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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended October 31, 2003
Commission File Number 0-26670

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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:None

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

Common Stock, par value $0.01 per share(Title of class)

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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.    ý 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
Form 10-K.    o

As
of January 19, 2004, approximately 10,330,639 shares of the Registrant's Common Stock, $.01 par value per share, were outstanding. The aggregate market value of voting stock
held by non-affiliates of the Registrant was approximately $95,546,000 (based upon the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market
for the last trading date prior to that date).

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of
1934).    o Yes    ý No

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on or about April 13, 2004, are incorporated by
reference into Part III of this Form 10-K.

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NORTH AMERICAN SCIENTIFIC, INC.        Table of Contents        Form 10-K

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                      
|Item 1.  |  | Business                                                                              |  | 1   
|Item 2.  |  | Properties                                                                            |  | 25  
|Item 3.  |  | Legal Proceedings                                                                     |  | 25  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|PART II  |  |                                                                                      
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 26  
|Item 6.  |  | Selected Consolidated Financial Data                                                  |  | 27  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 28  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk.                           |  | 37  
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  | 37  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 37  
|Item 9A. |  | Controls and Procedures                                                               |  | 37  
|PART III |  |                                                                                      
|Item 10. |  | Directors and Executive Officers of the Company                                       |  | 38  
|Item 11. |  | Executive Compensation                                                                |  | 38  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 38  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 38  
|Item 14. |  | Principal Accountant Fees and Services                                                |  | 38  
|PART IV  |  |                                                                                      
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 39  
|         |  | Signatures                                                                            |  | 63  

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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 1, 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
design, develop and produce innovative radioisotopic products, including brachytherapy seeds and radiopharmaceuticals, principally for the treatment and diagnosis of disease. Since
1990, we have applied our expertise in radioisotopes to develop and market products for medical, environmental, research and industrial applications.

In
1996, we began to focus our research and product development activities primarily on high value, high growth medical products that are useful in the diagnosis, management and
treatment of disease 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. These products were initially marketed under an exclusive third party distribution agreement, which terminated in
January 2003. We transitioned to direct sales and marketing of our brachytherapy products during fiscal year 2003, and currently 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
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 believe that this acquisition enhances our product portfolio and better enables us to provide a more complete product offering to customers and prospects.

Our
primary radiopharmaceutical product candidate, Hynic-Annexin V, is anin vivonuclear medicine imaging agent that targets cells
undergoing apoptosis or necrosis, two common forms of cell death. Hynic-Annexin V is intended to be used for determining response to anti-cancer treatment within the first few days
following the initial dose of therapy. We intend for this product candidate to provide information that would allow clinicians to make better therapeutic decisions for individual patients by
monitoring a patient's response to treatment of disease with increased accuracy and timeliness.

Our
Hynic-Annexin V product candidate is currently in Phase II clinical trials in Europe for early detection of patient response to chemotherapy treatment in patients with lung cancer.
In June 2003, we opened an Investigational New Drug (IND) application in the U.S. for Hynic-Annexin V. The studies are intended to provide preliminary assessment of the predictive value of
Hynic-Annexin V imaging at various times following a single course of chemotherapy. The clinical study is also designed to provide information about product safety, biodistribution, and imaging
technique after initiation of chemotherapy in patients with lung cancer.

In
October 2003, we entered into an agreement to acquire NOMOS Corporation (NOMOS). We believe that this transaction will enhance our portfolio of products and technologies for
the treatment of

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cancer.
Under the terms of the merger agreement, at closing we will issue approximately 5.3 million shares of common stock and pay cash of approximately $12 million, in exchange for all
of the outstanding capital stock of NOMOS. Based on the closing stock price preceding the announcement of the transaction, the implied value of the transaction, including the assumption of outstanding
NOMOS stock options (using the treasury stock method), is approximately $56 million. The consummation of the transaction is subject to customary closing conditions, including approval by the
stockholders of both companies. We expect this transaction will close during the second quarter of fiscal 2004.

NOMOS
is a privately held developer, manufacturer and marketer of intensity modulated radiation therapy (IMRT) products and services. IMRT is a rapidly growing category of external beam
radiation therapy using innovative software and equipment to provide more accurate radiation delivery to solid tumors while reducing radiation to surrounding healthy tissue. NOMOS is a recognized
pioneer in the IMRT field and its products are used to treat a variety of cancers at hospitals and free-standing radiation oncology centers. As a result of the transaction, we will be able
to offer a broader complement of products and services to address the needs of the radiation oncologist.

BRACHYTHERAPY SEEDS FOR PROSTATE CANCER

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. A digital rectal examination during a routine physical examination is the most commonly used test for identifying prostate
cancer. Additionally, a blood test to detect a prostate specific antigen, or PSA, has become an accepted means of detecting early-stage prostate cancer. The PSA test, which is recommended for men over
the age of 50, determines the amount of prostate specific antigen contained in an examinee's blood. Elevated levels of PSA can result from benign symptoms such as inflammation but can also be
indicative of the presence of cancerous cells in the prostate. The emergence of PSA blood testing has greatly improved physicians' ability to diagnose and treat early stage prostate cancer.

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 estimated
that in 2003 approximately 220,000 new cases of prostate cancer would be diagnosed in the U.S. and approximately 29,000 deaths of men in the U.S. would be attributable to the disease.

There
are several therapies available for the treatment of prostate cancer.

Prostate Brachytherapy

Overview.Brachytherapy is a minimally invasive medical procedure in which sealed radioactive sources are temporarily (High
Dose Rate or HDR) or permanently (Low Dose Rate or LDR) implanted into cancerous tissue in the prostate, delivering a therapeutically prescribed dose of radiation that is lethal to the cancerous
tissue. In the 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.

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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 radical prostatectomy, or RP. Moreover,
studies show that the disease free survival rates ten years after brachytherapy treatment are 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, the newest of the three primary techniques for the treatment of prostate cancer, has grown significantly over the past several years due to its advantages
over the other primary therapies, which include RP and external beam radiation therapy, or 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. 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. Both types of seeds were previously marketed by a third party under an excusive marketing and distribution agreement. In connection with the January 2003 termination of that agreement,
we are now directly marketing and selling our Iodine-125 and Palladium-103 seeds under the trade names Prospera®
I-125 and Prospera® Pd-103, respectively. Although our products have primarily been marketed in the U.S., in December 2000 we received a CE mark which allows
for sales of our seeds in Europe.



Other Treatment Modalities

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 often 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

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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.

External Beam Radiation Therapy.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.

Studies
have shown, however, 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.

A
newer technique, known as Intensity Modulated Radiation Therapy, or IMRT, is designed to elevate the radiation dose to the tumor while limiting the amount of radiation to healthy
tissue by directing multiple smaller radiation beams from various angles to the cancerous tissue, with varying levels of intensity. As a result, IMRT provides the potential for improved outcomes by
more effectively treating tumors. In October 2003, we entered into an agreement to acquire NOMOS who develops, markets and services IMRT products to improve the safety and effectiveness of
external beam radiation therapy. We expect this transaction will close during the second quarter of fiscal 2004.

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.

Mentor Relationship

In June 1997, we executed an exclusive worldwide marketing and distribution agreement with Mentor Corporation (Mentor) which granted Mentor an exclusive
license to market and sell our brachytherapy seeds for the treatment of prostate cancer. Sales under this five year agreement commenced in January 1998 and concluded in January 2003. We
now directly market and sell our brachytherapy seeds, and compete against Mentor.

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THE HYNIC-ANNEXIN V PROGRAM

Our Hynic-Annexin V product candidate, based on the Apomate technology platform, is a kit consisting of multiple components for the preparation of
Technetium Tc-99m labeled Annexin V. Tc-99m labeled Annexin V is administered intravenously and is intended for thein vivoimaging of apoptosis and necrosis, two common forms of cell death, using standard nuclear medicine imaging procedures. We are using Hynic (hydrazinonicotinamic acid) technology, licensed from
AnorMed Inc., in our product candidate as a linker to bind the Tc-99m atom to the annexin protein. The product is prepared just prior to patient administration.

We
had performed over 200 studies on patients using the initial Apomate technology kit to demonstrate proof-of-principle of our product during
1999-2002. In fiscal 2002, we incorporated the current Hynic linker technology to improve reliability and ease-of-use for the end-user, and because the
new formulation resulted in improved biodistribution. The Hynic-Annexin V formulation is cleared by the kidneys and makes possible abdominal imaging that was not possible with our initial
Apomate product, which cleared through both the kidneys and the liver, with bowel activity thus obscuring abdominal scans.

Nuclear Medicine and Cell Death

Nuclear medicine imaging involves injecting a radioisotope into the patient's body, detecting the signal emitted by the radioisotope with a gamma camera and then
creating an image of the target area, usually through the use of a computer. A radioisotope, such as Technetium Tc-99m, is typically coupled with a carrier molecule that binds on a
selective basis with targeted tissues. Because of the sensitivity of gamma cameras, only tiny amounts of radioisotopes are required to produce nuclear images. Nuclear medicine imaging is distinct in
that it documents organ and cellular function, in contrast to most other diagnostic radiology procedures, which typically image anatomic structure. Nuclear medicine imaging procedures often identify
abnormalities very early in the progression of a disease, long before some medical problems are detected using other diagnostic tests.

