupancy costs, clinical trial and related clinical
      manufacturing costs, contract services and other outside costs, and costs to
      acquire in-process research and development projects and technologies which
      have
      no alternative future use. Research and development costs are expensed as
      incurred.





*Stock-based
      Compensation*





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





The
      Company adopted SFAS 123(R) using the modified prospective transition method
      as
      of and for the fiscal year ended October 31, 2006. In accordance with the
      modified prospective transition method, the Company’s financial statements for
      prior periods have not been restated to reflect, and do not include, the impact
      of SFAS 123(R). Share-based compensation expense recognized is based on the
      value of the portion of share-based payment awards that is ultimately expected
      to vest. Share-based compensation expense recognized in the Company’s Condensed
      Consolidated Statement of Operations during the fiscal year ended October 31,
      2006 includes compensation expense for share-based payment awards granted prior
      to, but not yet vested as of, October 31, 2005 based on the grant date fair
      value estimated in accordance with the pro forma provisions of SFAS 123 and
      new
      stock option grants made during the fiscal year ended October 31, 2006. A total
      of 2,349,470 and 1,303,000 stock option grants were awarded to employees for
      the
      years ended October 31, 2007 and 2006, respectively, and a total of 115,000
      and
      150,000 stock option grants were awarded to directors for the years ended
      October 31, 2007 and 2006.




70


In
      conjunction with the adoption of SFAS 123(R), the Company elected to attribute
      the value of share-based compensation to expense using the straight-line method,
      which was previously used for its pro forma information required under SFAS
      123
      and SFAS 148. Share-based compensation expense related to stock options and
      employee stock purchases was $679,000 and $896,000 for the fiscal year ended
      October 31, 2007 and 2006, respectively, and was recorded in the financial
      statements as a component of general and administrative expense. Note that
      for
      the fiscal year ended October 31, 2006, a total of 650,500 stock options were
      granted that contain certain market conditions (“2006 Premium Price Awards”) The
      2006 Premium Price Awards are, to the extent provided by law, incentive stock
      options that have an exercise price of $3.35 per share, which is equal to 159%
      of the fair market value of the Company’s common stock on the grant date. The
      2006 Premium Price Awards also include a condition that provides that such
      stock
      options will only vest if the closing price of the Company's common stock is
      equal to or greater than $3.35 on each day over any consecutive four month
      period beginning on any date after the date of grant and ending no later than
      the third anniversary of the date of grant. If the market condition is not
      satisfied by the third anniversary of the date of grant, the 2006 Premium Price
      Awards will not vest. Subject to the attainment of the market condition by
      the
      Company, the 2006 Premium Price Awards will vest, if at all, in equal annual
      installments over a four year period beginning on the second anniversary of
      the
      grant date of March 16, 2006. The 2006 Premium Price Awards have a term of
      8
      years from the date of grant. The 2006 Premium Price Awards, share-based
      compensation expense has been estimated using a 40% forfeiture rate.





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




**Year
                  Ended October 31, 2005****Continuing**
                **Operations**
              
              **Discontinued**
                **Operations**
              
              **Total**Net
                  loss, as reported
              
              $
              (7,209,000
              )
              $
              (48,304,000
              )
              $
              (55,513,000
              )Add:
                  stock-based compensation recognized
              
              
              —
              
              
              —
              
              
              —Less:
                  total stock-based compensation (1)
              
              
              (1,116,000
              )
              
              (202,000
              )
              
              (1,318,000
              )Net
                  loss, as adjusted
              
              $
              (8,325,000
              )
              $
              (48,506,000
              )
              $
              (56,831,000
              )Basic
                  and diluted loss per share, as reported
              
              $
              (0.44
              )
              $
              (2.92
              )
              $
              (3.36
              )Basic
                  and diluted loss per share, as adjusted
              
              $
              (0.50
              )
              $
              (2.94
              )
              $
              (3.44
              )




(1)
      As
      determined under the fair value method.




71


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





*Net
      Loss per Share*





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





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





**Year
                Ended October 31,****2007**
            
            **2006**
            
            **2005**Net
                loss from continuing operations, as reported
            
            $
            (10,545,000
            )
            $
            (9,445,000
            )
            $
            (7,209,000
            )Net
                loss from discontinued operations, as reported
            
            $
            (10,453,000
            )
            $
            (7,685,000
            )
            $
            (48,304,000
            )Net
                loss, as reported
            
            $
            (20,998,000
            )
            $
            (17,130,000
            )
            $
            (55,513,000
            )Weighted
                average shares outstanding—Basic
            
            
            29,344,269
            
            
            21,956,565
            
            
            16,502,071Dilutive
                effect of stock options and warrants
            
            
            —
            
            
            —
            
            
            —Weighted
                average shares outstanding—Diluted
            
            
            29,344,269
            
            
            21,956,565
            
            
            16,502,071Basic
                and diluted loss from continuing operations, per share
            
            $
            (0.36
            )
            $
            (0.43
            )
            $
            (0.44
            )Basic
                and diluted loss from discontinued operations, per share
            
            
            (0.36
            )
            
            (0.35
            )
            
            (2.92
            )Basic
                and diluted net loss per share
            
            $
            (0.72
            )
            $
            (0.78
            )
            $
            (3.36
            )




72




Stock
      options to purchase 3,947,578, 3,073,788, and 2,862,849 common shares for the
      years ended October 31, 2007, 2006 and 2005, respectively, and stock
      warrants to purchase 2,368,299 and 594,722 common shares for the years ended
      October 31, 2007 and 2006 were not included in the computation of diluted loss
      per share for those years because their effect would have been anti-dilutive.
      There were no stock warrants outstanding for the year ended October 31,
      2005.





*Income
      Taxes*





The
      Company utilizes SFAS No. 109 “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized by applying
      enacted statutory tax rates applicable to future years to differences between
      the tax bases and financial reporting amounts of existing assets and
      liabilities. A valuation allowance is provided when it is more likely than
      not
      that all or some portion of deferred tax assets will not be
      realized.





*Diversification
      of Credit Risk*





The
      Company's financial instruments that are subject to concentrations of credit
      risk consist primarily of cash equivalents, marketable securities and accounts
      receivable, which are not collateralized. The Company's policy is to invest
      its
      cash with highly rated financial institutions in order to limit the amount
      of
      credit exposure. As of October 31, 2007, $1.0 million of the Company’s cash
      balance was in excess of the federally insured limit.





The
      Company extends differing levels of credit to customers, does not require
      collateral, and maintains reserves for potential credit losses based upon the
      collectibility of accounts receivable. The Company monitors the credit
      worthiness of its customers and makes provision whenever there are indications
      of potential credit losses.





*Significant
      Concentrations*





As
      of
      October 31, 2007, there were two customers that made up more than 10% of the
      accounts receivable and two customers which generated more than 10% of sales
      for
      the year ended October 31, 2007. There were no customers that made up more
      than
      10% of the accounts receivable at October 31, 2006, and no customers generated
      more than 10% of sales for the year ended October 31, 2006.





The
      Company relies on certain companies as the sole source of various materials
      in
      its manufacturing process. Any extended interruption in the supply of these
      materials could result in the failure to meet customer demand and materially
      impact future operating results. As of October 31, 2007 and 2006, the purchases
      from one of the Company’s vendors represented more than 10% of total purchases,
      and the balance owed to that vendor at October 31, 2007 and 2006 represented
      more than 10% of total accounts payable.





*Recent
      Accounting Pronouncements*





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* (FIN 48).  FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with FASB Statement No. 109, *Accounting
      for Income Taxes.* FIN 48 also prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return that results in a tax benefit.
      Additionally, FIN 48 provides guidance on de-recognition, income statement
      classification of interest and penalties, accounting in interim periods,
      disclosure and transition. This interpretation is effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      effect that the application of FIN 48 will have on its results of
      operations and financial condition.




73




In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. SFAS No. 157 applies under other accounting
      pronouncements that require or permit fair value measurements, and does not
      require any new fair value measurements. The application of SFAS No. 157,
      however, may change current practice within an organization. SFAS No. 157 is
      effective for all fiscal years beginning after November 15, 2007, with earlier
      application encouraged. The Company does not believe that SFAS No. 157 will
      have
      a material impact on the Company’s financial position, results of operations or
      cash flows.





In
      September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for
      Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
      Statements No. 87, 88, 106 and 132(R)”(“SFAS 158”). SFAS 158 requires us to
      (a) recognize a plan’s funded status in the statement of financial
      position, (b) measure a plan’s assets and its obligations that determine
      its funded status as of the end of the employer’s fiscal year and
      (c) recognize changes in the funded status of a defined postretirement plan
      in the year in which the changes occur through other comprehensive income.
      SFAS
      No. 158 is effective for fiscal years ending after December 15, 2006. The
      Company does not sponsor a defined benefit pension or post-retirement plans
      such
      employee related benefits. As such, SFAS No. 158 will not have a material impact
      on the Company’s financial position, results of operations or cash
      flows.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
      companies with an option to report selected financial assets and liabilities
      at
      fair value. The standard’s objective is to reduce both complexity in accounting
      for financial instruments and the volatility in earnings caused by measuring
      related assets and liabilities differently. The standard requires companies
      to
      provide additional information that will help investors and other users of
      financial statements to more easily understand the effect of the company’s
      choice to use fair value on its earnings. It also requires companies to display
      the fair value of those assets and liabilities for which the company has chosen
      to use fair value on the face of the balance sheet. The new standard does not
      eliminate disclosure requirements included in other accounting standards,
      including requirements for disclosures about fair value measurements included
      in
      SFAS 157, “Fair Value Measurements,” and SFAS 107, “Disclosures about Fair Value
      of Financial Instruments.” SFAS 159 is effective as of the start of fiscal years
      beginning after November 15, 2007. Early adoption is permitted. We are in
      the process of evaluating this standard and therefore have not yet determined
      the impact that the adoption of SFAS 159 will have on our financial position,
      results of operations or cash flows.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
      Combinations” (“SFAS 141 (R)”). The objective of SFAS 141 (R) is to improve
      reporting by creating greater consistency in the accounting and financial
      reporting of business combinations, resulting in more complete, comparable,
      and
      relevant information for investors and other users of financial statements.
      SFAS
      141 (R) requires the acquiring entity in a business combination to recognize
      all
      (and only) the assets acquired and liabilities assumed in the transaction;
      establishes the acquisition-date fair value as the measurement objective for
      all
      assets acquired and liabilities assumed; and requires the acquirer to disclose
      to investors and other users all of the information they need to evaluate and
      understand the nature and financial effect of the business combination. SFAS
      141
      (R) includes both core principles and pertinent application guidance,
      eliminating the need for numerous EITF issues and other interpretative guidance,
      thereby reducing the complexity of existing GAAP. SFAS 141 (R) is effective
      as
      of the start of fiscal years beginning after December 15, 2008. Early
      adoption is not allowed. The Company is in the process of evaluating this
      standard and therefore has not yet determined the impact that the adoption
      of
      SFAS 141 (R) will have on its financial position, results of operations or
      cash
      flows.




74


In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements” (“SFAS 160”) SFAS 160 improves the relevance,
      comparability and transparency of financial information provided to investors
      by
      requiring all entities to report non-controlling (minority) interests in
      subsidiaries in the same way—as equity in the consolidated financial statements.
      Moreover, SFAS160 eliminates the diversity that currently exists in accounting
      for transactions between an entity and non-controlling interests by requiring
      they be treated as equity transactions. SFAS 160 is effective as of the start
      of
      fiscal years beginning after December 15, 2008. Early adoption is not
      allowed. The Company is in the process of evaluating this standard and therefore
      have not yet determined the impact that the adoption of SFAS 160 will have
      on
      our financial position, results of operations or cash flows.