Apoptosis
was once of interest only in a few specialized fields of biology, but is now recognized as a central feature of cancer treatment, heart attack, and organ transplant rejection.
During apoptosis, several physiologic stimuli may trigger a cellular set of processes that result in an orderly self-destruction and disposal of the cell without breaking open the cell
membrane. This process can be induced by disease, such as in transplant rejection or heart attack, or can be purposely induced as the result of certain forms of cancer therapy, including chemotherapy
and radiotherapy. Unlike apoptosis, necrosis is a disorganized non-physiologic process characterized by physical disruption of the cell membrane. Necrosis can be caused by mechanical,
thermal, electrical or noxious chemical injury and by profound hypoxia (a deficiency in the amount of oxygen reaching body tissues), ischemia (a decrease in the blood supply to a bodily organ, tissue,
or part caused by constriction or obstruction of the blood vessels), or respiratory poisons. In a normal healthy cell, membrane integrity is maintained by a series of controlled biochemical processes.

During
apoptosis, the inactivation of a particular enzyme, translocase, and the activation of another enzyme called scramblase, allows a molecule known as phosphatidylserine, or PS,
which is normally only found on the inside of the cell membrane, to migrate to the outer surface of the cell membrane. Annexin V has a strong binding affinity for PS. As soon as PS is expressed on the
surface of the cell it becomes accessible as a binding target site for Hynic-Annexin V.

Cells
dying from necrosis have membrane disruption, typically with cell swelling. Although PS may not migrate to the outer surface of the cell membrane during necrosis, the loss of
membrane integrity is thought to allow Hynic-Annexin V to reach and bind to PS on the inner leaflet of the cell membrane.

Once
Hynic-Annexin V binds to PS, standard nuclear medicine imaging techniques are used to produce an image of cell death associated with either apoptosis or necrosis. Our Hynic-Annexin
V product candidate is currently in clinical trials in Europe and the United States for early detection of patient

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response
to chemotherapy treatment in patients with lung cancer. We believe that Hynic-Annexin V will allow clinicians to make better therapeutic decisions for individual patients by monitoring the
patient's response to treatment with increased accuracy and timeliness.

Cancer Treatment

Most cancer treatments, including radiotherapy, chemotherapy or immunotherapy, are intended to kill tumor cells. Technetium Tc-99m labeled Annexin V
has been shown to imagein vivotumors responding to treatment by binding to apoptosis-specific membrane markers that appear as soon as a few days after
the initial course of effective treatment.

Normally,
it may take many weeks of repeated dosing with cancer drugs until response to treatment is evaluated by observation of tumor size changes. This long evaluation period can be
troublesome in many respects. For example, although only approximately 25% to 30% of lung cancer patients respond to first-line cancer drug treatment, the side effects of the drugs are
felt in nearly all of the treated population. Consequently, an imaging agent with the ability to quickly measure patient response to cancer therapy should be in great demand. Such an agent would allow
for rapid identification of ineffective treatments, thereby allowing reassessment of patient management to identify new treatment options and potentially avoiding negative side effects of treatment
from which the patient is unlikely to receive meaningful clinical benefit.

We
believe that Hynic-Annexin V, as a predictive tool for individual response to cancer treatment, has the potential to provide several benefits to patients, physicians and
pharmaceutical and biotechnology companies by:



We
believe that Hynic-Annexin V imaging could dramatically facilitate improved clinical outcomes, since no diagnostic tool in use today gives clinicians such rapid, direct and detailed
evidence as to whether a particular treatment is likely to be effective.

Clinical trials.Phase I studies of the safety, biodistribution, pharmacokinetics, and dosimetry of the Hynic-Annexin V kit
have been completed. The new formulation demonstrated an appropriate safety profile in these studies, acceptable radiation dosimetry, and favorable pharmacokinetics and biodistribution compared to the
earlier formulation.

Phase
II trials are under way in Europe to assess the early predictive value of Hynic-Annexin V imaging in patients with advanced lung cancer undergoing chemotherapy. The Phase II images
are being monitored on an ongoing basis, and the imaging and timing parameters demonstrated in this trial are intended to allow optimization of a planned Phase III study protocol in this patient
population. On October 13, 2003, we announced observations from an internal preliminary review of data from our European clinical trials of Hynic-Annexin V in lung cancer patients treated with
platinum-based chemotherapy regimens. The data from these observations, which were derived from the first 28 subjects enrolled in these clinical trials, all were obtained at
16-24 hours after initiation of chemotherapy. The study

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was
planned to collect data from 4 hours to 72 hours after initiation of chemotherapy, and it is continuing with imaging studies at time points later than 24 hours after start of
therapy. The initial results showed one out of the five patients who positively responded to the chemotherapy also demonstrated increased tumor Hynic-Annexin V uptake at 16 hours
post-treatment; all non-responders showed no Hynic-Annexin V uptake. It was also shown that increased Hynic-Annexin V uptake around the region of the tumor at baseline prior to
initiation of treatment was seen in all responders to chemotherapy, but only about half of the non-responders. Thus, the information in these baseline images is being evaluated as an
additional indicator for early response to platinum-based therapy. However, the data from these observations were preliminary and to some extent inconclusive. Hence, we are planning additional
clinical trials to further analyze the data. The Company distributes its experimental drug product through a facility within the European Union; and it anticipates continuing this arrangement
throughout the period of clinical trials.

In
June 2003, we opened an Investigational New Drug (IND) application in the U.S. for Hynic-Annexin V. The studies are intended to provide assessment of the predictive value of
Hynic-Annexin V imaging at various times following a single course of platinum-based chemotherapy in non-small cell lung cancer. The clinical study is also designed to provide information
about product safety, biodistribution, and imaging technique after initiation of chemotherapy in patients with lung cancer. Based on the results of this study and of ongoing phase II studies of lung
cancer patients in the EU, the Company anticipates expanding the study population at optimum timepoints and designing pivotal trials to support U.S. and European marketing approvals.

To
date, patient enrollment both in the United States and in Europe has proceeded more slowly than we had originally anticipated.

Other potential indications.At this time, we have elected to focus our Hynic-Annexin V development program and resources for
company-sponsored clinical trials on indications in oncology. However, cell death is a basic biologic process implicated in multiple diseases and their treatments. Various published preclinical and
early clinical studies have suggested potential utility of Hynic-Annexin V imaging in various cardiovascular diseases including myocardial infarction, cardiac transplant rejection, early detection of
cardiac toxicity from chemotherapy drugs, and identification of vulnerable atherosclerotic plaque. In addition, preclinical and early clinical studies suggest that imaging with Hynic-Annexin V may be
able to identify an early treatment response in inflammatory conditions such as rheumatoid arthritis and Crohn's disease. Although we do not plan to conduct company sponsored clinical trials for
these indications in the near future, we do intend to continue providing kits for use in third party investigator initiated preclinical and clinical studies of Hynic-Annexin V imaging for these
indications.

OTHER 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. Each radioisotope emits energy characteristic to that specific 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.

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Standards for Nuclear Medicine.Nuclear medicine is practiced at over 5,000 U.S. 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
make radiation standards available 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.

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.

INTELLECTUAL PROPERTY

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.

We
currently hold two U.S. patents relating to brachytherapy. In December 1999, we received a patent (No. 5,997,643Laser Welded Brachytherapy Source and Method
of Making the Same) for a laser welded closure technique which expires in 2018. Additionally, we have applied to extend our patent protection internationally with the European Patent Office. We also
filed an application for patent protection in August 1997 on our radioactive brachytherapy source design. In October 2002, the United States Patent and Trademark Office issued a patent
(No. 6,440,058Radioactive Seeds and Method for Using Same) on several of our claims related to the use of multiple markers to designate seed characteristics which expires in 2019.
In January 2003, we received Patent No. 6,503,186Radioactive Seed with Multiple Markers and Method for Using Same which allowed further claims related to brachytherapy seed
design and the design's ability to indicate type of isotope or activity level. This patent expires in 2020. The remaining portion of the application is still pending. No patent protection is afforded
while the application is pending before the United States Patent and Trademark Office.

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We
have exclusively licensed intellectual property which covers Technetium Tc-99m labeled Annexin V technology forin vivoimaging of cell death from certain entities that hold issued and pending patents with respect to this technology. The United States Patent and Trademark Office has granted full patent rights to our
licensor, Stanford University, for a patent for "Imaging Cell Death In Vivo" which we believe is a key patent providing strong protection for the Apomate technology platform and use in
our Hynic-Annexin V product candidate.

The
Technetium Tc-99m labeled Annexin V technology is licensed to us under the following arrangements:



In
addition, we have licensed additional technology governing composition of matter and use of Technetium Tc-99m labeled Annexin V.

We
have also filed certain patents covering use of annexin technology for use in magnetic resonance imaging and in optical imaging. We have filed patents for the therapeutic use of
annexin in conjunction with the delivery of therapeutic radioisotopes and photodynamic therapy agents.

In
2002, we ceased the development efforts of our initial Apomate technology utilizing the linking agent licensed from NeoRx Corporation. We notified NeoRx of this change,
and we believe that we have no further payment obligations arising from this license agreement.

In
July 1997, we were granted a patent (No. 5,647,374Needle for Imaging and Sampling) on a radioisotope-based device for site localization during biopsy
procedures, which expires in 2014.

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.

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COMPETITION

Our brachytherapy business is subject to intense competition. Our primary competitors in the brachytherapy seed business include: Nycomed Amersham PLC (through
its controlling interest of Oncura), C.R Bard, Inc. and Mentor, each of which manufacture and sell Iodine-125 brachytherapy seeds, as well as distribute Palladium-103
seeds manufactured by a third party, and Theragenics Corporation, which manufacturers Palladium-103 seeds and sells
both Palladium-103 and Iodine-125 brachytherapy seeds. Several additional companies currently sell brachytherapy seeds as well.

In
addition, other products using alternative technologies may be developed which would compete with our brachytherapy products. For example, if treatment methods such as IMRT,
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.

For
the indications currently being evaluated in clinical trials for our Hynic-Annexin V product candidate, established methods of patient evaluation exist and must currently be
considered "gold standards" of treatment. To our knowledge, no radiopharmaceutical product comparable to our product candidate is currently under evaluation in human trials. The challenges which
Hynic-Annexin V could potentially encounter include physician acceptance and adoption of a new diagnostic and management tool designed to replace well-established procedures. It is also
possible that Positron Emission Tomography, or PET, techniques or magnetic resonance imaging, or MRI, techniques could be used to study patient response to anti-tumor treatment. Early
changes in PET images have been described soon after successful treatment of certain tumors.

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 with our competitors 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 seeding treatments and products that are similar to our brachytherapy 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.

SALES AND MARKETING

We have developed an internal sales force to directly market and sell our Iodine-125 and Palladium-103 brachytherapy seeds under the trade
name Prospera®. The sales staff currently consists of eleven full-time dedicated brachytherapy sales representatives.

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Each
of our sales representatives sells products and services customers within an assigned territory. The sales representatives promote customer satisfaction with periodic service calls
in addition to scheduled follow-up visits. While we can legally sell our brachytherapy seeds in Europe and South America, currently our sales efforts are primarily concentrated on the U.S.
market. Our products are principally marketed directly to the end-user physicians or purchasing groups that act on their behalf.

Our
radiation and references standards are sold directly, as well as through a select group of third party representatives and distributors, in North America, Europe and Australia. 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 research and development activities and the manufacturing and marketing of our radioisotope products are 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. 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. Governments in other countries have similar requirements for testing and
marketing. In the United States, in addition to FDA regulations, we are also subject to other federal laws, including the Occupational Safety and Health Act and the Environmental Protection Act, and
we are also subject to certain state laws.

U.S. Regulatory Process

Approval of new medical devices and biological products is a lengthy procedure leading from development of a new product through preclinical and clinical testing.
This process takes a number of years and the expenditure of significant resources. There is a shorter FDA review and clearance process, the premarket 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.

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, prevent us from entering into government supply
contracts, withdrawal of previously approved applications and criminal prosecution.

In
October 1997, we received 510(k) clearance from the FDA to market Iodine-125 seeds. In July 1998, we received 510(k) clearance from the FDA to market
Palladium-103 seeds.

In
order to commence clinical trials for Hynic-Annexin V in the United States, an IND must be reviewed and cleared by the FDA. In June 2003, upon receiving FDA clearance, we
opened an IND application in the U.S. for Hynic-Annexin V. Further, studies are currently being undertaken in Europe in accordance with applicable laws.

In
connection with the manufacture and distribution of brachytherapy sources, we are required to be registered as a medical device manufacturer with the FDA. As such, we are subject to
inspection by the FDA for compliance with the FDA's current Good Manufacturing Practices, or cGMP, regulations, among other things. 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

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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.

The
research, testing, manufacture and marketing of our radiopharmaceutical drug candidates are extensively regulated by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, and other federal and state statutes and regulations, govern, among
other things, the research, development, testing, manufacture, storage, recordkeeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable
regulatory requirements may subject a company to a variety of administrative or judicially-imposed sanctions and/or the inability to obtain or maintain required approvals or to market approved drug
products.

The
steps ordinarily required before a new pharmaceutical product may be marketed in the United States include preclinical laboratory tests, animal tests and formulation studies, the
submission to the FDA of an investigational new drug application, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to
establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes several years
and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential products
for a considerable period of time and impose costly procedures upon a manufacturer's activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data
obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.

Preclinical
tests which are generally required of radiopharmaceuticals include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the
potential safety and efficacy of the product. The conduct of the preclinical tests and formulation of compounds for testing must comply with federal regulations and requirements. The results of
preclinical testing are submitted to the FDA as part of an investigational new drug application.

A
30-day waiting period after the filing of each investigational new drug application is required prior to the commencement of clinical testing in humans. If the FDA has not
commented on or questioned the investigational new drug application within this 30-day period, clinical trials may begin. If the FDA has comments or questions, the questions may have to be
answered to the satisfaction of the FDA before initial clinical testing can begin. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a
clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the investigational new drug application
process can result in substantial delay and expense.

Clinical
trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be
conducted in compliance with federal regulations and requirements, under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria
to be evaluated. Each protocol involving testing on U.S. subjects must be submitted to the FDA as part of the investigational new drug application. Similar requirements exist in European nations. The
study protocol and informed consent information for patients in clinical trials must be submitted to institutional review boards for approval.

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Clinical
trials to support new drug applications for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated
with increasing doses. Phase II usually involves trials in a limited patient population, to determine dosage tolerance and optimum dosage, identify possible adverse effects and safety risks, and
provide preliminary support for the efficacy of the drug in the indication being studied.

If
a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and
to further test for safety within an expanded patient population, typically at geographically dispersed clinical trial sites. Phase I, Phase II or Phase III testing of any product candidates may not
be completed successfully within any specified time period, if at all.

After
successful completion of the required clinical testing, generally a new drug application or a biologics license application is prepared and submitted to the FDA. FDA approval of
the new drug or biologics license application is required before marketing of the product may begin in the United States. These marketing applications must include the results of extensive clinical
and other testing and a compilation of data relating to each product's pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an application is substantial. Under
Federal law, the submission of applications is additionally subject to substantial application user fees, and the manufacturer and/or sponsor under an approved new drug or biologics license
application is also subject to annual product and establishment user fees. These fees are typically increased annually.

The
FDA has 60 days from its receipt of a new drug or biologics license application to determine whether the application will be accepted for filing based on the agency's
threshold determination that the new drug application is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review
of the application. Under federal law, the FDA has agreed to certain performance goals in the review of such applications. Most such applications for non-priority drug products are
reviewed within twelve months. Priority applications for drugs addressing important unmet clinical needs may be approved in six months under an accelerated review procedure. The review process is
often significantly extended by FDA requests
for additional information or clarification regarding information already provided in the submission. The FDA may also refer applications for novel drug products or drug products which present
difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the
application should be approved. The FDA is not bound by the recommendation of an advisory committee.

If
FDA evaluations of the new drug or biologics license application and the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in some cases, an approvable
letter followed by an approval letter. An approvable letter generally contains a statement of specific conditions that must be met in order to secure final approval of the application. If and when
those conditions have been met to the FDA's satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing
information for specific indications. As a condition of new drug or biologics license application approval, the FDA may require post-approval testing and surveillance to monitor the
product's safety or efficacy. The FDA also may impose other conditions for approval, including labeling restrictions which can materially impact the potential market and profitability of the drug.
Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Once
a new drug or biologics license application is approved, FDA-regulated products will be subject to certain post-approval requirements, including requirements
for adverse event reporting and submission of periodic reports. Additionally, the FDA also strictly regulates the promotional claims that may be made

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about
prescription drug products. In particular, the FDA requires substantiation of any claims of superiority of one product over another including, in many cases, requirements that such claims be
proven by adequate and well controlled head-to-head clinical trials. To the extent that market acceptance of our products may depend on their superiority over existing agents
and procedures, any restriction on our ability to advertise or otherwise promote claims of superiority, or requirements to conduct additional expensive clinical trials to provide proof of such claims,
could negatively affect the sales of our products and/or our costs.

If
the FDA's evaluation of the new drug or biologics license application submission or manufacturing facilities is not favorable, the FDA may refuse to approve the application or issue a
not approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application.
Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. With limited exceptions, the FDA may
withhold approval of a marketing application regardless of prior advice it may have provided or commitments it may have made to the sponsor.

From
time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug
products. In addition,
FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative
changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

Foreign Regulatory Process

In order to sell our medical device products within the European Union, we must comply with the European Commission's medical device directive. We received a CE
mark on our brachytherapy products for prostate cancer in December 2000. The CE mark is recognized worldwide as an essential European regulatory approval and will enable us to expand our sales
and distribution of the products throughout the European Union. In order to perform clinical studies of our Hynic-Annexin V product candidate in Europe, we have met with governmental drug regulatory
oversight bodies in several countries to identify potential rapporteurs for our projected E.U. marketing application. We also have pursued and received ethics board and certain required government
approvals in several countries, and individuals are presently enrolling in studies for imaging patients with lung cancer.

Approval
of a new drug or biological product by regulatory authorities comparable to the U.S. FDA may be necessary in foreign countries prior to the commencement of marketing of the
product in those countries, whether or not FDA approval has been obtained. The approval procedure varies among countries and can involve requirements for additional testing. The time required may
differ from that required for FDA approval. Although there are some procedures for unified filings for some European countries with the sponsorship of the country which first granted marketing
approval, in general each country has its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from
foreign regulatory authorities after the relevant applications are filed.