**NOTE
      2 - DISCONTINUED OPERATION**





*NOMOS*





On
      August
      3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology
      business (“NOMOS”), which develops and markets IMRT/IGRT products used during
      external beam radiation therapy for the treatment of cancer. The Company expects
      that the divestiture of NOMOS will allow it to better utilize financial
      resources to benefit the marketing and development of innovative brachytherapy
      products for the treatment of cancer The Company executed a purchase and sale
      agreement with Best Medical International, Inc. (“Best”) to purchase certain
      assets and to assume certain liabilities of NOMOS, with a carrying value of
      $0.4
      million at September 17, 2007 for $0.5 million. The Company incurred $0.5
      million in legal and other closing costs in connection with the sale. In
      connection with the divestiture of NOMOS, the Company determined that the
      carrying value of the NOMOS assets held for sale at July 31, 2007 exceeded
      their
      fair value, as determined by estimated future cash flows, and therefore,
      recorded a $6.7 million charge for the impairment of its net assets. The sale
      was completed on September 17, 2007. These amounts have been recorded as part
      of
      the loss from discontinued operations for the year ended October 31,
      2007.





At
      October 31, 2007, the Company has included in its Accounts Payable and Accrued
      Liabilities on its Balance Sheet $1.1 million of retained obligations to its
      vendors, customers and former employees of the NOMOS operation, to be paid
      in
      accordance with their terms.




At
      October 31, 2005, the Company recorded a $40.2 million impairment loss of NOMOS
      and RTP goodwill and intangible assets as a result of its evaluation of the
      fair
      value of its long-lived assets under SFAS 142 and SFAS 144. The impairment
      loss
      is included in the Loss from Discontinued Operations in the Consolidated
      Statements of Operations for the year ended October 31, 2005.




*THESEUS*





In
      September 2004, the Company discontinued its Theseus Operation which had been
      engaged in the research and development of a proprietary radiopharmaceutical
      agent (referred to as “Hynic-Annexin V”) since its acquisition in October 2000.
      As a result of the shut-down, the Company has presented the Theseus operation
      as
      a discontinued operation in the accompanying financial statements. For the
      fiscal years ended October 31, 2006 and 2005, the Company recorded a $0.3
      million and a $0.4 million income related to that discontinued operation as
      a
      result of changes in its estimated costs to shut down the operations of Theseus
      and the subsequent write off of the remaining accounts. There were no revenues
      relating to the Theseus discontinued operations for the years ended October
      31,
      2007, 2006 and 2005.




75




Summarized
      statement of earnings data for discontinued operations for the Fiscal Years
      ended October 31,:


**2007**
              
              **2006**
              
              **2005**Net
                  revenue (NOMOS)
              
              $
              10,309,000
              
              $
              16,394,000
              
              $
              20,192,000Loss
                  from discontinued operations before income tax benefit
                  (NOMOS)
              
              $
              (10,453,000
              )
              $
              (7,938,000
              )
              $
              (48,666,000
              )Income
                  from discontinued operations (Theseus)
              
              
              —
              
              
              253,000
              
              
              362,000Income
                  tax benefit, net of reserve
              
              
              —
              
              
              —
              
              
              —Loss
                  from discontinued operations
              
              $
              (10,453,000
              )
              $
              (7,685,000
              )
              $
              (48,304,000
              )$
              (10,453,000
              )
              $
              (7,685,000
              )
              $
              (48,304,000
              )Loss
                  from discontinued operations, per share
              
              $
              (0.36
              )
              $
              (0.35
              )
              $
              (2.92
              )


**NOTE
      3—MARKETABLE SECURITIES**





The
      Company had no investments in marketable securities at October 31, 2007. At
      October 31, 2006, Marketable securities consist of the following:





Securities
                held to maturity:Corporate
                and government bonds
            
            $
            4,886,000Commercial
                paper
            
            
            2,947,000Certificate
                of deposits and other
            
            
            587,0008,420,000Less:
                current portion
            
            
            (8,420,000
            )Non-current
                portion
            
            $
            —




76


The
      amortized cost of all held to maturity securities approximates fair value.
      At
      October 31, 2006, the entire balance of investments in debt securities
      matures within one year.





**NOTE
      4—ACCOUNTS RECEIVABLE**





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




Accounts
      receivable consist of the following:




**October 31,****2007**
              
              **2006**Accounts
                  receivable - trade
              
              $
              2,475,000
              
              $
              3,124,000Less:
                  allowance for doubtful accounts
              
              
              (179,000
              )
              
              (506,000
              )$
              2,296,000
              
              $
              2,618,000




The
      provision for doubtful accounts was $(0.2) million, $0.2 million, and $0.7
      million for the fiscal years ended October 31, 2007, 2006 and 2005,
      respectively.





**NOTE
      5—INVENTORIES**





Inventories
      consist of the following:


**October 31,****2007**
              
              **2006**Raw
                  materials
              
              $
              1,358,000
              
              $
              1,059,000Work
                  in process
              
              
              144,000
              
              
              140,000Finished
                  goods
              
              
              250,000
              
              
              135,000Reserve
                  for excess inventory
              
              
              (206,000
              )
              
              (50,000
              )$
              1,546,000
              
              $
              1,284,000




77




The
      Company recorded $0.2 million, $(0.1) million and $0.1 million charge for
      obsolete inventory for the years ended October 31, 2007, 2006 and 2005,
      respectively.





**NOTE
      6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**





Equipment
      and leasehold improvements consist of the following:


**October 31,****2007**
              
              **2006**Furniture,
                  fixtures and equipment
              
              $
              2,194,000
              
              $
              4,861,000Leasehold
                  improvements
              
              
              4,913,000
              
              
              2,134,0007,107,000
              
              
              6,995,000Less:
                  accumulated depreciation
              
              
              (6,216,000
              )
              
              (5,677,000
              )$
              891,000
              
              $
              1,318,000




Depreciation
      expense was $0.5 million, $0.6 million, and $0.8 million for the fiscal years
      ended October 31, 2007, 2006 and 2005, respectively.




**NOTE
      7—INTANGIBLE ASSETS**





Intangible
      assets consist of the following:


**October 31,****2007**
              
              **2006**Amortizable
                  intangible assetsPurchased
                  technology
              
              $
              98,000
              
              $
              98,000Existing
                  customer relationships
              
              
              11,000
              
              
              11,000Trademark
              
              
              19,000
              
              
              19,000Patents
                  and licenses
              
              
              158,000
              
              
              158,000286,000
              
              
              286,000Less:
                  accumulated amortization
              
              
              (176,000
              )
              
              (148,000
              )$
              110,000
              
              $
              138,000




78





Intangible
      assets have a remaining useful life of four years. Amortization expense was
      $28,000, $28,000 and $44,000 for the fiscal years ended October 31, 2007,
      2006 and 2005, respectively.





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





**For
                the Years Ended October 31,**2008
            
            $
            28,0002009
            
            
            28,0002010
            
            
            28,0002011
            
            
            26,000$
            110,000





**NOTE
      8 – BORROWINGS**





Borrowings
      consist of the following at October 31, 2007:





**October 31, 2007**Silicon
                Valley Bank -Line
                of credit
            
            $
            1,573,000Bridge
                loan sub-limit
            
            
            750,000Subordinated
                short-term note -Agility
                Capital, LLC
            
            
            1,000,000Total
                borrowings
            
            
            3.323,000Less:
                unamortized loan origination fees
            
            
            (82,000
            )Borrowings,
                net
            
            $
            3,241,000





*Lines
      of Credit*





*Silicon
      Valley Bank*





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




79


On
      January 12, 2006, the Company entered into a First Amendment to Loan and
      Security Agreement (the “First Amendment”) with the Bank.  The First
      Amendment revised certain terms of the Loan Agreement to provide an adjustment
      to the borrowing base formula and to permit liens in favor of a holder of
      subordinated debt that are subordinated to the liens of the Bank.  In
      addition, the First Amendment decreased the minimum tangible net worth that
      must
      be maintained by the Company under the Asset Based Terms of the Loan Agreement
      from $5 million to $1.5 million and granted the Bank a warrant to purchase
      39,683 shares of the Company’s common stock at an exercise price of $1.89 per
      share.  The warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $51,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $
            1.89Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            63
            %Risk-free
                interest rate
            
            
            4.9
            %Expected
                life
            
            
            5
                years





The
      value
      of the warrant is being amortized over the term of the line of credit at $5,100
      per month, and is included in Interest and Other Expense on the Income
      Statement. No borrowings were outstanding against the Line of Credit as of
      October 31, 2006.





On
      October 31, 2006, the Company entered into a Second Amendment to the Loan
      Agreement (the “Second Amendment”) with the Bank.  The Second Amendment
      extended the term of the line of credit to October 3, 2007 and revised certain
      terms of the Loan Agreement. Specifically, the Second Amendment decreased the
      amount available under the line of credit from $5 million to $4 million, and
      increased the minimum tangible net worth that must be maintained by the Company
      from $1.5 million to $5 million. Borrowings under the line of credit were
      subject to a borrowing base formula. Borrowings bore interest at the prime
      rate
      until such time as the Company’s quick ratio, which is defined as the ratio of
      unrestricted cash plus the Company’s net accounts receivable to the Company’s
      current liabilities, fell below 1.00 to 1.00. At such time as the Company’s
      quick ratio fell below 1.00 to 1.00, borrowings bore interest at the prime
      rate
      plus 1.50%, and the Company paid a fee of 0.50% per annum on the unused portion
      of the line of credit, and a collateral handling fee in an amount equal to
      $2,000 per month during 2007. The fees are included in Interest and Other
      Expenses at October 31, 2007.





On
      August
      24, 2007, the Company entered into a Third Amendment to the Loan Agreement
      (the
“Third Amendment”) with the Bank. The Third Amendment added a Bridge Loan
      Sub-limit to the Loan Agreement of up to $1,500,000 at an interest rate of
      prime
      plus 4.0%, subject to a borrowing base formula, and decreased the minimum
      tangible net worth that must be maintained by the Company from $5 million to
      $2
      million. The maturity date of the Bridge Loan Sub-limit shall be the earlier
      of
      October 3, 2007 or the date the Company closes a private investment public
      equity transaction. Concurrent with the Third Amendment, the Company issued
      the
      Bank a warrant for 300,000 shares of the Company’s common stock at an exercise
      price of $0.98, the closing price of the Company’s common stock on August 24,
      2007. The
      Company calculated the fair value of the warrant on the date of grant to be
      $175,000 using the Black-Scholes model incorporating the following
      assumptions:




80




Stock
                price
            
            $
            0.98Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            67
            %Risk-free
                interest rate
            
            
            4.4
            %Expected
                life
            
            
            5
                years





The
      value
      of the warrant has been amortized over the term of the line of credit, and
      is
      included in Interest and Other Expense on the Income Statement for the fiscal
      year ended October 31, 2007.





On
      September 14, 2007, the Company entered into a Fourth Amendment to the Loan
      Agreement (the “Fourth Amendment”) with the Bank. The Fourth Amendment included:
      (i) a forbearance by the Bank from exercising its rights and remedies against
      the Company, until such time as the Bank determines in its discretion to cease
      such forbearance, due to the default under the Loan Agreement resulting from
      the
      Company failing to comply with the tangible net worth covenant in the Loan
      Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a
      subordinated debt facility of up to $750,000 with Agility Capital LLC. In
      connection with the Fourth Amendment, the Bank consented to the NOMOS
      Transaction and released its lien on the NOMOS assets.





On
      October 3, 2007, the Company entered into a Fifth Amendment and Forbearance
      to
      the Loan Agreement (the “Fifth Amendment”) with the Bank. The Fifth Amendment
      includes: (i) an extension of the maturity date of the Loan Agreement to
      November 9, 2007, and an extension of the maturity date of the Bridge Loan
      Sub-limit to the earlier of November 9, 2007 or the date the Company closes
      a
      private investment public equity transaction, (ii) a forbearance by the Bank
      from exercising its rights and remedies against the Company, until such time
      as
      the Bank determines in its discretion to cease such forbearance, due to the
      defaults under the Loan Agreement resulting from the Company failing to comply
      with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
      August 31, 2007 and September 30, 2007, and (iii) a consent to an increase
      in
      the Company’s subordinated debt facility with Agility Capital LLC from $750,000
      to up to $1,000,000.





On
      October 29, 2007, the Company entered into a Sixth Amendment and Forbearance
      to
      the Loan Agreement (the “Sixth Amendment”) with the Bank. The Sixth Amendment
      includes: (i) an extension of the maturity date of the Loan Agreement to
      November 20, 2007, and an extension of the maturity date of the Bridge Loan
      Sub-limit to the earlier of November 20, 2007 or the date the Company closes
      a
      private investment public equity transaction, (ii) a forbearance by the Bank
      from exercising its rights and remedies against the Company, until such time
      as
      the Bank determines in its discretion to cease such forbearance, due to the
      defaults under the Loan Agreement resulting from the Company failing to comply
      with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
      August 31, 2007 and September 30, 2007, and (iii) a consent to the Company’s
      issuing up to $500,000 in unsecured subordinated debt to Mr. John Friede, or
      an
      entity owned or controlled by Mr. Friede. Mr. Friede is a significant
      stockholder of the Company, and was a director of the Company at the date of
      the
      agreement. The maturity date for the Loan Agreement and the Bridge Sub-limit
      agreement have been extended to the earlier of February 1, 2008 or the date
      the
      Company completes its private placement by the Seventh Amendment, entered into
      on November 20, 2007, and by the Eighth Amendment, entered into on December
      18,
      2007. (See Note 15 – Subsequent Events.).





The
      Company was not in compliance with the tangible net worth covenant of the Loan
      Agreement, as amended, with the Bank as of October 31, 2007. Under the terms
      of
      the Eighth Amendment between the Company and the Bank, the Bank agreed to
      continue its forbearance from exercising its rights and remedies against the
      Company, until such time as the Bank determines in its discretion to cease
      such
      forbearance, due to the defaults under the Loan Agreement resulting from the
      Company failing to comply with the tangible net worth covenant in the Loan
      Agreement as of July 31, 2007, August 31, 2007, September 30, 2007 and October
      31, 2007. (See Note 15—Subsequent Events)




81




Interest
      rates were 9.3% and 11.8% per annum on the Line
      of Credit and Bridge Sub-limit Agreement as of October 31, 2007, respectively,
      and 8.25% on the Line of Credit at October 31, 2006.





*Subordinated
      Short-Term Borrowings*





*Partners
      for Growth, LLC*





On
      March
      28, 2006, the Company entered into a Loan and Security Agreement (the “PFG Loan
      Agreement”) **** with
      Partners for Growth, LLC (“PFG”) for a secured, revolving line of credit of up
      to $4,000,000, which supplemented an existing line of credit provided by Silicon
      Valley Bank. The line of credit had a term of eighteen months, and earned
      interest at prime rate as quoted in the *Wall
      Street Journal* .
      Borrowings under the line of credit were subject to a borrowing base formula.
      Amounts owing under the line of credit were secured by all of the assets of
      the
      Company and were subordinated to amounts owing under the line of credit with
      Silicon Valley Bank. The line of credit did not contain financial covenants;
      however the Company was subject to other customary covenants, including
      reporting requirements, and events of default. In connection with the PFG Loan
      Agreement, the Company also granted PFG a warrant to purchase 395,000 shares
      of
      the Company’s common stock at an exercise price of $1.89 per share. As a result
      of the private placement of the Company’s common stock completed on June 7, 2006
      (see Note 9), and pursuant to the anti-dilution terms of the warrant issued
      to
      PFG, the warrant was amended to increase the number of shares of the Company’s
      common stock that PFG can purchase from 395,000 shares to 555,039 shares, and
      the exercise price was decreased from $1.89 per share to $1.35 per share. The
      warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $475,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $
            2.05Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            63
            %Risk-free
                interest rate
            
            
            4.9
            %Expected
                life
            
            
            5
                years





The
      value
      of the warrant was deferred and amortized over the life of the loan at $26,500
      per month and is included in Interest and Other Expense on the Income Statement.
      As of October 31, 2007, the value of the warrant was fully amortized. On August
      30, 2007 the Company terminated the PFG Loan Agreement with PFG by mutual
      consent. As a result of the termination, PFG released all liens on the Company’s
      assets. There were no outstanding borrowings under the PFG Loan Agreement at
      the
      date of termination.





*Agility
      Capital, LLC*





On
      September 21, 2007, the Company entered into a Loan Agreement (the “Agility Loan
      Agreement”) with Agility Capital, LLC (“Agility”). The Agility Loan Agreement
      provides for advances of up to $750,000 subject to the achievement of certain
      milestones. Amounts owing under the Agility Loan Agreement are secured by all
      of
      the Company's assets, and are subordinated to amounts owing under the line
      of
      credit with Silicon Valley Bank. The Agility Loan Agreement does not contain
      financial covenants; however, the Company is subject to other customary
      covenants, including reporting requirements, and events of default. The Company
      is obligated to pay interest on borrowings under the Agility Loan Agreement
      at
      the prime rate, as quoted in The Wall Street Journal, plus 6% . The Agility
      Loan
      Agreement term was 60 days, and all amounts outstanding thereunder were due
      and
      payable on November 20, 2007. The Company paid an origination fee of $20,000
      to
      Agility in connection with the Agility Loan Agreement. The
      origination fee and legal expenses were amortized over the term of the Agility
      Loan Agreement at $10,000 per month, and is included in Interest and Other
      Expense on the Income Statement. The Company further covered $15,000 of
      Agility’s legal fees in connection with the Agility Loan Agreement, which are
      recorded as general and administrative expenses.




82


On
      October 18, 2007, the Company entered into a First Amendment (the “First
      Amendment”) to the Agility Loan Agreement. The First Amendment provides for
      advances of up to $1,000,000. Amounts advanced under the Agility Loan Agreement
      are subordinated to the existing line of credit provided by Silicon Valley
      Bank.
      The First Amendment matured on November 20, 2007. In addition, within the First
      Amendment, Agility consented to the Company incurring up to $500,000 of
      subordinated unsecured indebtedness to John Friede or an entity owned or
      controlled by him (“Friede”), provided that Friede executes and delivers to
      Agility a subordination agreement pursuant to which the debt owed by the Company
      to Friede will be subordinated to the debt owed to Agility. Interest rate
      was 13.75%
      on the Loan Agreement as of October 31, 2007. The
      Company paid an origination fee of $10,000 to Agility in connection with the
      Agility Loan Agreement. The
      maturity date for the Agility Loan Agreement and the Bridge Sub-limit agreement
      have been extended to the earlier of February 1, 2008 or the date the Company
      completes its private placement by the Second Amendment, entered into on
      November 20, 2007, and by the Third Amendment, entered into on December 18,
      2007. (See Note 15 – Subsequent Events).





In
      connection with the Agility Loan Agreement, on September 21, 2007, the Company
      granted Agility a $262,500 warrant to purchase 345,395 shares of the Company’s
      common stock at an exercise price of $0.76 per share, as determined by the
      closing price of the Company’s common stock on September 20, 2007, the day
      immediately preceding the issue date of the warrant (the “Initial Warrant”). The
      Initial Warrant will expire in seven years unless previously exercised.





The
      Company calculated the fair value of the Initial Warrant on the date of grant
      to
      be $149,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $
            0.65Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            69
            %Risk-free
                interest rate
            
            
            4.4
            %Expected
                life
            
            
            7
                years





In
      connection with the First Amendment, and in exchange for Agility’s returning to
      the Company the Initial Warrant issued on September 21, 2007, the Company
      granted Agility a revised $362,500 warrant to purchase 476,974 shares of the
      Company’s common stock at an exercise price of $0.76 per share, as determined by
      the closing price of the Company’s common stock on September 20, 2007, the day
      immediately preceding the issue date of the Initial Warrant (the “Revised
      Warrant”). The Revised Warrant will expire in seven years unless previously
      exercised.





The
      Company calculated the fair value of the Revised Warrant on the date of grant
      to
      be $253,000 using the Black-Scholes model incorporating the following
      assumptions:





83





Stock
                price
            
            $
            0.56Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            71
            %Risk-free
                interest rate
            
            
            4.3
            %Expected
                life
            
            
            7
                years





The
      warrant price per share and the number of shares to be issued under the terms
      of
      the Revised Warrant will adjust to the price at which the Company next issues
      its common stock or other equity-linked securities, provided that any amount
      is
      outstanding under the Agility Loan Agreement. In evaluating the terms of the
      Revised Warrant under EITF 00-19 *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”* ,
      the
      Company was unable to determine the price at which it will next issue its common
      stock or other equity-linked securities at October 31, 2007. If the next issue
      price falls below a certain price point, the Company would not have sufficient
      authorized shares to settle the warrant after considering all other commitments
      that may require the issuance of its common stock during the life of the Revised
      Warrant. The Company concluded that the Revised Warrant is correctly classified
      as a liability and will be revalued to fair value each reporting period.





At
      October 31, 2007, the Company calculated the fair value of the Revised Warrant
      to be $173,000 using the Black-Scholes model incorporating the following
      assumptions:





Stock
                price
            
            $
            0.56Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            71
            %Risk-free
                interest rate
            
            
            4.3
            %Expected
                life
            
            
            7
                years





The
      Initial Warrant has been fair valued and classified as a liability at the time
      of the grant. The fair value of $148,830 for the Initial Warrant was classified
      as debt discount. The debt discount is a reduction on the face of value of
      the
      note, and is being amortized over the life of the loan. As of October 31, 2007,
      $109,000 has been amortized as interest and other expense in the statement
      of
      operations.





The
      Revised Warrant has been fair valued and the increase in the fair value between
      the Initial Warrant and the Revised Warrant has been recorded as an adjustment
      to the debt discount and amortized over the remaining term of the loan, since
      the Revised Warrant was granted in conjunction with the increase in the loan
      amount pursuant to the First Amendment to the Agility Loan Agreement. As of
      October 31, 2007, the debt discount has been amortized as interest and other
      expense in the statement of operations. The Company fair valued the Revised
      Warrant on October 31, 2007, and has adjusted the liability and the statement
      of
      operations for an insignificant amount.





In
      addition, under the terms of the Revised Warrant, the Company has until July
      31,
      2008 (the “Filing Date”), to file a registration statement on Form S-3 or
      applicable form covering the resale of the warrant shares on a registration
      statement (the “Registration Statement”) with the Securities Exchange Commission
      (the “SEC”). The Shares, or the common stock into which the Shares are
      convertible, shall be “Registrable Securities”, and the holder shall have the
      rights of a “Holder” under such investor rights agreement or registration rights
      agreement as the Company may enter into from time to time. If the Registration
      Statement (i) has not been filed with the SEC by the Filing Date, (ii) has
      not
      been declared effective by the SEC within 45 days thereafter, or (iii) after
      the
      Registration Statement is declared effective by the SEC, is suspended by Company
      or ceases to remain continuously effective as to all Shares for which it is
      required to be effective (a “Registration Default”), for any 30-day period (a
“Penalty Period”) during which the Registration Default remains uncured, the
      holder may acquire an additional number of Shares equal to 50,000 shares for
      each such penalty period, but not more that 600,000 shares in the aggregate.
      All
      expenses incurred in connection with any registration, qualification, exemption
      or compliance pursuant to these provisions shall be borne by
      Company.




84


**NOTE
      9—STOCKHOLDERS' EQUITY**





*Preferred
      Stock*





The
      Company has authorized the issuance of 2,000,000 shares of preferred stock;
      however, no shares have been issued. The designations, rights and preferences
      of
      any preferred stock that may be issued will be established by the Board of
      Directors at or before the time of such issuance.





*Authorized
      Shares of Common Stock*





Pursuant
      to a consent solicitation dated April 5, 2007, a majority of the Company’s
      shareholders consented to amend the Company’s Certificate of Incorporation to
      increase the total number of authorized sharesof
      common stock of the Company from 40,000,000 shares to 100,000,000 shares on
      April 20, 2007. The Company used some of the additional authorized shares to
      cover the grant of stock options to the Company’s President and Chief Executive
      Officer and the Company intends to use some of the shares for issuance in
      connection with the Company’s stock-based benefit plans, as well as for future
      equity financings and other corporate purposes.





*Sale
      of Common Stock and Warrants*





On
      June
      7, 2006, the Company completed a private placement of 12,291,934
      shares of its common stock at a purchase price of $1.95 per share as well as
      warrants to purchase an additional 6,145,967 shares of the Company’s common
      stock at an exercise price of $2.08 per share for an aggregate consideration
      of
      approximately $24.0 million (before cash commissions and expenses of
      approximately $2.0 million). The warrants are exercisable beginning 180 days
      after the date of closing until 7 years after the date of closing. The values
      of
      the warrants and common stock in excess of par value have been classified as
      stockholders’ equity in additional paid-in capital in our consolidated balance
      sheet as of October 31, 2006. The warrants were evaluated under SFAS 133 and
      EITF 00-19, and the Company determined that the warrants have been correctly
      classified as equity.