In
Europe, marketing authorizations may be submitted at a centralized, a decentralized or a national level. The centralized procedure is mandatory for the approval of biotechnology
products and provides for the grant of a single marketing authorization which is valid in all European Union member states. As of January 1995, a mutual recognition procedure is available at
the request of the applicant for all medicinal products which are not subject to the centralized procedure. We will choose the appropriate route of European regulatory filing to accomplish the most
rapid regulatory approvals. However, our chosen regulatory strategy may not secure regulatory approvals on a timely basis or at all.

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Other Regulation

In addition to FDA regulation, certain of our activities are regulated by, and require approvals from, other federal and state agencies in the United States. For
example, we operate under a license issued by the California Department of Health which allows us to manufacture and process radioactive materials. Our licenses for our North Hollywood and Chatsworth
facilities expire in 2007 and 2008, respectively. We are also 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. Violation or alleged violation of these regulations may result in government action ranging from warning letters to criminal prosecution.
Companies that violate these regulations are also subject to large civil penalties. 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.

We
also occupy laboratory space in Worcester, Massachusetts for the purposes of research and development for our Hynic-Annexin V product candidate. We operate using radioactive materials
under a license issued by the Commonwealth of Massachusetts, Executive Office of Health and Human Services. The license expires in October 2007.

MANUFACTURING

We manufacture all of our brachytherapy seed products at our North Hollywood and Chatsworth, California facilities. We manufacture certain of our brachytherapy
accessory products, such as our steppers and stabilizers, in our Seattle facility, and we manufacture our calibration and reference source products in our North Hollywood facility. 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.

The
components of the Hynic-Annexin V kit are manufactured for us by third party contract manufacturers. We conduct audits of our third party manufacturers to ensure they comply with the
FDA's current Good Manufacturing Practice regulations.

RESEARCH AND DEVELOPMENT

Research and development expenses totaled $7,351,000, $8,951,000 and $7,602,000 during the years ended October 31, 2003, 2002 and 2001, respectively, which
relate primarily to the ongoing clinical trial and development costs related to the Hynic-Annexin V development program. Significant clinical trial and development costs will be required over the next
several years with respect to Hynic-Annexin V.

EMPLOYEES

As of October 31, 2003, we had a total of 96 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.

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Risk Factors

We presently have limited marketing and sales experience.

Until its termination in January 2003, we relied almost exclusively on our marketing and distribution agreement with a third party for the marketing and
sales of our brachytherapy products, including Iodine-125 and Palladium-103 seeds. In connection with the termination of this agreement, we developed an internal sales and
marketing force to directly market and sell these products. We have limited experience, however, marketing and selling our brachytherapy products, which in fiscal 2003 accounted for approximately 73%
of our revenue.

Our
sales staff currently consists of eleven representatives. Subsequent to the termination of the exclusive third party agreement, sales declined. Although our direct sales have begun
to steadily increase, there can be no assurance that sales will reach or exceed sales that we experienced while the agreement was in effect. Furthermore, there can be no assurance that our direct
sales and marketing efforts will be otherwise 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.

Development of our Hynic-Annexin V product candidate involves considerable risk and could threaten our future profitability.

Our anticipated expenditures in the development of Hynic-Annexin V are expected to have a significant negative impact on our earnings. Development of this product
presents considerable risks including:



On
October 13, 2003, we announced observations from an internal preliminary review of data from our European clinical trials of Hynic-Annexin V. The data from these observations,
which were derived from the first 28 subjects enrolled in these clinical trials, were preliminary and to some extent inconclusive. Hence, further analyses or additional clinical trials will be
required. Further analyses or additional clinical trials may result in negative findings, may delay the availability of Hynic-Annexin V as a product candidate and may reveal the need for greater
expenditures than currently planned to commercialize Hynic-Annexin V. Even if further early clinical trials produce positive results, these results may not predict results that will be obtained in
large-scale clinical trials and there can be no assurance that the clinical trials will demonstrate the safety and efficacy of Hynic-Annexin V or that the clinical trials will lead to any marketable
products.

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We
continue to evaluate, on an ongoing basis, strategic alternatives for our Hynic-Annexin V product development program and are engaged in assessing various options with a view of
optimizing shareholder value.

A significant percentage of our revenues comes from the sale of our brachytherapy products.

We expect to continue to derive a substantial percentage of our existing revenues for the next several years from sales of our Iodine-125 and
Palladium-103 brachytherapy seeds. Our failure to maintain and improve the revenues from these products would have a material adverse effect on our business, financial condition and
results of operations. Our brachytherapy product sales accounted for approximately 73% of our revenues for the year ended October 31, 2003. We had an exclusive agreement with a third party for
the distribution of our brachytherapy products which terminated in January 2003. This customer represented 27%, 78% and 79% of total revenues for the years ended October 31, 2003, 2002
and 2001, respectively. In addition, two other customers each represented 11% of total revenues for the year ended October 31, 2003.

Our ability to commercialize product candidates is subject to uncertainty related to clinical trials.

Before obtaining regulatory approval for the commercial sale of our Hynic-Annexin V product candidate, or any other product candidates, we must demonstrate
through clinical trials that such product candidates are safe and efficacious for use in each indication. The results from pre-clinical testing and early clinical trials may not predict
results that will be obtained in large-scale clinical trials, and there can be no assurance that our clinical trials will demonstrate the safety and efficacy of any of our product candidates or will
lead to marketable products. A number of companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. We, the FDA or other regulatory
authorities may suspend or terminate clinical trials at any time. In addition, there can be no assurance that any of our product candidates will obtain FDA or other regulatory approval for any
indication or that an approved product will be capable of being produced in commercial quantities at reasonable cost and successfully marketed.

If
we are delayed or unable to develop a commercially acceptable Hynic-Annexin V product formulation to take to market, we may be unable to proceed with further clinical trials for any
indications. In addition, the FDA has indicated that clinical trial data we present from an adequate and well-controlled study suitable for supporting a marketing application, often
referred to as a pivotal study, for any indication must be performed with the final commercial form of the product candidate. As a result, any delay caused by implementing the final design of, or the
manufacturing process for, Hynic-Annexin V may delay commercialization.

In
addition, the rate at which we complete clinical trials depends upon, among other things, the rate of patient enrollment. Patient enrollment is a function of many factors, including
the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. To date, patient enrollment both in the United
States and in Europe has proceeded more slowly than we had originally anticipated. Delays in planned patient enrollment may result in increased costs, program delays, or both.

There
can be no assurance that any of our clinical trials will be completed successfully within any specified time period, or at all. There also can be no assurance that the results from
any of these clinical trials will warrant commencing further clinical trials or taking a product candidate to market.

If we fail to maintain our competitive position in key product areas, we may lose significant sources of revenue.

Our brachytherapy business is subject to intense competition. Our primary competitors in the brachytherapy seed business include: Nycomed Amersham PLC (through
its control of Oncura) and C.R

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Bard, Inc.,
which both manufacture and sell Iodine-125 brachytherapy seeds, as well as distribute Palladium-103 seeds manufactured by a third party; Mentor, which
manufactures and sells Iodine-125 brachytherapy seeds and currently distributes third party manufactured Palladium-103 brachytherapy seeds; and Theragenics Corporation, which
manufacturers Palladium-103 seeds and sells Palladium-103 and Iodine-125 brachytherapy seeds directly and its Palladium-103 brachytherapy seeds through marketing
relationships with third parties. Several additional companies currently sell brachytherapy seeds as well.

Our
radiation reference source business also is 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.

Currently,
the leading imaging technologies include computer tomography, or CT, scanning and magnetic resonance imaging, or MRI, both of which image changes in the anatomy of organs and
other tissue. Our Hynic-Annexin V product candidate images apoptosis and necrosis at the cellular level; however, there can be no assurance that alternative technologies will not be developed which
have equivalent or superior imaging capabilities to Hynic-Annexin V and which may become more widely accepted as clinical techniques.

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
than us, as well as more extensive experience in research and development, the regulatory approval process, manufacturing and marketing, may be in a better position than we are to seize market
opportunities created by technological advances in our industry.

The innovative nature of Hynic-Annexin V raises questions as to whether the market will accept such a product.

The success of our products will depend on our ability to foster and maintain favorable perceptions among patients, doctors, healthcare payers and medical
researchers regarding the safety, efficacy utility and cost effectiveness of these products. This is particularly true with respect to Hynic-Annexin V. Healthcare providers and payers may not accept
gamma imaging of cell death through the use of Hynic-Annexin V as a viable alternative to traditional methods for assessing response to cancer or evaluating other diseases involving cellular death. If
we receive regulatory approval, we may not receive acceptance among physicians, patients and healthcare payers in the United States or elsewhere, and we may be unable to market and sell these
products.

If we are unable to acquire sufficient supplies from key suppliers that in some cases may be the only sources of raw materials, our ability to deliver our products to the
market may be impeded.

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

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We depend on several key licenses for our Hynic-Annexin V product candidate. If we lose our rights under any of these licenses, our ability to develop, market and sell
Hynic-Annexin V may be jeopardized.

We
license separately from several different entities certain technology rights related to Hynic-Annexin V. We are obligated to pay such entities royalties, milestone payments and other
payments in exchange for such licenses and we rely on such parties' intellectual property rights to protect our proprietary interests in Hynic-Annexin V. If we or our licensors breach any of the terms
of these license
agreements, or if we are unable to pay amounts owed to our licensors when they become due, we may lose the right to use this technology. If such an event occurs, we may be unable to develop, market or
sell Hynic-Annexin V.

In
addition, we are aware of other third party rights relating to Tc-99m -labeled Annexin V technology. We believe we and our licensors have good and sufficient defenses
against any possible infringement claims. Nevertheless, should a court rule against us or our licensors, we may be prohibited from marketing Hynic-Annexin V unless we obtain a license from such third
party which, if available at all, may require us to make substantial royalty or other payments.

If
we are unable to obtain a license from such third party or if we lose rights to use technology related to Hynic-Annexin V under any of our current license agreements, we may be unable
to market and sell Hynic-Annexin V.

If we fail to protect our intellectual property rights, other companies may take advantage of our technology ideas and more effectively compete directly against
us.

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 also
have licensed patents and technology for which patents are issued and pending related to Hynic-Annexin V. We currently hold two U.S. patents relating to brachytherapy. In December 1999, we
received a patent (No. 5,997,643Laser Welded Brachytherapy Source and Method of Making the Same) for a laser welded closure device which expires in 2018. Additionally, we have
applied to extend our patent protection internationally with the European Patent Office. We also filed an application for patent protection in August 1997 on our radioactive brachytherapy
source design. In October 2002, the United States Patent and Trademark Office issued a patent (No. 6,440,058Radioactive Seeds and Method for Using Same) on several of our
claims related to the use of multiple markers to designate seed characteristics which expires in 2019. In January 2003, we received Patent No. 6,503,186Radioactive Seed with
Multiple Markets and Method for Using Same which allowed further claims related to brachytherapy seed design and the design's ability to indicate type of isotope or activity level. This patent expires
in 2020. The remaining portion of the application is still pending. No patent protection is afforded while the application is pending before the United States Patent and Trademark Office. Furthermore,
in 2003, the Company received notification that claims relating to its Featherlite flood source product were allowed by the United States Patent & Trademark Office. The scope and extent of
patent protection for our products is uncertain and frequently involves complex legal and factual questions. The breadth of the claims allowed in patents relating to biotechnology applications used in
our products or their enforceability cannot be predicted, and patent litigation can be expensive and time consuming. No assurance can be given that our pending patent applications will be approved. If
patents are issued with respect to those applications, however, questions which arise regarding the validity and scope of these patents may not be resolved in our favor. In addition, our current or
future patents, trade secrets, or know-how may not protect us against competitors with similar technologies or processes. Furthermore, others may infringe any patents issued to us and
other companies may develop independently proprietary technologies or processes which are the same as or substantially equivalent to our proprietary technologies and processes. Costly litigation might
be necessary to protect our patents or to determine the scope and validity of third-party proprietary rights, and it is possible that we will not have the required resources to pursue such litigation
or to protect our patent rights. An adverse outcome in litigation with respect to the validity of any of our patents could subject us to

19

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significant
liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using a product or technology.

In
addition, there can be no assurance that patents have not been issued or will not be issued in the future that conflict with our patent rights or prevent us from marketing our
products. Such conflicts could result in a rejection of our licensors' patent applications or the invalidation of patents. Furthermore, if patents that contain dominating or conflicting claims have
been or are subsequently issued to others, and such claims are ultimately determined to be valid, we may be required to obtain licenses under patents or other proprietary rights of others. No
assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to
us, or at all. If we do not obtain such licenses, we could encounter delays or find that we are unable to develop, manufacture or sell products requiring such licenses.

We
also rely on trade secrets, proprietary know-how and other proprietary information that we seek to protect, in part, through confidentiality agreements with our
collaborators, customers, employees and consultants. It is possible that these agreements will be breached or that they will not be enforceable in every instance, and that we will not have adequate
remedies for any such breach. Furthermore, enforcing a claim alleging the infringement of trade secrets would be expensive and time consuming, making the outcome uncertain. It is also possible that
our trade secrets will become known or independently developed by competitors. There can be no assurance that these confidentiality agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information.

We are subject to extensive government regulation applicable to the manufacture and distribution of our products. If we fail or are delayed in obtaining regulatory approvals or
fail to comply with applicable regulations, we may be unable to 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.

The
FDA generally requires that medical devices receive FDA 510(k) pre-market notification clearance or an approved pre-market approval application, or PMA,
before we, as a manufacturer of such devices, can take orders or distribute those products in the United States. In addition, modifications or enhancements to these products that could significantly
affect safety or effectiveness, or constitute a major

20

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change
in intended use, require further FDA clearance or approval. Obtaining FDA market clearances or approvals can be time consuming, expensive and uncertain. We may fail to obtain the necessary
clearances or approvals or may be unduly delayed in doing so. Furthermore, even if we are granted regulatory clearances, the clearances may include significant limitations on the indicated uses of the
product, which may limit the market for those products. The FDA review process typically requires extended proceedings pertaining to the safety and efficacy of new products, which may delay or hinder
a product's timely entry into the marketplace. If we were unable to achieve required FDA approval or clearance for a product, or were limited or unduly delayed in doing so, our business would suffer.
In addition, we have generally been able to use the 510(k) pre-market notification clearance for our products, which is less time-consuming, expensive and uncertain than the
PMA approval process. If we were required to use the PMA approval process for future products or product modifications, it could delay or prevent release of the proposed products or modifications, and
could cause our business to suffer.

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. 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.

Reimbursement policies of Medicare and other third-party payers have a significant impact on our business.

A
substantial percentage of the patients treated for prostate cancer in the United States are covered by Medicare and, consequently, the costs of prostate cancer treatment are subject to
Medicare's prescribed rates of reimbursement. 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. There can be no assurance that:



Also,
we, our distributors and healthcare providers performing brachytherapy seeding 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.

In
addition, from time to time, significant attention is placed on reforming the healthcare system in the United States. Any future changes in Medicare and other third-party payer
reimbursement which may result from healthcare reform or deficit reduction legislation would likely place downward pressure on prices. Future reimbursement policies may also affect the commercial
acceptance of products we develop,

21

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including
Hynic-Annexin V. A number of legislative proposals have been introduced in Congress and state legislatures in recent years that would affect major reforms of the healthcare system and
otherwise reduce healthcare spending. Because of the uncertainties surrounding the nature, timing and extent of any such reimbursement changes, audits and reform initiatives, we are unable to predict
the effects of any such matters on our business.

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

We
manufacture and process radioactive materials which are subject to stringent regulation. We operate under licenses issued by the California Department of Health which are renewable
every eight years. We received a renewal of our license for our North Hollywood facility in 1998 and we were issued a license for our Chatsworth facility in March 1999. California is one of the
"Agreement States," which
are so named because the Nuclear Regulatory Commission, or NRC, has granted such states regulatory authority over radioactive materials, provided such states have regulatory standards meeting or
exceeding the standards imposed by the NRC. Most users of our products must obtain licenses issued by the state in which they reside (if they are Agreement States) or the NRC. Use licenses are also
required by some of the foreign jurisdictions in which we may seek to market our products.

We
use radioactive materials which are subject to stringent regulation in our Worcester, Massachusetts research laboratory. We operate under a "Massachusetts Radioactive Materials
License" issued by the Commonwealth of Massachusetts Executive Office of Health and Human Services, which expires in October 2007.

Historically,
we spend approximately $250,000 per year to comply with government regulations applicable to our use of radioactive materials.

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 the Company in the event of any damages resulting from the use of hazardous materials.

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 proposed
acquisition of NOMOS, which we announced on October 27, 2003, are examples of such transactions. In the future, 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.

We may require additional capital in the future and we may be unable to obtain capital on favorable terms or at all.

Our capital requirements have been and are expected to continue to be significant. We expect our existing capital resources and future operating cash flows to be
sufficient for the foreseeable future. In October 2003, we entered into an agreement to acquire NOMOS. Under the terms of the agreement, we will issue approximately 5.3 million shares of
common stock and pay approximately $12 million in cash in

22

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exchange
for all the outstanding capital stock of NOMOS. The transaction is subject to shareholder approval and is expected to be completed in the second fiscal quarter of 2004. Additionally, ongoing
clinical trial and development costs for Hynic-Annexin V will require significant expenditures which could exceed our current estimates. Furthermore, we may require further capital for the purchase of
complementary businesses, technologies or products. Our capital requirements will depend on numerous factors, including the time and cost involved in expanding production capacity, the cost involved
in protecting our proprietary rights and the time and expense involved in completing clinical trial and development programs and obtaining required regulatory approvals for new products we may develop
or acquire.

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:



The testing, marketing and sale of our products involve the risk of product liability claims by consumers and other third parties, and insurance against such potential claims
is expensive.

Our
business is subject to product liability risks inherent in the testing, manufacturing and marketing of products containing radioisotopes. To date, no product liability claims have
been asserted against us. However, there can be no assurance that such claims will not arise in the future based on past, present or future services or products we offer. We maintain product liability
and general liability insurance with a limit in the aggregate amount of $2 million with additional umbrella insurance coverage of $10 million; however, there can be no assurance that
liability claims will not exceed the scope of coverage or limits of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. If we do not or
cannot maintain sufficient liability insurance, our ability to market our products may be significantly impaired. In addition, product liability claims, as well as negative publicity arising out of
such claims, could have a material adverse effect on our business, operating results and financial condition.

23

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Our recently announced proposed merger with NOMOS Corporation may subject our stock price to downward adjustments as a result of adverse developments in NOMOS'
business.