The
      shares of common stock sold to the investors and the shares of common stock
      issuable upon the exercise of the warrants are subject to certain registration
      rights as set forth in the Securities Purchase Agreements. Under the Securities
      Purchase Agreements, we agreed to file a registration statement with the
      Securities and Exchange Commission within 45 days after the closing of the
      transaction to register the resale of the shares of common stock and the shares
      of common stock issuable upon the exercise of the warrants. If we failed to
      file
      a registration statement within such time period or such registration statement
      was not declared effective within 90 days after the closing of the transaction,
      we would have been liable for certain specified liquidated damages as set forth
      in the Securities Purchase Agreements, except that the parties have agreed
      that
      the Company will not be liable for liquidated damages with respect to the
      warrants or the warrant shares. We have agreed to maintain the effectiveness
      of
      this registration statement until the earlier of such time as the passage of
      two
      years from the closing date or all of the securities registered under the
      registration statement may be sold under Rule 144(k) of the Securities Act
      of
      1933 or all of the securities registered under the registration statement have
      been sold. We will pay all expenses incurred in connection with the
      registration, except for underwriting discounts and commissions. Pursuant to
      the
      terms of the Securities Purchase Agreement, we filed a registration statement
      on
      Form S-3 with the Securities and Exchange Commission on July 21, 2006 to
      register the shares of common stock sold to the investors and the shares of
      common stock issuable upon the exercise of the warrants. The registration
      statement was declared effective by the Securities and Exchange Commission
      on
      August 4, 2006.




85


The
      Securities Purchase Agreements required that we increase the number of members
      of the Board of Directors of the Company (the “Board”) from seven members to
      nine members. Under the Securities Purchase Agreements, Three Arch Partners,
      one
      of the investors, has the right to designate two members to the Board so long
      as
      Three Arch Partners beneficially owns greater than 3,500,000 shares of common
      stock (including shares of common stock issuable upon exercise of the warrants,
      and as appropriately adjusted for stock splits, stock dividends and
      recapitalizations) and the right to designate one member to the Board so long
      as
      Three Arch Partners beneficially owns greater than 2,000,000 shares of common
      stock (including shares of common stock issuable upon exercise of the warrants,
      and as appropriately adjusted for stock splits, stock dividends and
      recapitalizations). In accordance with the terms of the Securities Purchase
      Agreements, we increased the number of members of our Board from seven members
      to nine members and Three Arch Partners designated Wilfred E. Jaeger, M.D.
      and
      Roderick A. Young to fill the two vacancies. Our Board elected Dr. Jaeger and
      Mr. Young to serve as members of the Board on June 13, 2006.





In
      connection with the issuance of the warrants and upon closing of the
      transaction, we entered into a Warrant Agreement with our transfer agent
      relating to the warrant of Three Arch Partners and a different Warrant Agreement
      with our transfer agent relating to the warrants of the investors other than
      Three Arch Partners. The material differences between the two Warrant Agreements
      are described below.





The
      Three
      Arch Partners Warrant Agreement includes a non-waivable provision that provides
      that the number of shares issuable upon exercise of the warrants that may be
      acquired by Three Arch Partners will be limited to the extent necessary to
      assure that, following such exercise, the total number of shares of common
      stock
      then beneficially owned by Three Arch Partners and its affiliates does not
      exceed 19.9% of the total number of issued and outstanding shares of common
      stock as of the date of such exercise (including for such purpose the shares
      of
      common stock issuable upon such exercise of warrants), unless approved by our
      stockholders prior to such exercise. The Warrant Agreement relating to the
      warrants of the other investors does not include such a provision.





The
      Warrant Agreement relating to the investors other than Three Arch Partners
      includes a waivable provision that provides that the number of shares issuable
      upon exercise of the warrants that may be acquired by a registered holder of
      warrants upon an exercise of warrants will be limited to the extent necessary
      to
      assure that, following such exercise, the total number of shares of common
      stock
      then beneficially owned by its holder and its affiliates does not exceed 4.99%
      of the total number of issued and outstanding shares of common stock (including
      for such purpose the shares of common stock issuable upon such exercise of
      warrants). This provision may be waived by a registered holder of warrants,
      at
      the election of such holder, upon not less than 61 days prior notice to us.
      This
      Warrant Agreement also contains a non-waivable provision that provides that
      the
      number of shares issuable upon the exercise of the warrants that may be acquired
      by a registered holder of warrants upon an exercise of warrants will be limited
      to the extent necessary to assure that, following such exercise, the total
      number of shares of common stock then beneficially owned by such holder and
      its
      affiliates does not exceed 9.99% of the total number of issued and outstanding
      shares of common stock (including for such purpose the shares of common stock
      issuable upon such exercise of warrants). The Warrant Agreement relating to
      the
      warrants of Three Arch Partners does not include such provisions.




86




*Stock
      Options*





The
      Company's 1996 Stock Option Plan ("1996 Plan"), as amended April 6, 2001,
      provided for the issuance of incentive stock options to employees of the Company
      and non-qualified options to employees, directors and consultants of the Company
      with exercise prices equal to the fair market value of the Company's stock
      on
      the date of grant. Certain options were immediately exercisable while other
      options vested over periods up to four years. The options expire ten years
      from
      the date of grant. The 1996 Plan provided for the automatic increase on
      January 1 of each year, beginning with calendar year 2002 and continuing
      through calendar year 2004, by a number of shares equal to 3.5% of the total
      number of shares of the Company's Common Stock outstanding on the last trading
      day in the immediately preceding calendar year. In May 2004, the Company’s
      shareholders approved proposals to amend the 1996 Plan to make an additional
      600,000 shares available for issuance under the plan and to permit the issuance
      of 1,362,589 replacement options in connection with the acquisition of NOMOS.
      From November 1, 2005 through March 31, 2006, stock options for 1,303,000 shares
      were granted to employees under the 1996 Plan. The 1996 Plan expired on April
      1,
      2006.





On
      May 3,
      2006, the Company’s shareholders approved the North American Scientific, Inc.
      2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
      1,700,000 shares, plus any shares from the 1996 Plan that are subsequently
      terminated, expire unexercised or forfeited, to employees of the Company through
      incentive stock options, non-qualified options, stock appreciation rights,
      restricted stock and restricted stock units. The exercise price of an option
      is
      equal to the fair market value of the Company’s stock on the date of the grant.
      As of October 31, 2007, 1,401,275 shares were terminated, expired unexercised
      or
      forfeited in the 1996 Plan and were transferred to the 2006 Plan. During the
      fiscal year ended October 31, 2007, 1,149,470 options underlying shares of
      the
      Company’s common stock were granted under the 2006 Plan. As of October 31, 2007,
      1,986,805 shares are available for grant under the 2006 Plan.





In
      March 2003, the Company's shareholders approved the 2003 Non-Employee
      Directors' Equity Compensation Plan ("Directors' Plan"). The Directors' Plan
      supersedes prior provisions for grants of stock options to non-employee
      directors contained in the 1996 Plan. Under the Directors' Plan, the Company
      may
      issue up to 500,000 shares to non-employee directors of the Company through
      non-qualified options or restricted stock. The exercise price of an option
      is
      equal to the fair market value of the Company's stock on the date of grant.
      Options and restricted stock vest equally over a three-year period. The options
      expire ten years from the date of grant. In the fiscal years ended October
      31,
      2007 and 2006, stock options for 115,000 shares and 150,000 shares,
      respectively, were granted to non-employee directors under the Directors’ Plan.
      At October 31, 2007, there were 15,000 shares available for grant under the
      Directors’ Plan.





87







On
      April
      23, 2007, the Company granted stock options with respect to 1,800,000 shares
      of
      its common stock in connection with the employment by the Company of its new
      CEO. (See Note 10 – Commitments and Contingencies). Options with respect to
      600,000 shares of the Company’s common stock were issued under the 2006 Plan.
      Options with respect to the remaining 1,200,000 shares of the Company’s common
      stock were issued as a stand-alone grant outside the 2006 Plan and approved
      by
      the written consent of a majority of shareholders on April 20, 2007. The stock
      options have an exercise price of $1.16, which is equal to the fair market
      value
      per share of the Company’s common stock on the grant date. All of the options
      have a term of ten years and vest monthly over a four-year period. The options
      remain exercisable until the earlier of the expiration of the term of the option
      or (i) three months following Mr. Rush’s date of termination in the case of
      termination for reasons other than cause, death or disability (as such terms
      are
      defined in his employment agreement) or (ii) 12 months following Mr. Rush’s date
      of termination in the case of termination on account of death or disability.
      In
      the event that Mr. Rush is terminated for cause, all outstanding options,
      whether vested or not, will immediately lapse.




At
      October 31, 2007, a total of 6,508,918 shares of the Company’s common stock were
      reserved for issuance under the stock option plans. The following table
      summarizes stock option activity for both plans:




**Options
                Outstanding****Options**
              **Available**
              **for
                Grant**
            
            **Number**
              **Outstanding**
            
            **Exercise Price**Balance
                at October 31, 2004
            
            
            1,579,742
            
            
            3,253,821
            
            
            $0.03
                - $24.54Granted
            
            
            (275,000
            )
            
            275,000
            
            
            $2.25
                - $3.66Forfeited
                and expired
            
            
            427,699
            
            
            (427,699
            )
            
            $1.11
                - $16.75Exercised
            
            
            —
            
            
            (687,013
            )
            
            $1.11
                - $1.96Balance
                at October 31, 2005
            
            
            1,732,441
            
            
            2,414,109
            
            
            $0.03
                - $24.54Granted
            
            
            (1,453,000
            )
            
            1,453,000
            
            
            $1.92
                - $3.35Forfeited
                and expired
            
            
            (194,441
            )
            
            (426,618
            )
            
            $1.11
                - $16.75Exercised
            
            
            —
            
            
            (2,186
            )
            
            $1.11
                - $1.12Additional
                shares reserved
            
            
            1,700,000
            
            
            —
            
            
            —Balance
                at October 31, 2006
            
            
            1,785,000
            
            
            3,438,305
            
            
            $0.03
                - $24.54Granted
            
            
            (2,464,470
            )
            
            2,464,470
            
            
            $0.93
                - $1.23Forfeited
                and expired
            
            
            1,481,275
            
            
            (1,395,662
            )
            
            $0.70
                - $24.54Exercised
            
            
            —
            
            
            —
            
            
            —Additional
                shares reserved
            
            
            1,200,000
            
            
            —
            
            
            —Balance
                at October 31, 2007
            
            
            2,001,805
            
            
            4,507,113
            
            
            $0.03
                - $23.50




88




There
      were 1,669,521, 1,878,663 and 1,873,220 options exercisable with weighted
      average exercise prices of $6.94, $8.57 and $8.79 at October 31, 2007, 2006
      and
      2005, respectively.





The
      following table summarizes options outstanding at October 31, 2007 and the
      related weighted average exercise price and remaining contractual life
      information:




**Employee
                  Options Outstanding**
              
              **Employee
                  Options Exercisable****Range
                  of**
                **Exercise
                  Prices**
              
              **Shares**
              
              **Weighted
                  Avg.**
                **Remaining**
                **Contractual**
                **Life
                  (Years)**
              
              **Weighted**
                **Avg.**
                **Exercise**
                **Price**
              
              **Shares**
              
              **Weighted**
                **Avg.**
                **Exercise**
                **Price**$0.03
                  - $0.94
              
              
              521,470
              
              
              9.83
              
              $
              0.94
              
              
              7,000
              
              $
              0.03$0.95
                  - $1.16
              
              
              1,800,000
              
              
              9.48
              
              
              1.16
              
              
              225,000
              
              
              1.16$1.17
                  - $3.18
              
              
              768,750
              
              
              6.52
              
              
              2.27
              
              
              299,628
              
              
              2.59$3.19
                  - $7.31
              
              
              700,968
              
              
              4.66
              
              
              5.52
              
              
              434,468
              
              
              6.85$7.32
                  - $23.50
              
              
              715,925
              
              
              4.13
              
              
              10.70
              
              
              703,425
              
              
              10.764,507,113
              
              
              7.41
              
              $
              3.52
              
              
              1,669,521
              
              $
              6.94




The
      average fair value for accounting purposes of options granted was $1.12, $1.09
      and $2.47 for the years ended October 31, 2007, 2006 and 2005,
      respectively.