On
October 27, 2003, we announced that we had entered into an agreement and plan of merger with NOMOS Corporation. Under the terms of the merger agreement, at closing we will
issue approximately 5.3 million shares of common stock and pay cash of approximately $12 million, in exchange for all of the outstanding capital stock of NOMOS. Based on the closing
stock price preceding the announcement of the transaction, the implied value of the transaction, including the assumption of outstanding NOMOS stock options (using the treasury stock method), is
approximately $56 million.

Since
we may terminate the agreement only in very limited circumstances and the exchange ratios are not subject to adjustment, our stockholders are subject to the risk of downward
adjustments in our stock price as a result of adverse developments in NOMOS' business. Moreover, if for any reason we are unable to complete the merger with NOMOS, the price of our common stock may be
adversely affected.

We may be unable to successfully integrate NOMOS' operations with our operations.

The
proposed merger with NOMOS involves the integration of our company with NOMOS, which integration will be complex, costly and a time-consuming process. The challenges of
combining the companies' operations include, among other things:



The
process of integrating our operations with NOMOS' operations could cause an interruption of, or loss of momentum in, the activities of the combined company's business and the loss of
key personnel. The diversion of management's attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies' operations could harm our
business, results of operations, financial condition or prospects after the merger.

Failure to complete the proposed merger with NOMOS could harm our business.

Failure to complete the proposed merger with NOMOS could harm our business in a number of ways including, among others, the following:



24

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Item 2.    PROPERTIES

We are headquartered in the Los Angeles, California metropolitan area where we occupy two properties totaling approximately 40,000 square feet. These facilities
are used for office, manufacturing, engineering, warehouse and research and development. We believe our manufacturing and distribution facilities are adequate, suitable and of sufficient capacity to
support our current operations. Our leases in each of these facilities expire in November 2004, with multiple renewal options. Our Theseus subsidiary is headquartered in Boston, Massachusetts
where we lease office space totaling approximately 4,100 square feet, with our lease expiring in September 2004. In addition, we lease laboratory space in Worcester, Massachusetts, totaling
approximately 4,300 square feet, for the Hynic-Annexin V development program, which also expires in September 2004, and we lease space in Seattle related to our acquisition of RTP, which
expires in March 2006.

Item 3.    LEGAL PROCEEDINGS

We are subject to 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.

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

None.

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is listed on the Nasdaq National Market stock exchange under the ticker symbol "NASI". The following table sets forth, for the periods
indicated, the high and low sales prices for our common stock, as reported on the Nasdaq National Market.

Fiscal 2003

High

LowFirst Quarter

$
9.77

$
7.26Second Quarter


8.05


6.25Third Quarter


9.00


6.62Fourth Quarter


11.24


6.80Fiscal 2002First Quarter

$
16.90

$
8.73Second Quarter


13.99


10.07Third Quarter


14.00


9.00Fourth Quarter


11.20


7.06


As
of January 19, 2004, we had approximately 82 holders of record and estimate that we had approximately 3,800 beneficial owners of our Common Stock.

We
have never paid cash dividends on our Common Stock and have no plans to do so.

26

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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,  
|------------------------------------------------------------------------ | --------------------------------------------- | ------------------------
|
|
|Statement of Operations:                                                 |                                               |                         
|Net sales                                                                |                                               | $                       
|Cost of goods sold                                                       |                                               |                         
|                                                                         |                                               |                         
|Gross profit                                                             |                                               |                         
|                                                                         |                                               |                         
|Operating expenses:                                                      |                                               |                         
|                                                                         | Selling, general and administrative           |                         
|                                                                         | Research and development                      |                         
|                                                                         | Purchased in-process research and development |                         
|                                                                         | Write-off of licenses and equipment           |                         
|                                                                         |                                               |                         
|                                                                         |                                               | Total operating expenses
|                                                                         |                                               |                         
|Income (loss) from operations                                            |                                               |                         
|Interest and other income, net                                           |                                               |                         
|                                                                         |                                               |                         
|Income (loss) before provision (benefit) for income taxes                |                                               |                         
|Provision (benefit) for income taxes                                     |                                               |                         
|                                                                         |                                               |                         
|Income (loss) before cumulative effect of change in accounting principle |                                               |                         
|Cumulative effect of change in accounting principle                      |                                               |                         
|                                                                         |                                               |                         
|Net income (loss)                                                        |                                               | ($                      
|                                                                         |                                               |                         
|Diluted earnings (loss) per share                                        |                                               | ($                      
|                                                                         |                                               |                         
|Shares used in per share calculation                                     |                                               |                         
|                                                                         |                                               |                         

|                                                 |  | As of October 31,
|------------------------------------------------ |  | -----------------
|
|
|Balance Sheet Data:                              |  |                  
|Cash, cash equivalents and marketable securities |  | $                
|Cash held in variable interest entity            |  |                  
|Working capital                                  |  |                  
|Total assets                                     |  |                  
|Total debt                                       |  |                  
|Total stockholders' equity                       |  |                  

---

27

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

The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our financial condition
and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements contained herein and the notes thereto. Certain statements contained in this 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 1 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 design, develop and produce innovative radioisotopic products, including brachytherapy seeds and radiopharmaceuticals, principally for the treatment and
diagnosis of disease. Since 1990, we have applied our expertise in radioisotopes to develop and market products for medical, environmental, research and industrial applications.

From
1998 to January 2003, our brachytherapy seeds were distributed under an exclusive agreement with Mentor Corporation ("Mentor"). In January 2003, the agreement with
Mentor terminated and we began to market and sell our brachytherapy products directly to health care providers. Future revenues and gross profit relating to our brachytherapy products will depend on
several factors, including our ability to successfully directly market and distribute our brachytherapy products and to successfully withstand pricing pressure from competition and price containment
pressure from Medicare reimbursement limits for brachytherapy procedures.

In
October 2000, we acquired Theseus Imaging Corporation, a developer of proprietary radiopharmaceuticals to enhance the medical management of patients with cancer or other
medical conditions. Our principal radiopharmaceutical product candidate is Hynic-Annexin V which is currently in early Phase II clinical trials in Europe and the United States. We have incurred direct
expenses related to the project of approximately $8.5 million, $11.8 million and $8.2 million for the fiscal years ended October 31 2003, 2002 and 2001, respectively.

Our
anticipated expenditures in the development of Hynic-Annexin V are expected to have a significant negative impact on our earnings. Development of this product presents considerable
risks including:



28

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On
October 13, 2003, we announced observations from an internal preliminary review of data from our European clinical trials of Hynic-Annexin V. The data from these observations,
which were derived from the first 28 subjects enrolled in these clinical trials, were preliminary and to some extent
inconclusive. Hence, further analyses or additional clinical trials will be required. Further analyses or additional clinical trials may result in negative findings, may delay the availability of
Hynic-Annexin V as a product candidate and may reveal the need for greater expenditures than currently planned to commercialize Hynic-Annexin V. Even if further early clinical trials produce positive
results, these results may not predict results that will be obtained in large-scale clinical trials and there can be no assurance that the clinical trials will demonstrate the safety and efficacy of
Hynic-Annexin V or that the clinical trials will lead to any marketable products.

In
view of these risks and uncertainties, we are unable to estimate with any certainty when, if ever, we will complete the development of our Hynic-Annexin V product candidate or the
final cost thereof. We do believe that successful completion and receipt of required regulatory approvals allowing marketing will not be earlier than 2007, and additional related costs could be at
least $50 million. We estimate that meaningful revenues from this product would commence within one year after our receipt of the required marketing approvals.

We
expect that the costs related to our Hynic-Annexin V development program will continue to have a significant negative effect on our earnings, and therefore, on our liquidity and
financial position. However, since most of the costs that we incur in connection with this project are being expensed as incurred, our ultimate inability to complete the program or otherwise be unable
to successfully commercialize the product should not have any additional adverse effect on our results of operations or financial position except that, if the program is unsuccessful, we could
recognize an impairment charge in connection with the carrying value of goodwill (approximately $3.7 million) arising from our acquisition of Theseus as well as other impairments or charges
related to equipment owned and other obligations.

We
continue to evaluate, on an ongoing basis, strategic alternatives for our Hynic-Annexin V product development program and are engaged in assessing various options with a view of
optimizing shareholder value.

In
August 2003, we acquired substantially all of the assets of Radiation Therapy Products ("RTP"), a manufacturer and distributor of equipment used in prostate brachytherapy
procedures. We believe that the acquisition of RTP will enhance our product portfolio and enable us to offer a more complete product offering to our brachytherapy customers.

In
October 2003, we entered into an agreement to acquire NOMOS Corporation ("NOMOS"). NOMOS is a privately held developer, manufacturer, and marketer of intensity modulated
radiation therapy ("IMRT") products and services. IMRT is a rapidly growing category of radiation therapy used to treat a variety of cancers. We believe that this acquisition will further complement
our current product offerings to radiation oncologists. The transaction is subject to both shareholder and regulatory approval and is expected to be completed in the second quarter of fiscal 2004.

29

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Results of Operations

Fiscal 2003 vs. Fiscal 2002

Net sales.Net sales decreased $6,097,000, or 29%, to $14,683,000 for the year ended October 31, 2003 from $20,780,000
for the year ended October 31, 2002. The decrease in net sales was due to the following: (i) an approximately 45% decline in unit sales of seeds associated with the transition to the
direct marketing and sale of our brachytherapy products upon the conclusion in January 2003 of our previous distribution agreement with Mentor, and (ii) although our average selling
prices of seeds increased by approximately 17% as a result of eliminating our primary distributor, the industry witnessed a significant reduction in average selling prices to end users of
brachytherapy seeds as a result of a highly competitive pricing environment and price containment pressure arising from Medicare reimbursement limits. Thus, although we captured the distributor
margin, overall average selling prices to end users of our brachytherapy products decreased approximately 30%. Our brachytherapy product sales accounted for approximately 73% of our revenues for the
year ended October 31, 2003.