The
      following table summarizes the weighted average price, weighted average
      remaining contractual life and intrinsic value for granted and exercisable
      options outstanding as of October 31, 2007 and 2006:




**Number
                of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Weighted
                Avg.**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Intrinsic****Value***As
                of October 31, 2006:*Employee
                Options Outstanding
            
            
            3,438,305
            
            $
            6.06
            
            
            5.81
            
            $
            56,500Employee
                Options Expected to Vest
            
            
            1,691,925
            
            $
            2.68
            
            
            7.14
            
            $
            —Employee
                Options Exercisable
            
            
            1,746,380
            
            $
            8.57
            
            
            4.52
            
            $
            56,500*As
                of October 31, 2007*Employee
                Options Outstanding
            
            
            4,507,113
            
            $
            3.52
            
            
            7.54
            
            $
            3,710Employee
                Options Expected to Vest
            
            
            2,837,592
            
            $
            0.56
            
            
            2.82
            
            $
            —Employee
                Options Exercisable
            
            
            1,669,521
            
            $
            6.94
            
            
            5.26
            
            $
            3,710





89




*Fair
      Value Disclosures*





The
      Company calculated the fair value of each option grant on the respective date
      of
      grant using the Black-Scholes option-pricing model as prescribed by
      SFAS 123(R) using the following assumptions:





**Year
                Ended October 31,****2007**
            
            **2006**
            
            **2005**Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            61
            %
            
            63
            %
            
            82
            %Risk-free
                interest rate
            
            
            4.8
            %
            
            4.9
            %
            
            3.9
            %Expected
                life
            
            
            5
                years
            
            
            5
                years
            
            
            5
                years





*Stockholders'
      Rights Plan*





In
      October 1998, the Board of Directors of the Company implemented a rights
      agreement to protect stockholders' rights in the event of a proposed takeover
      of
      the Company. In the case of a triggering event, each right entitles the
      Company's stockholders to buy, for $80, $160 worth of common stock for each
      share of common stock held. The rights will become exercisable only if a person
      or group acquires, or commences a tender offer to acquire, 15% or more of the
      Company's common stock. The rights, which expire in October 2008, are
      redeemable at the Company's option for $0.001 per right. The Company also has
      the ability to amend the rights, subject to certain limitations. On May 2,
      2007,
      the Company entered into a Third Amendment to Rights Agreement, which amended
      the Rights Agreement to provide, among other things, that the Board of Directors
      of the Company may determine that a person who would otherwise become an
      Acquiring Person, as defined in the amendment, has become such inadvertently,
      and provided certain conditions are satisfied, that such person is not an
      Acquiring Person for any purposes of the Rights Agreement.




*Employee
      Stock Purchase Plan*





In
      March
      2000, the Board of Directors authorized an Employee Stock Purchase Plan (the
      “ESPP") under which 300,000 shares of the Company's common stock are reserved
      for issuance. Eligible employees may authorize payroll deductions of up to
      15%
      of their salary to purchase shares of the Company's common stock at a discount
      of up to 15% of the market value at certain plan-defined dates. For the years
      ended October 31, 2007, 2006 and 2005, the shares issued under the ESPP were
      154,082, 96,489 and 59,742 shares, respectively. On June 5, 2007, the Board
      of
      Directors approved a 300,000 share increase to 600,000 authorized shares for
      the
      ESPP. At October 31, 2007 and 2006, 219,757 and 73,839 shares were available
      for
      issuance under the ESPP, respectively.





*Common
      Stock Repurchase Program*





In
      October 2001, the Board of Directors authorized a stock repurchase program
      to acquire up to $10 million of the Company's common stock in the open
      market at any time. The number of shares of common stock actually acquired
      by
      the Company will depend on subsequent developments and corporate needs, and
      the
      repurchase of shares may be interrupted or discontinued at any time. As of
      October 31, 2007 and 2006, a total of 116,995 shares and 22,100 shares had
      been repurchased by the Company at a cost of $227,000 and $132,000, respectively
      and are reflected as Treasury Stock on the Balance Sheet at the respective
      dates.




90




**NOTE
      10—INCOME TAXES**





The
      provision (benefit) for income taxes is comprised as follows:




**Year
                  Ended October 31,****2007**
              
              **2006**
              
              **2005**Current:Federal
              
              $
              —
              
              $
              —
              
              $
              —State
              
              
              —
              
              
              —
              
              
              ——
              
              
              —
              
              
              —Deferred:Federal
              
              
              (6,037
              )
              
              (5,100
              )
              
              12,025State
              
              
              (1,567
              )
              
              (1,273
              )
              
              3,446Valuation
                  Allowance
              
              
              7,604
              
              
              6,373
              
              
              (15,471
              )—
              
              
              —
              
              
              —$
              —
              
              $
              —
              
              $
              —




The
      Company did not recognize a benefit for the loss during the years ended October
      31, 2007, 2006, and 2005. Deferred income taxes reflect the net tax effects
      of
      temporary differences between the carrying amount of assets and liabilities
      for
      financial reporting purposes and the amounts used for income tax purposes.
      Significant components of the Company's net deferred tax assets are as
      follows:





**October
                31,****2007**
            
            **2006**Deferred
                tax assets :Accrued
                liabilities
            
            $
            465,000
            
            $
            586,000Accrued
                decommissioning
            
            
            —
            
            
            158,000Allowance
                for doubtful accounts
            
            
            192,000
            
            
            614,000Inventory
                reserve and capitalized inventory
            
            
            163,000
            
            
            1,898,000Other
            
            
            10,000
            
            
            19,000Depreciation
                and amortization
            
            
            1,004,000
            
            
            2,091,000Tax
                credits
            
            
            4,814,000
            
            
            4,814,000Theseus
                impairment
            
            
            1,850,000
            
            
            1,850,000Net
                operating loss carryforwards
            
            
            59,173,000
            
            
            50,497,00067,671,000
            
            
            62,527,000Deferred
                tax liabilities:Purchased
                intangible assets
            
            
            —
            
            
            (2,248,000
            )Other
            
            
            —
            
            
            (212,000
            )—
            
            
            (2,460,000
            )Net
                deferred tax assets
            
            
            67,671,000
            
            
            60,067,000Less:
                valuation allowance
            
            
            (67,671,000
            )
            
            (60,067,000
            )$
            —
            
            $
            —




91




Based
      upon the level of historical losses and projections of future taxable income
      over the periods in which the deferred tax assets are deductible, a valuation
      allowance has been recorded for tax assets as the Company believes that it
      is
      more likely than not, based upon available evidence, that such assets will
      not
      be realized.





At
      October 31, 2007, the Company had federal net operating loss carryforwards
      of
      approximately $144 million which begin to expire in 2013. The Company also
      has
      state NOL carryforwards of approximately $116 million which begin to expire
      in
      2008. The Company is evaluating its state NOL carryforwards to deterimine its
      ability to ultimately realize the benefits of the NOL carryforwards. The Company
      has federal research and experimentation credits of approximately $5 million
      which begin to expire in 2008, of which $3 million was acquired in the NOMOS
      acquisition. The use of net operating loss and tax credit carryforwards are
      subject to statutory limitations upon a change in control during a three year
      rolling period.





A
      reconciliation of tax expense computed at the U.S. federal statutory rate is
      as
      follows:




**Year
                Ended October 31,****2007**
            
            **2006**
            
            **2005**Federal
                tax provision at U.S. statutory rate
            
            
            (34
            )%
            
            (34
            )%
            
            (34
            )%State
                income taxes, net of federal tax benefit
            
            
            —
            
            
            —
            
            
            —Impairment
                of Goodwill
            
            
            —
            
            
            —
            
            
            10Other
            
            
            —
            
            
            1
            
            
            3Other
                non-deductible expenses
            
            
            2
            
            
            —
            
            
            —Tax
                credits
            
            
            —
            
            
            —
            
            
            —Valuation
                allowance
            
            
            32
            
            
            33
            
            
            21—
            %
            
            —
            %
            
            —
            %





92




**NOTE
      11—RETIREMENT PLAN**





The
      Company has a 401(k) retirement plan that allows eligible employees to
      contribute up to the statutory annual limits. Under this plan, the Company
      makes
      certain contributions based upon the compensation of eligible employees and
      makes additional matching contributions for those employees who elect to
      contribute to the plan. The Company's expense for its plan totaled $85,000,
      $78,000 and $46,000, for the years ended October 31, 2007, 2006, and 2005,
      respectively.





**NOTE
      12—COMMITMENTS AND CONTINGENCIES**





*Contract
      Commitments*





The
      Company has entered into purchase commitments of $0.1 million to suppliers
      under
      blanket purchase orders. The blanket purchase orders expire when the designated
      quantities have been purchased.




*Lease
      Commitments*





The
      Company leases facilities and equipment under non-cancelable operating lease
      agreements. Future minimum lease payments are subject to annual adjustment
      for
      increases in the Consumer Price Index. Total rent expense for the years ended
      October 31, 2007, 2006 and 2005 was $379,000, $373,000 and $380,000,
      respectively.




Future
      minimum annual lease payments under all operating leases are as
      follows:





**For
                the Years Ended October 31,**2008
            
            $
            380,0002009
            
            
            20,000$
            400,000





*Third
      Party License Agreements*




We
      license from third parties some of the technologies used in our core products.
      The license agreements are described in Item 1. of this report under Third-Party
      License Agreements. The following are the minimum royalty amounts under each
      of
      the agreements:




**Licensor**IdeaMatrix,
                Inc.
            
            $
            500,000University
                of South Florida Research Foundation, Inc.
            
            
            325,000$
            825,000




93




The
      royalty payments for IdeaMatrix, Inc. are payable annually at $125,000 through
      2011, and for the University of South Florida Research Foundation, Ind.,
      annually at $50,000 through 2009, increasing to $75,000 in 2010 through 2012.




*Employment
      Agreements*




On
      March
      22, 2007, the Company entered into an employment agreement (the “Agreement”)
      with John B. Rush in connection with his employment as the Company’s new
      President and Chief Executive Officer. Mr. Rush’s base salary will be $350,000.
      Mr. Rush will also be eligible to receive an annual bonus, if any, based upon
      performance goals approved by the Board or the Compensation Committee of the
      Board, in consultation with Mr. Rush, in an amount, not to exceed 60% of his
      base salary, to be determined by the Compensation Committee. For the period
      beginning on April 23, 2007 and ending the last day of the Company’s fiscal
      year, October 31, 2007, Mr. Rush will receive a guaranteed, minimum, pro-rated
      bonus of 30% of his base salary. The Company has accrued $115,000 for this
      obligation as of October 31, 2007, included in Accrued Liabilities and General
      and Administrative Expenses.





On
      April
      23, 2007, the Company granted stock options to Mr. Rush with respect to
      1,800,000 shares of our common stock. The stock options have an exercise price
      of $1.16, which was equal to the fair market value per share of our common
      stock
      on the grant date. In addition, in the event that within 24 months of April
      23,
      2007, the Company issues additional shares of stock in connection with raising
      capital in a private placement transaction, the Company is required to grant
      options to Mr. Rush to acquire an additional number of shares of common stock
      equal to 3% of the number of shares issued in connection with such transaction
      (the “Additional Shares”).





94




All
      of
      the options have a term of ten years and vest monthly over a four-year period.
      The options remain exercisable until the earlier of the expiration of the term
      of the option or (i) three months following Mr. Rush’s date of termination in
      the case of termination for reasons other than cause, death or disability (as
      such terms are defined in his employment agreement) or (ii) 12 months following
      Mr. Rush’s date of termination in the case of termination on account of death or
      disability. In the event that Mr. Rush is terminated for cause, all outstanding
      options, whether vested or not, will immediately lapse.





In
      the
      event (a) Mr. Rush’s employment is terminated by the Company at any time after
      April 23, 2007 for any reason other than Mr. Rush’s death, disability or cause
      or (b) Mr. Rush resigns for a “good reason” (as defined in the Agreement), Mr.
      Rush will receive his base salary in effect on the date of termination for
      a
      period ending 12 months following the date of termination.




In
      the
      event of a “Control Termination” (as defined in the Agreement), Mr. Rush will be
      entitled to receive his base salary in effect on the date of termination and
      group health benefits for a period ending 12 months following the date of
      termination and, in addition, Mr. Rush shall, as of the date of the Control
      Termination, become fully vested in any unvested options previously granted
      to
      him.




Mr.
      Rush’s employment agreement also provides that the Company will make a tax
      gross-up payment to Mr. Rush in the event that payments to Mr. Rush on account
      of a change in control constitute an excess parachute payment subject to an
      excise tax under Section 4999 of the Code. Similarly, the Company will make
      a
      tax gross-up payment to Mr. Rush for any excise tax in the event that amounts
      or
      benefits payable to Mr. Rush are determined to be subject to the excise tax
      on
      nonqualified deferred compensation under Section 409A of the Code.





In
      the
      event that any amount payable upon Mr. Rush’s termination would be determined to
      be “non-qualified deferred compensation” subject to Section 409A of the Code,
      the Company may delay payment for six months, in order to comply with Section
      409A of the Code.




On
      November 2, 2006, the Company announced that Mr. Cutrer will transition from
      the
      position of President and Chief Executive Officer to become the Company’s
      Executive Vice President and Chief Technology Officer upon his successor being
      identified and joining the Company. As part of this transition process, on
      December 21, 2006, the Company and Mr. Cutrer entered into a First Amended
      and
      Restated Employment Agreement (the “Amended Agreement”), which became effective
      with the employment of Mr. Rush (the “Effective Date”). Under the Amended
      Agreement, Mr. Cutrer’s annual base salary will be $280,000. In addition, Mr.
      Cutrer will be eligible to receive an annual bonus, if any, based upon
      performance goals approved by the Compensation Committee or the Board in an
      amount to be determined in the sole discretion of the Compensation Committee
      or
      the Board. If Mr. Cutrer meets or exceeds the performance goals for a particular
      measuring year, the annual bonus may not be less than 25% of his base
      salary.




In
      the
      event Mr. Cutrer’s employment terminates on or before October 31, 2007 for (a)
      any reason other than Mr. Cutrer’s death, disability or “cause” (as defined in
      the Amended Agreement) or (b) Mr. Cutrer resigns for “good reason” (as defined
      in the Amended Agreement), Mr. Cutrer will continue to receive his base salary
      in effect on the termination date through October 31, 2007.




In
      the event Mr. Cutrer’s employment terminates at any time after the Effective
      Date for any reason, except for a “Control Termination” (as defined in the
      Amended Agreement), and in addition to any payment that may be due if he is
      terminated on or before October 31, 2007 as noted above, Mr. Cutrer will be
      entitled to receive (a) severance pay equal to three times his highest base
      salary during his employment by the Company payable over a three year period
      in
      accordance with the Company’s standard payroll practices for salaried employees,
      and (b) any unvested stock options shall immediately vest as of the termination
      date. In addition, the exercise date of all stock options that, on the
      termination date, have an exercise price greater than the fair market value
      of
      the Company’s common stock will be extended to the later of (i) the last day of
      the year in which the stock option would otherwise have expired or (ii) two
      and
      a half months after the date on which the stock option would otherwise have
      expired (or such later date as may be permitted by final regulations issued
      pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the
      “Code”), but in no event later than the date on which the stock option would
      have expired had Mr. Cutrer’s employment not been terminated).




95




In
      the event of a Control Termination, Mr. Cutrer will be entitled to a “Control
      Severance Payment” in the gross amount equal to the total of: (a) three years’
base salary; (b) the highest annual bonus paid to Mr. Cutrer in the three years
      prior to such termination multiplied by three; (c) the Black-Scholes valuation
      of the stock options received by Mr. Cutrer during the one year prior to such
      termination multiplied by three (3); and (d) a tax gross-up payment if any
      severance payment constitutes an excess parachute payment subject to the excise
      tax imposed by Section 4999 of the Code. The Control Severance Payment will
      be
      paid as salary continuation ratably over a one year period. In addition, any
      unvested stock options will immediately vest as of the termination
      date.




The
      Company also maintains employment agreements with certain other key management.
      The agreements provide for minimum base salaries, eligibility for stock options
      and performance bonuses and severance payments.




*Litigation*





In
      November 2005, the Company was served with a complaint filed in U.S. District
      Court in Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s
      six count complaint alleges breach of a confidentiality agreement, fraud, patent
      infringement, wrongful interference with contractual relations, violation of
      the
      Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
      Practices Act. WWMT alleges that the Company fraudulently obtained WWMT’s
      confidential information during negotiations to purchase WWMT in 2004 and that
      once the Company acquired that information, it allegedly learned that Richard
      Terwilliger, (our former Vice President of New Product Development) owned
      certain patent rights and that the Company began trying to inappropriately
      gain
      property rights by hiring him away from WWMT. The Company was served with this
      matter at approximately the same time Mr. Terwilliger was served with
      a lawsuit in state court and with an application seeking a preliminary
      injunction declaring plaintiffs to be the sole owners of the intellectual
      property at issue and preventing Mr. Terwilliger from effectively serving
      as our Vice President of New Product Development. The Company has agreed to
      defend Mr. Terwilliger. The Company has removed the state court claim against
      Mr. Terwilliger to federal court and the cases have been consolidated. The
      defendants have answered both complaints and discovery has commenced
      in each matter. In April 2006, WWMT had its hearing for a preliminary injunction
      against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned
      that portion of their application for preliminary injunction that was based
      on
      an alleged misappropriation of trade secrets shortly before the hearing. On
      August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering
      that what remained of plaintiffs' motion be denied.  Specifically, the
      Magistrate Judge found that plaintiffs do not have a reasonable likelihood
      of
      success on the merits of their claim for declaratory judgment that some or
      all
      of plaintiffs are the sole owners of the intellectual property at issues, and
      she further found that there do not exist sufficiently serious questions
      going to the merits of that claim to make them a fair ground for
      litigation.  The Company denies liability and intends to vigorously
      defend itself in this litigation as it progresses. No trial date has
      yet been set.





96




On
      April
      20, 2006, a lawsuit captioned ** *J.P.
      Morgan Trust Company, N.A. v. John Alan Friede, et al.* was
      filed in the U.S. District Court for the Southern District of New York against
      John Friede, a stockholder of the Company who was then also a director of the
      Company, Mr. Friede’s wife, and NOMOS Corporation, a subsidiary of the Company.
      With respect to NOMOS, the complaint sought repayment of at least approximately
      $5,250,000 principal amount of loans allegedly made to and still outstanding
      and
      owed by NOMOS, and other related equitable remedies plus interest, costs and
      expenses.




In
      accordance with the indemnification provisions of the merger agreement under
      which the Company acquired NOMOS on May 4, 2004, and the related indemnity
      escrow agreement, the Company made a claim for indemnification against the
      escrow to preserve our right of indemnity. The indemnity escrow account recently
      held approximately $1,225,000 of cash and 526,810 shares of our common stock.




As
      of
      October 23, 2007, a stipulation was entered into by all parties to dismiss
      the
      lawsuit, with prejudice, which stipulation was filed and certified by the Court
      on November 6, 2007. The plaintiff has issued a general release and discharge
      of
      claims against NOMOS and its affiliates, including the Company. Therefore,
      on
      November 15, 2007, the Company notified the escrow agent that the Company was
      withdrawing its claim of indemnification against the escrow, and authorized
      the
      escrow agent to distribute amounts held in the escrow fund in accordance with
      the terms of the escrow agreement.




In
      October 2007, the Company were served with a demand for arbitration by
      AnazaoHealth Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading
      services for our Prospera brachytherapy products pursuant to a Services
      Agreement dated as of June 1, 2005, as amended (the “Services Agreement”). In
      its demand for arbitration, AnazaoHealth is seeking indemnification from the
      Company under the Services Agreement for damages arising out of a litigation
      filed against AnazaoHealth in the U.S. District Court for the District of
      Connecticut (the “Connecticut Litigation”) by Richard Terwilliger, Gary
      Lamoureux, World Wide Medical Technologies, LLC, IdeaMatrix, Inc., Advanced
      Care
      Pharmacy, LLC, Advanced Care Pharmacy, Inc., and Advanced Care Medical, Inc.
      The
      plaintiffs in the Connecticut Litigation claim that AnazaoHealth’s provision of
      services in the brachytherapy field infringes their patent rights, and certain
      of the plaintiffs claim that our Prospera products infringes their patent
      rights. The Company denies liability and intends to vigorously defend itself
      in
      this arbitration.




The
      Company is subject to other legal proceedings, claims and litigation arising
      in
      the ordinary course of business. While the outcome of these matters is currently
      not determinable, management does not expect that the ultimate costs to resolve
      these matters will have a material adverse effect on the Company’s consolidated
      financial position, results of operations, or cash flows.





**RELATED
      PARTIES**





On
      February 17, 2006 the Company entered an exclusive license agreement with
      IdeaMatrix, Inc. (a company wholly owned by our former Vice President of New
      Product Development (Brachytherapy), Richard Terwilliger) for certain
      brachytherapy technology pertaining to needles and strands, used in the
      brachytherapy manufacturing process. This technology is critical to our SurTRAK
      line of products, sold in connection with our brachytherapy seeds. Under this
      exclusive license agreement, we paid $125,000 upon execution of the license
      agreement on February 17, 2006, and we are required to pay $125,000 per year
      over five years. There is no annual renewal fee or royalty arising out of this
      license. The term of this license expires upon the last expiring patent included
      in the license. As part of this license agreement, we have agreed to indemnify
      Mr. Terwilliger and IdeaMatrix, Inc. for claims arising from the licensed
      property, including the claim raised in the Worldwide Medical Technology lawsuit
      against Mr. Terwilliger and IdeaMatrix, Inc.





97




**NOTE
      13—NASDAQ LISTING**





The
      Company received a NASDAQ Stock Market (“Nasdaq”) Staff Deficiency Letter dated
      September 21, 2007 indicating that, based on the Quarterly Report on Form 10-Q
      for the period ended July 31, 2007, Nasdaq had determined that the Company
      was
      not in compliance with the minimum $10 million stockholders’ equity requirement
      for continued listing on the Nasdaq Global Market set forth in Marketplace
      Rule
      4450(a)(3). Further, on October 5, 2007, the Company received a notice from
      Nasdaq, dated October 5, 2007 indicating that for the last 30 consecutive
      business days, the bid price of the Company’s common stock had closed below the
      minimum $1.00 per share requirement for continued inclusion under Marketplace
      Rule 4450(a)(5), (the “Rule”). Therefore, in accordance with Marketplace Rule
      4450(e)(2), the Company has 180 calendar days, or until April 2, 2008, to regain
      compliance. If, at anytime before April 2, 2008, the bid price of the Company’s
      common stock closes at $1.00 per share or more for a minimum of 10 consecutive
      business days, Nasdaq’s Staff will provide written notification that the Company
      has achieved compliance with the Rule. If the Company does not regain compliance
      with the Rule by April 2, 2008, the Company’s common stock will be delisted, a
      decision which the Company may appeal to a Nasdaq Listing Qualifications Panel.





On
      December 11, 2007, the Company received formal notice that the Nasdaq Listing
      Qualifications Panel had granted the Company’s request for a transfer from the
      Nasdaq Global Market to the Nasdaq Capital Market, and continued listing on
      the
      Nasdaq Capital Market, subject to the following exception:





§
            On
                or before January 17, 2008, the Company was required to inform the
                Panel
                that it has received funds sufficient to put it in compliance with
                the
                Capital Market shareholders’ equity requirement of $2.5 million. Within
                four business days of the receipt of the funds, the Company was required
                to make a public disclosure of receipt of the funds and file a Form
                8-K
                with pro forma financial information indicating that it plans to
                report
                proforma shareholders’ equity of $2.5 million or greater for the fiscal
                year ended October 31, 2007. We informed the Panel of receipt of
                sufficient funds on January 18, 2008. We publicly disclosed receipt
                of
                such funds in a press release dated January 22, 2008 and filed a
                Form 8-K
                with respect to this matter on January 25,
                2008.