Gross profit.Gross profit decreased $5,460,000 or 41% to $7,739,000 for the fiscal year ended October 31, 2003 from
$13,199,000 for the fiscal year ended October 31, 2002. Gross profit as a percent of sales decreased from 64% to 53% during this period. The decrease in gross profit as a percentage of sales
was primarily due to reduced economies of scale beginning in our fiscal second quarter associated with brachytherapy revenues due to a reduction in unit volume as we transitioned to a direct sales
initiative in January 2003 and the addition of certain low margin brachytherapy accessories such as pre-loaded needles and stranded seeds which are contracted out.

Selling, general and administrative expenses ("SG&A").SG&A increased $4,741,000 or 73%, to $11,266,000 for the fiscal year
ended October 31, 2003, from $6,525,000 for the fiscal year ended October 31, 2002. The increase in SG&A is primarily attributed to the following: (i) the development of a direct
sales and marketing force for our brachytherapy products ($2.9 million), (ii) legal expenses associated with the Mentor litigation ($0.6 million), (iii) increased Theseus
personnel costs ($0.5 million), and (iv) an increase in other general and administrative expenses.

Research and development.Research and development costs decreased $1,600,000 or 18%, to $7,351,000 for the fiscal year ended
October 31, 2003, from $8,951,000 for the fiscal year ended October 31, 2002. These costs primarily represent our continued investment in our Hynic-Annexin V product candidate. The
decrease in research and development spending is primarily due to a decrease in manufacturing costs as the quantity of kit components on hand was sufficient for fiscal 2003 clinical trials, partially
offset by increased R&D personnel and facility costs. All of our research and development costs are expensed as incurred. 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.

Write-off of licenses and equipment.Results of operations for the fiscal year ended October 31, 2002
include a charge of approximately $2.7 million to reflect the total write-off of abandoned licenses and related equipment associated with technology licensed from third parties for
the development of our Apomate technology platform. In 2001 we licensed additional technology and patent rights from a third party for the development of an improved version of our
Apomate kit, or Hynic-Annexin V. During the second quarter of 2002, we decided to exclusively pursue the development of our Apomate technology with the newly licensed
technology and to write-off the prior technology.

Interest and other income, net.Interest and other income, net decreased $85,000, or 5% to $1,749,000 for the fiscal year
ended October 31, 2003 from $1,834,000 for the fiscal year ended October 31, 2002. This decrease reflects lower interest income as a result of a lower portfolio balance and a general
decline in the effective yield of our portfolio of marketable securities consistent with the general decline in interest rates

30

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in
the period which was partially offset by a gain of approximately $600,000 resulting from the sale of our remaining shares of RadioMed Corporation, a privately held company.

Provision (benefit) for income taxes.Results of operations for the year ended October 31, 2002 included a provision
for income taxes of $2,087,000, whereas we did not recognize a benefit for the loss during the year ended October 31, 2003. Due to the uncertainty of our ability to fully recognize the future
benefit of our deferred tax assets, we recorded a valuation allowance in fiscal 2003 and 2002. The valuation allowance was approximately $9.6 million and $5.1 million at
October 31, 2003 and 2002, respectively.

Cumulative effect of change in accounting principle.During 2003, we adopted Statement of Financial Accounting Standards
(SFAS) No. 143, "Accounting for Asset Retirement Obligations," for recording future decommissioning costs related to our leased manufacturing and research facilities. Under SFAS No. 143,
a future retirement obligation is recorded at present value by discounting the Company's estimated future asset retirement obligation. In adopting this pronouncement, we recognized a charge of
$311,000 which is reported in the caption "Cumulative effect of change in accounting principle."

Fiscal 2002 vs. Fiscal 2001

Net sales.Net sales increased $1,437,000, or 7%, to $20,780,000 for the year ended October 31, 2002 from $19,343,000
for the year ended October 31, 2001. The increase in net sales was due to the increase in revenues generated from our brachytherapy product lines.

Gross profit.Gross profit increased $718,000 or 6% to $13,199,000 for the fiscal year ended October 31, 2002 from
$12,481,000 for the fiscal year ended October 31, 2001. Gross profit as a percent of sales decreased from 65% to 64% during this period. The decrease in gross profit as a percentage of sales
was primarily due to a change in the product mix and increased price competition in our brachytherapy products.

Selling, general and administrative expenses.SG&A increased $428,000 or 7%, to $6,525,000 for the fiscal year ended
October 31, 2002, from $6,097,000 for the fiscal year ended October 31, 2001. The increase is primarily attributed to our increase in personnel costs due to the growth of our
brachytherapy and radiopharmaceutical business, increased operating expenses associated with the development of Hynic-Annexin V, and an increase in the provision for doubtful accounts, which was
partially offset by discontinued amortization of goodwill. The Company adopted SFAS No. 142 effective November 1, 2001. In accordance with SFAS No. 142, we discontinued the
amortization of goodwill. Amortization of goodwill for the year ended October 31, 2001 was $368,000. For additional information regarding SFAS No. 142, see Note 10 to the
Consolidated Financial Statements.

Research and development.Research and development costs increased $1,349,000 or 18%, to $8,951,000 for the fiscal year ended
October 31, 2002, from $7,602,000 for the fiscal year ended October 31, 2001. These costs primarily represent our continued investment in our Hynic-Annexin V product candidate. The
increase in research and development 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. All of our research and development costs are expensed as incurred.

Write-off of licenses and equipment.Results of operations for the fiscal year ended October 31, 2002
include a charge of approximately $2.7 million to reflect the total write-off of abandoned licenses and related equipment associated with technology licensed from third parties for
the development of our Apomate technology platform. In 2001 we licensed additional technology and patent rights from a third party for the development of an improved version of our
Apomate kit, or Hynic-Annexin V. During the second quarter of 2002, we decided to exclusively pursue the development of our Apomate technology with the newly licensed
technology and to write-off the prior technology.

31

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Results
of operations for the fiscal year ended October 31, 2001 included a charge of approximately $3.7 million to reflect the write-off of the costs of two
partially completed linear particle accelerators that were intended to produce Palladium-103 for use in our brachytherapy products. Based on the uncertainty of the estimated costs to
complete the units coupled with an increasingly reliable commercial supply of Palladium-103, we ceased the development efforts and disposed of the equipment.

Interest and other income.Interest and other income decreased $52,000, or 3% to $1,834,000 for the fiscal year ended
October 31, 2002 from $1,886,000 for the fiscal year ended October 31, 2001. This decrease was a result of a decline in the effective yield on our portfolio of marketable securities
consistent with the general decline in interest rates throughout 2002, which was partially offset by (i) the recognition of a full year worth of interest income related to the investment of
funds received from our follow-on offering completed in December 2000, (ii) a gain on sale of securities held as available for sale, and (iii) the elimination of
interest expense in fiscal 2002 as our short term debt was retired in fiscal 2001.

Provision (benefit) for income taxes.Results of operations for the year ended October 31, 2002 included a provision
for income taxes of $2,087,000 as compared to a benefit for income taxes of $1,090,000 for the year ended October 31, 2001. Due to the uncertainty of our ability to fully recognize the future
benefit of our deferred tax assets, in accordance with the SFAS No. 109, we recorded a valuation allowance of approximately $5.1 million as of October 31, 2002.

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.

Allowance for Doubtful Accounts and Sales Returns

The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. We
regularly review the allowance by considering factors such as historical experience, age of the accounts receivable balances and current economic conditions that may affect a customer's ability to
pay. If there were a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be
overstated which could have an adverse impact on our financial results. In fiscal 2003, we recorded a credit for doubtful accounts as a result of the resolution of disputes.

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

32

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Goodwill

Our methodology for allocating the purchase price related to purchase acquisitions is determined through established valuation techniques. Goodwill is measured as
the excess of the cost of the acquisition over the amounts assigned to identifiable assess acquired less assumed liabilities. We perform goodwill impairment tests on an annual basis and between annual
tests in certain circumstances. In response to changes in industry and market conditions, we may strategically realign our resources and consider restructuring, disposing of, or otherwise exiting
businesses, which could result in an impairment of goodwill.

Impairment of Long-lived Assets

We assess the impairment of long-lived assets, which include equipment and leasehold improvements and identifiable intangible assets, whenever events
and circumstances indicate that such assets might be impaired. In the event the expected undiscounted future cash flow attributable to the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair value is recorded.

Loss Contingencies

We record liabilities related to pending litigation when an unfavorable outcome is probable and we can reasonably estimate the amount of the loss. We are subject
to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. We evaluate, among other factors, the degree of probability of an unfavorable
outcome and an estimate of the amount of the loss. Significant judgment is required in both the determination of the probability and as to whether an exposure can be reasonably estimated. When we
determine that it is probable that a loss has been incurred, the effect is recorded promptly in the consolidated financial statements. Although the outcome of these claims cannot be predicted with
certainty, we do not believe that any of the existing legal matters will have a material adverse effect on our financial condition or results of operations.