§
            On
                or before January 31, 2008, the Company was required to file its
                Annual Report on Form 10-K for the fiscal year ended October 31,
                2007,
                which shall demonstrate proforma shareholder’s equity of $2.5 million or
                greater. (See NOTE 15—SUBSEQUENT
                EVENTS)





98




**NOTE
      14—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)**





The
      following table presents summarized quarterly financial data (in thousands,
      except per share data):





**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
              **(Revised**
            
            **Fourth**
              **Quarter**
              **(Revised****(Revised)**
            
            **(Revised)**
            
            **for 2006)**
            
            **for 2006)****Fiscal
                2007**Net
                sales
            
            $
            3,914
            
            $
            3,788
            
            $
            3,438
            
            $
            4,177Gross
                profit
            
            
            1,416
            
            
            1,183
            
            
            750
            
            
            1,279Net
                loss from continuing operations
            
            
            (2,274
            )
            
            (2,135
            )
            
            (2,970
            )
            
            (3,152
            )Net
                loss from discontinued operations
            
            
            (921
            )
            
            (1,044
            )
            
            (7,718
            )
            
            (783
            )Net
                loss
            
            
            (3,195
            )
            
            (3,179
            )
            
            (10,688
            )
            
            (3,935
            )Basic
                and diluted loss per share –
                continuing
                operations
            
            $
            (0.08
            )
            $
            (0.07
            )
            $
            (0.10
            )
            $
            (0.11
            )Basic
                and diluted loss per share – discontinued operations
            
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.26
            )
            $
            (0.02
            )Basic
                and diluted loss per share
            
            $
            (0.11
            )
            $
            (0.11
            )
            $
            (0.36
            )
            $
            (0.13
            )**Fiscal
                2006**Net
                sales
            
            $
            2,852
            
            $
            3,226
            
            $
            3,166
            
            $
            3,349Gross
                profit
            
            
            747
            
            
            804
            
            
            994
            
            
            1,051Net
                loss from continuing operations
            
            
            (1,701
            )
            
            (2,350
            )
            
            (2,526
            )
            
            (2,830
            )Net
                loss from discontinued operations
            
            
            (974
            )
            
            (1,345
            )
            
            (2,107
            )
            
            (3,297
            )Net
                loss
            
            
            (2,675
            )
            
            (3,695
            )
            
            (4,633
            )
            
            (6,127
            )Basic
                and diluted loss per share – continuing operations
            
            $
            (0.10
            )
            $
            (0.14
            )
            $
            (0.10
            )
            $
            (0.10
            )Basic
                and diluted loss per share – discontinued operations
            
            $
            (0.06
            )
            $
            (0.08
            )
            $
            (0.09
            )
            $
            (0.11
            )Basic
                and diluted loss per share
            
            $
            (0.16
            )
            $
            (0.22
            )
            $
            (0.19
            )
            $
            (0.21
            )





**NOTE
      15—SUBSEQUENT EVENTS**





*Debt
      arrangements*





*John
      Friede Note*





On
      October 30, 2007, the Company entered into a Loan Agreement (the “Friede Loan
      Agreement”) with Mr. John Friede (the “Lender”) a stockholder and former
      director of the Company. Subject to the terms of the Friede Loan Agreement,
      the
      Lender agreed to loan the Company $500,000 in two installments of $250,000
      each.
      The loan is unsecured and subordinated to the loan agreements with Silicon
      Valley Bank and Agility Capital. In connection with the Friede Loan Agreement,
      the Company agreed to issue to the Lender a warrant to purchase that number
      of
      shares of the Company’s common stock as shall be equal to $200,000 divided by
      the Exercise Price, which is the per share closing price of the Company’s common
      stock on the trading day before the issuance of the warrant. On November 1,
      2007, the Company executed the promissory note underlying the loan and received
      the first $250,000 installment. The Company and the Lender amended the Friede
      Loan Agreement on November 20, 2007, prior to funding of the second $250,000
      installment, to extend the maturity date of the Friede Loan Agreement from
      November 20, 2007 to December 20, 2007, and to reduce the borrowing capacity
      to
      $250,000 from $500,000. The loan and accrued interest were paid in full on
      December 20, 2007.





99




*Silicon
      Valley Bank*





On
      November 20, 2007, the Company entered into a Seventh Amendment and Forbearance
      to its Loan Agreement (the “Seventh Amendment”) with Silicon Valley Bank (the
“Bank”). The Seventh Amendment includes: (i) an extension of the maturity date
      of the Loan Agreement to December 20, 2007, and an extension of the maturity
      date of the Bridge Loan Sub-limit to the earlier of December 20, 2007 or the
      date the Company closes a private investment public equity transaction, and
      (ii)
      a forbearance by the Bank from exercising its rights and remedies against the
      Company, until such time as the Bank determines in its discretion to cease
      such
      forbearance, due to the defaults under the Loan Agreement resulting from the
      Company failing to comply with the tangible net worth covenant in the Loan
      Agreement as of July 31, 2007, August 31, 2007 and September 30, 2007. In
      connection with the Seventh Amendment, the Company granted a warrant to the
      Bank
      to purchase 90,909 shares of the Company’s common stock, at a warrant price of
      $0.55 per share, subject to adjustment as provided in such warrant. The warrant
      will expire in five years unless previously exercised.




On
      December 18, 2007, the Company, entered into an Eighth Amendment and Forbearance
      to the Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth
      Amendment includes: (i) an extension of the maturity date of the Loan Agreement
      to the earlier of February 1, 2008 or the date the Company completes its private
      placement (See *Securities
      Purchase Agreement below)* ,
      (ii) a
      forbearance by the Bank from exercising its rights and remedies against the
      Company, until such time as the Bank determines in its discretion to cease
      such
      forbearance, due to the defaults under the Loan Agreement resulting from the
      Company failing to comply with the tangible net worth covenant in the Loan
      Agreement as of July 31, 2007, August 31, 2007, September 30, 2007 and October
      31, 2007 and (iii) a consent from the Bank to allow the Company to repay its
      outstanding loan from Mr. John A. Friede in the amount of $250,000. In
      connection with the Eighth Amendment, the Company granted a warrant to the
      Bank
      to purchase that number of shares of the Company’s common stock as shall be
      equal to $50,000 divided by the warrant price, which is equal to the lower
      of
      (i) the closing price of the Company’s common stock on the date the Company’s
      Board of Directors approves the issuance of this warrant or (ii) the closing
      price of the Company’s common stock on date the warrant is issued, subject **** to
      adjustment as provided in such warrant. The warrant will expire in five years
      unless previously exercised.





*Agility
      Capital, LLC*




On
      November 20, 2007, the Company executed a Second Amendment to the Agility Loan
      Agreement (the “Second Amendment”) with Agility Capital, LLC (“Agility”) to
      extend the maturity date of the Agility Loan Agreement from November 20, 2007
      to
      December 21, 2007. In connection with the Second Amendment, the Company granted
      a warrant to Agility to purchase that number of shares of the Company’s common
      stock as shall be equal to $231,250 divided by the warrant price, which is
      equal
      to the lowest of (i) the closing price of Company’s common stock the day before
      the issue date of the warrant, as published in The Wall Street Journal on the
      issue date, or (ii) the average closing price of the Company’s common stock for
      the 30 days before the issue date, or (iii) the price at which Company next
      issues its common stock or other equity-linked securities, other than issuances
      of its common stock to officers and employees by the Company pursuant to its
      2006 Stock Plan, 2000 Employee Stock Purchase Plan and 2003 Non-Employee
      Directors’ Equity Compensation Plan and any other employee incentive plan
      approved by Company’s stockholders, subject to adjustment as provided in the
      warrant. The warrant will expire in seven years unless previously exercised.





100




On
      December 20, 2007, the Company executed a Third Amendment to the Agility Loan
      Agreement (the “Third Amendment”) with Agility. The Third Amendment includes (i)
      an extension of the maturity date of the Loan Agreement to February 1, 2008,
      (ii) a loan modification and extension fee of $20,000, paid by the Company
      upon
      the execution of the amendment, and (iii) a consent from Agility to allow the
      Company to repay its outstanding loan from Mr. John A. Friede in the amount
      of
      $250,000. In connection with this amendment, the Company granted a warrant
      to
      Agility to purchase that number of shares of the Company’s common stock as shall
      be equal to $200,000 divided by the warrant price, which is equal to the lowest
      of (i) the closing price of Company’s common stock the day before the issue date
      of the warrant, as published in The Wall Street Journal on the issue date,
      or
      (ii) the average closing price of the Company’s common stock for the 30 days
      before the issue date, or (iii) the price at which Company next issues its
      common stock, subject to adjustment as provided in the warrant. The warrant
      will
      expire in seven years unless previously exercised.  The loan and accrued
      interest were paid in full on January 23, 2008.




*Three
      Arch Capital (et al)*




On
      December 7, 2007, the Company entered into a Loan Agreement (the “Three Arch
      Loan Agreement”) with Three Arch Capital, L.P., TAC Associates, L.P., Three Arch
      Partners IV, L.P. and Three Arch Associates IV, L.P. (the “Lenders”). The
      Lenders are, collectively, the largest stockholder of the Company, and Dr.
      Wilfred Jaeger and Roderick Young, two of our directors, are affiliates of
      the
      Lenders. The transaction contemplated by the Three Arch Loan Agreement was
      approved by a committee of the Company’s Board of Directors consisting only of
      disinterested directors.





Under
      the
      Three Arch Loan Agreement, the Lenders loaned $1.0 million to the Company and
      the Company issued notes to the Lender (the “Notes”). The Notes bear interest at
      an annual rate equal to the prime rate plus six percent (6%) and are
      subordinated to the Company’s indebtedness to Silicon Valley Bank and Agility
      Capital LLC. The Notes are due and payable on December 20, 2007, provided that
      if prior to December 20, 2007, Silicon Valley Bank shall have extended the
      maturity date under its Loan and Security Agreement with the Company (the “SVB
      Loan Agreement”) until after December 20, 2007, then the Notes shall be due and
      payable on the earliest of (i) February 4, 2008, (ii) the close of the Company’s
      pending private investment public equity financing transaction (See Securities
      Purchase Agreement below), or (iii) the maturity date under the SVB Loan
      Agreement. In connection with the Loan Agreement, the Company has agreed to
      pay
      an aggregate of $20,000 as a loan fee to the Lenders and has granted the Lenders
      warrants to purchase, in the aggregate, 1,025,641 shares of the Company’s common
      stock at a purchase price of $0.39 per share. The loan and accrued interest
      were
      paid in full on January 24, 2008.





*Securities
      Purchase Agreement*





On
      December 12, 2007, the Company entered into a Securities Purchase Agreement
      with
      Three Arch Partners IV, L.P. and affiliated funds (“Three Arch Partners”), SF
      Capital Partners Ltd. (“SF Capital”) and CHL Medical Partners III, L.P. and an
      affiliated fund (“CHL,” and together with Three Arch Partners and SF Capital,
      the “Investors”) providing for the private placement (the “Private Placement”)
      of 63,008,140 shares (the “Shares”) of common stock of the Company, par value
      $0.01 per share (the “Common Stock”), and warrants to purchase 3,150,407 shares
      of Common Stock (the “Warrants,” and, together with the Shares, the
“Securities”) for a total purchase price of $15.5 million. As described above,
      Three Arch Partners is the Company’s largest stockholder. SF Capital also is one
      of our significant stockholders. This transaction was approved by a committee
      of
      our Board of Directors consisting only of disinterested directors.




101




The
      purchase price is equal to $0.246 per Security, of which $0.01 is allocated
      to
      the Warrants. The purchase price represents a 40% discount to the volume
      weighted average price of the Common Stock on the Nasdaq Global Market, as
      reported by Bloomberg Financial Markets, for the 20 trading day period ending
      on
      the trading day immediately preceding the date of the Securities Purchase
      Agreement. The Warrants have an exercise price of $0.246 per share, subject
      to
      certain adjustments. The Warrants may be exercised no earlier than 180 days
      from
      the closing date of the transaction and will expire seven years from the date
      of
      issuance.





In
      order
      to close the Private Placement, the Company was required to obtain stockholder
      approval of the Private Placement and the amendment of its Certificate of
      Incorporation to increase the number of shares of Common Stock it is authorized
      to issue. The Company received the approval of a majority of the stockholders
      on
      January 17, 2008 and closed the transaction on January 18, 2008.





The
      Investors purchased the following amounts of Securities in the offering:




Investor
            
            Shares
            
            Warrants(Shares issuable upon exercise)Three
                Arch Partners
            
            
            40,650,420
            
            
            2,032,521SF
                Capital
            
            
            10,162,600
            
            
            508,130CHL
            
            
            12,195,120
            
            
            609,756





Prior
      to
      the closing of the transaction, Three Arch Partners owned 5,121,638 shares
      of
      Common Stock. After the transaction was consummated, Three Arch Partners’
percentage ownership of the outstanding Common Stock increased from
      approximately 17.3% to 49.5% (and 43.9% of the Common Stock on a fully diluted
      basis).





The
      net
      proceeds to the Company of the Private Placement after payment of fees and
      expenses were approximately $14,115,000. The terms of the Private Placement
      were
      approved by a committee of the Company’s Board of Directors consisting only of
      disinterested directors. The Company’s directors and executive officers have
      executed lock-up agreements restricting their ability to sell shares of the
      Common Stock for 180 days following the closing of the transaction. The
      Investors entered into such lock-up agreements prior to the closing of the
      transaction.





Oppenheimer
      & Company acted as sole placement agent in connection with the Private
      Placement. The placement agent received aggregate fees of $1,085,000 plus
      reimbursement for reasonable out-of-pocket fees and expenses.





Holders
      of the Shares and the shares of Common Stock issuable upon the exercise of
      the
      Warrants (the “Warrant Shares” and collectively, with the Shares, the
“Registrable Securities”) are entitled to certain registration rights as set
      forth in the Securities Purchase Agreement. Under the Securities Purchase
      Agreement, the Company has agreed to use its reasonable best efforts to prepare
      and file a registration statement on Form S-3 or other applicable form available
      to the Company to register the resale of the Registrable Securities. If the
      Company fails to file a registration statement or such registration statement
      is
      not declared effective between the time it files its next Annual Report on
      Form
      10-K and the 180th date after the closing of the Private Placement, or, if
      additional registration statements are required to be filed to register such
      shares because of limitations imposed by the staff of the Commission on the
      number of shares that may be registered on behalf of selling stockholders on
      Form S-3, within 45 days of filing each such additional registration statement
      (or 90 days if such filing is reviewed by the Commission), the Company will
      be
      liable for certain specified liquidated damages as set forth in the Securities
      Purchase Agreement. The Company has agreed to maintain the effectiveness of
      the
      registration statement until the earliest of (i) the second anniversary of
      the closing of the Private Placement, (ii) such time as all Registrable
      Securities have been sold pursuant to the registration statement or
      (iii) the date on which all of the Registrable Securities may be resold by
      each of the Investors without registration pursuant to Rule 144(k). The Company
      will pay all expenses incurred in connection with the registration, other than
      fees and expenses, if any, of counsel or other advisors to the Investors or
      underwriting discounts, brokerage fees and commissions incurred by the
      Investors, if any, in connection with an underwritten offering of the
      Registrable Securities .





102




The
      Securities Purchase Agreement contains certain customary closing conditions,
      as
      well as the requirement that the Company decrease the number of members of
      the
      Board of Directors of the Company (the “Board”) from nine members to seven
      members at or by the time of its next annual meeting of stockholders. Under
      the
      Securities Purchase Agreement, Three Arch Partners has the right to name one
      member to the Board so long as Three Arch Partners beneficially owns greater
      than 5,000,000 shares of Common Stock (including shares of Common Stock issuable
      upon exercise of the Warrants, and as appropriately adjusted for stock splits,
      stock dividends and recapitalizations). Two of the current members of the Board,
      Dr. Wilfred E. Jaeger and Roderick A. Young, have been designated by Three
      Arch
      Partners. Under the Securities Purchase Agreement, the Company has agreed to
      add
      two new independent members to the Board at or before the Company’s next annual
      meeting.





In
      connection with the issuance of the Warrants and upon closing of the
      transaction, the Company entered into Warrant Agreements with its transfer
      agent
      relating to the Warrants. The Warrant Agreement relating to the Warrants issued
      to SF Capital contains a non-waivable provision that provides that the number
      of
      shares issuable upon exercise of the Warrants will be limited to the extent
      necessary to assure that, following such exercise, the total number of shares
      of
      Common Stock then beneficially owned by such holder and its affiliates does
      not
      exceed 14.9% of the total number of issued and outstanding shares of Common
      Stock of the Company (including for such purpose the shares of Common Stock
      issuable upon such exercise of Warrants). The Warrant Agreement relating to
      the
      Warrants issued to the other Investors does not contain this provision.





The
      sale
      of the Shares, the Warrants and the Warrant Shares have not been registered
      under the Securities Act of 1933, as amended (the “Securities Act”), or any
      state securities laws. The Company is relying upon the exemptions from
      registration provided by Section 4(2) of the Securities Act and Regulation
      D
      promulgated under that section. Each Investor has represented that it is an
      accredited investor, as such term is defined in Regulation D under the
      Securities Act, and that it was acquiring the Shares and Warrants for its own
      account and not with a view to or for sale in connection with any distribution
      thereof, and appropriate legends will be affixed to the Shares and Warrants.





*Amendment
      to Bylaws*





On
      December 5, 2007, the Board of Directors of North American Scientific, Inc.
      (the
“Company”) amended the bylaws of the Company (the “Bylaws”), effective
      immediately. Section 6 of the Bylaws now enables the Board of Directors to
      authorize the issuance of uncertificated shares of the Company’s capital stock.
      The purpose of the amendments to Section 6 are to satisfy the requirement of
      The
      Nasdaq Stock Market, Inc. that shares of the Company’s capital stock be eligible
      by January 1, 2008 for a Direct Registration Program operated by a clearing
      agency registered under Section 17A of the Securities Exchange Act of 1934.





103




*Nasdaq
      Delisting*




On
      December 11, 2007, the Company received formal notice that the Nasdaq Listing
      Qualifications Panel had granted the Company’s request for a transfer from the
      Nasdaq Global Market to the Nasdaq Capital Market, and continued listing on
      the
      Nasdaq Capital Market, subject to the following exception:





§
            On
                or before January 17, 2008, the Company was required to inform the
                Panel
                that it has received funds sufficient to put it in compliance with
                the
                Capital Market shareholders’ equity requirement of $2.5 million. Within
                four business days of the receipt of the funds, the Company was required
                to make a public disclosure of receipt of the funds and file a Form
                8-K
                with pro forma financial information indicating that it plans to
                report
                proforma shareholders’ equity of $2.5 million or greater for the fiscal
                year ended October 31, 2007. The Company informed the Panel of receipt
                of
                sufficient funds on January 18, 2008. The Company publicly disclosed
                receipt of such funds in a press release dated January 22, 2008 and
                filed
                a Form 8-K with respect to this matter on January 25,
                2008.





§
            On
                or before January 31, 2008, the Company was required to file its
                Annual
                Report on Form 10-K for the fiscal year ended October 31, 2007, which
                shall demonstrate proforma shareholder’s equity of $2.5 million or
                greater. This information is set forth below in this Report under
                “Subsequent Events – Nasdaq
                Delisting.”





On
      October 5, 2007, the Company received a notice from Nasdaq indicating that,
      for
      the preceding 30 consecutive days, the bid price of its common stock had closed
      below the minimum $1.00 per share requirement for continued listing. In
      accordance with the Nasdaq rules, the Company has until April 2, 2008, to regain
      compliance. In order to regain compliance, the bid price of its common stock
      must close at $1.00 per share or more for a minimum of 10 consecutive business
      days. If the Company does not regain compliance with the rule by April 2, 2008,
      the Company understands that the Nasdaq Staff will provide written notification
      to the Company that its common stock will be delisted. At that time, the Company
      may appeal the Staff’s determination to a Nasdaq Listing Qualifications Panel,
      but no assurance can be given that any such appeal would be successful.





The
      following shows the reported stockholders’ equity of the Company at October 31,
      2007 and proforma stockholders’ equity assuming the private placement
      transaction had been completed on October 31, 2007.





**At
                October 31, 2007****As
                Reported**
            
            **Proforma**Stockholders'
                (deficit) equityPreferred
                stock, $.01 par value, 2,000,000 shares authorized; no shares
                issued
            
            
            —
            
            
            —Common
                stock, $.01 par value, 100,000,000 (Reported) and 150,000,000 (Proforma)
                shares authorized; 29,601,352 (Reported) and 92,609,492 (Proforma)
                shares
                issued; and 29,395,331 (Reported) and 92,403,471 (Proforma) shares
                outstanding
            
            
            300,000
            
            
            930,000Additional
                paid-in capital
            
            
            145,533,000
            
            
            159,018,000Treasury
                stock, at cost - 206,021 (Reported) and (Proforma) common
                shares
            
            
            (227,000
            )
            
            (227,000
            )Accumulated
                deficit
            
            
            (148,518,000
            )
            
            (148,518,000
            )Total
                stockholders' (deficit) equity
            
            $
            (2,912,000
            )
            $
            11,203,000





104




**SCHEDULE
      II**


**NORTH
      AMERICAN SCIENTIFIC, INC.**


**VALUATION
      AND QUALIFYING ACCOUNTS**





**Revised
                for 2005 and 2006**
            
            
            
            **Additions****Description**
            
            **Balance
                at**
              **beginning**
              **of
                period**
            
            **Charged**
              **to
                cost and**
              **expenses**
            
            **Charged**
              **to
                other**
              **accounts**
            
            **Deductions**
            
            **Balance
                at**
              **end
                of**
              **Period****Fiscal
                2007**Allowance
                for doubtful accounts
            
            $
            506,000
            
            $
            (163,000
            )
            $
            —
            
            $
            402,000
            
            $
            179,000Deferred
                tax asset valuationallowance
            
            $
            60,067,000
            
            $
            —
            
            $
            7,604,000
            
            $
            —
            
            $
            67,671,000**Fiscal
                2006**Allowance
                for doubtful accounts
            
            $
            1,030,000
            
            $
            218,000
            
            $
            —
            
            $
            742,000
            
            $
            506,000Deferred
                tax asset valuationallowance
            
            $
            53,694,000
            
            $
            —
            
            $
            6,373,000
            
            $
            —
            
            $
            60,067,000**Fiscal
                2005**Allowance
                for doubtful accounts and returns
            
            $
            744,000
            
            $
            705,000
            
            $
            —
            
            $
            419,000
            
            $
            1,030,000Deferred
                tax asset valuationallowance
            
            $
            38,203,000
            
            $
            —
            
            $
            15,491,000
            
            $
            —
            
            $
            53,694,000





105


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the Registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.





NORTH
                AMERICAN SCIENTIFIC, INC.By:
            /s/JOHN
                B. RUSHJanuary
                29, 2008
            
            John
                B. Rush
              *President
                and Chief Executive Officer*





Pursuant
      to the requirements of the Securities Act of 1934, this report has been signed
      by the following persons on behalf of the Registrant in the capacities and
      on
      the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/GARY
                N. WILNERDr. Gary
                N. Wilner
            
            Chairman
                of the Board of Directors
            
            January
                29, 2008/s/JOHN
                B. RUSHJohn
                B. Rush
            
            President,
                Chief Executive Officer and Director (Principal Executive
                Officer)
            
            January
                29, 2008/s/JAMES
                W. KLINGLERJames
                W. Klingler
            
            Senior
                Vice President and Chief Financial Officer (Principal Financial and
                Accounting Officer)
            
            January
                29, 2008/s/L.
                MICHAEL CUTRERL.
                Michael Cutrer
            
            Executive
                Vice President and Chief Technology Officer and Director
            
            January
                29, 2008/s/WILFRED
              E. JAEGER, M.D.Wilfred
                E. Jaeger
            
            Director
            
            January
                29, 2008/s/JOHN
                M. SABINJohn
                M. Sabin
            
            Director
            
            January
                29, 2008/s/RICHARD
                A. SANDBERGRichard
                A. Sandberg
            
            Director
            
            January
                29, 2008/s/NANCY
                W. WYSENSKINancy
                W. Wysenski
            
            Director
            
            January
                29, 2008/s/RODERICK
              A. YOUNGRoderick
                A. Young
            
            Director
            
            January
                29, 2008




106