Income Taxes

We account for income taxes using the liability method. Deferred taxes are determined based on the differences between the financial statement and tax bases of
assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the
likelihood of adverse outcomes resulting from these examinations.

Liquidity and Capital Resources

To date, our short-term liquidity needs have generally consisted of operating capital to finance growth in inventories, trade accounts receivable, new
product research and development, capital expenditures, acquisitions and strategic investments in related businesses. We have satisfied these needs primarily through a combination of cash generated by
operations, public offerings and from private placements of our common stock. We do not currently have a line of credit or similar arrangement with a bank.

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, 2003, we had cash, cash equivalents
and investments in marketable securities aggregating approximately $48.8 million, a

33

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decrease
of approximately $7.2 million or 13% from $56.0 million at October 31, 2002. The decrease was primarily a result of ongoing costs associated with our Hynic-Annexin V
development program. In fiscal 2002 and 2001 these costs were largely offset by cash flow generated from our brachytherapy and other product lines. In connection with the termination of our
distribution agreement with a third party and the transition to direct sales of our brachytherapy products, we experienced a decrease in operating cash flows in fiscal 2003.

We
expect that cash provided by 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, the impact of acquisitions and the timing of payments.

During
the year ended October 31, 2003, we received $181,000 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.

We
are authorized to repurchase up to $10 million of our common stock on the open market. The shares may be repurchased from time to time at prevailing market prices through open
market or negotiated transactions, depending upon market conditions. There is no guarantee as to the exact number of shares that we may repurchase. Subject to applicable securities laws, repurchases
may be made at such times and in such amounts as management deems appropriate. During the year ended October 31, 2003, we purchased 19,000 shares of our common stock at a total cost of
$129,000.

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.

Other assets.Other assets were approximately $1.3 million and $0.1 million as of October 31, 2003 and
2002, respectively. We have incurred approximately $1.3 million in acquisition related costs related to the NOMOS transaction as of October 31, 2003. We capitalize transaction costs and
include these amounts in other assets until such time as the acquisition is completed or abandoned. We expect to incur approximately $2.7 million in total acquisition costs for this transaction
which is anticipated to close during the second quarter of fiscal 2004.

Accounts payable and accrued expenses.Accounts payable and accrued expenses were approximately $6.8 million and
$4.2 million as of October 31, 2003 and 2002, respectively. The increase was primarily a result of accrued transaction costs in connection with the NOMOS transaction
($1.3 million), the accrued liability for future decommissioning costs of our leased manufacturing and research facilities ($0.4 million) related to the adoption of FAS 143 (See
Note 8 to the Consolidated Financial Statements) and the timing of payments to vendors.

Commitments

We lease 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. Future annual minimum lease payments under all operating leases with an initial term in excess of one year as of October 31, 2003 were as follows:

Fiscal Year

Amount2004

$
751,0002005


243,0002006


21,000Thereafter


Total

$
1,015,000


34

---

We
have minimum commitments for various contract services with unrelated parties totaling approximately $1.1 million. The agreements provide for various payments to be made over a
one to three year period as services are provided and contain provisions to terminate our payment obligations with 30 to 90 day notification. We also have an obligation to fund up to $850,000
in 2004 on an installment note receivable.

Liquidity and Capital Resource Requirements

We believe our current cash and marketable securities will be sufficient to support our operations and planned expansion for the foreseeable future. However, the
amount of capital that we will need in the future will depend on many factors including:



We
anticipate continuing significant expenses with respect to our Hynic-Annexin V product candidate over the next several years for clinical trials and development costs. We are unable
to estimate with any certainty when, if ever, we will complete the development of our Hynic-Annexin V product candidate or the final cost thereof. Significant milestone payments to third parties are
payable throughout the life of the contracts associated with our licenses of patent rights of technology related to our Hynic-Annexin V product candidate. We do believe that successful completion and
receipt of required regulatory approvals allowing marketing will not be earlier than 2007, and additional related costs could be at least [$50] million. We estimate that
meaningful revenues from this product would commence within one year after our receipt of the required marketing approvals.

We
expect that the costs related to our Hynic-Annexin V development program will continue to have a significant negative effect on our earnings, and therefore, on our liquidity and
financial position. However, since most of the costs that we incur in connection with this project are being expensed as incurred, our ultimate inability to complete the program or otherwise be unable
to successfully commercialize the product should not have any additional adverse effect on our results of operations or financial position except that, if the program is unsuccessful, we could
recognize an impairment charge in connection with the carrying value of goodwill (approximately $3.7 million) arising from our acquisition of Theseus as well as other impairments or charges
related to equipment owned and other obligations.

We
continue to evaluate, on an ongoing basis, strategic alternatives for our Hynic-Annexin V product development program and are engaged in assessing various options with a view of
optimizing shareholder value.

In
October 2003, we entered into an agreement to acquire NOMOS Corporation ("NOMOS"). Under the terms of the agreement, we will issue approximately 5.3 million shares of
common stock and pay approximately $12 million in cash in exchange for all the outstanding capital stock of NOMOS. The transaction is subject to shareholder approval and is expected to be
completed in the second fiscal quarter

35

---

of
2004. As of October 31, 2003, we have incurred approximately $1.3 million in acquisition related expenses. We estimate that we will incur approximately $1.4 million in
additional direct transaction costs in connection with the merger.

Future
capital requirements will also depend on the extent to which we acquire or invest in other businesses, products and technologies. If we should require additional financing due to
unanticipated developments, additional financing may not be available when needed or, if available, we may not be able to obtain this financing on terms favorable to our stockholders or us.
Insufficient funds may require us to delay, scale back or eliminate some or all of our research and development programs. If additional funds are raised by issuing equity securities, dilution to
existing stockholders would result.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, Consolidation of Variable Interest
Entitiesan Interpretation of ARB No. 51. The Interpretation clarified the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of this Interpretation are effective for all enterprises with variable interest entities created after January 31,
2003 and are required to be fully implemented no later than the third quarter of 2003. The adoption of FIN No. 46 resulted in the Company consolidating a third party entity as a variable
interest entity (See Note 4 of Notes to Consolidated Financial Statements).

In
February 2003, FASB issued EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 requires revenue
arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated
among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria should be considered separately for separate units of accounting. The guidance in
EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material impact on our financial position, results of operations or cash flows.

In
April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the
accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for all contracts entered into or modified after June 30, 2003, with certain exceptions, and for
hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. If we elect to enter into structured stock repurchase transactions after June 30, 2003,
in accordance with SFAS No. 149, those transactions will be required to be marked to market with related gains and losses being recorded in the statement of operations. The impact of such
transactions on our financial position and results of operations would be dependent upon whether we chose to enter into such transactions, the size of the transactions, as well as changes in the
market value of our common stock.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 changes
the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity by now requiring those instruments to be classified as
liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our financial position, results of operations or cash flows.

36

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Related Party Transactions

We purchased certain printing and office supplies from Nationwide Office Supplies, a company owned by the parents of Alan Edrick, our Senior Vice President and
Chief Financial Officer. The purchases totaled approximately $86,000 and $85,000 for our fiscal years ended October 31, 2003 and 2002, respectively.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and marketable securities. At October 31, 2003, 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.

Our
policy is not to enter into derivative financial instruments. We do not have any significant foreign currency exposure. Therefore, we do not have significant overall 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.



(b)   Changes in internal controls.



37

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PART III

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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, 2003.

We
have adopted 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, 2003.

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, 2003.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We purchased certain printing and office supplies from Nationwide Office Supplies, a company owned by the parents of Alan Edrick, our Senior Vice President and
Chief Financial Officer. The purchases totaled approximately $86,000 and $85,000 for our fiscal years ended October 31, 2003 and 2002, respectively. Other 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, 2003.

Item 14.    PRINCIPAL ACCOUNTANT 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, 2003.

38

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PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|   |                                                                                                                                                    |                                                            |  | Page
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- |  | ----
|1. | Financial Statements of the Company                                                                                                                |                                                            | 
|   |                                                                                                                                                    | Report of Independent Auditors                             |  | 42  
|   |                                                                                                                                                    | Consolidated Balance Sheets                                |  | 43  
|   |                                                                                                                                                    | Consolidated Statements of Operations                      |  | 44  
|   |                                                                                                                                                    | Consolidated Statements of Changes in Stockholders' Equity |  | 45  
|   |                                                                                                                                                    | Consolidated Statements of Cash Flows                      |  | 46  
|   |                                                                                                                                                    | Notes to Consolidated Financial Statements                 |  | 47  
|2. | Financial Statement Schedule                                                                                                                       |                                                            | 
|   |                                                                                                                                                    | Schedule IIValuation and Qualifying Accounts              |  | 62  
|   | All 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(c) of this Annual Report on Form 10-K.                                                                                |                                                            | 

On August 28, 2003, we furnished to the SEC a report on Form 8-K for the purpose of furnishing our press release announcing our
financial results for the quarter ended July 31, 2003.

On
October 13, 2003, we filed a report on Form 8-K to report the announcement of our internal preliminary review of data from our European clinical trials of
our Hynic-Annexin V product candidate.

On
October 27, 2003, we filed a report on Form 8-K to report the announcement of our proposed acquisition of NOMOS Corporation.

(c)   Exhibits

|Exhibit No. |  | Description                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                  
|3.1         |  | Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) of the Registrant's Registration Statement on Form 10-SB, filed August 22, 1995.                                                                                       
|3.2         |  | Certificate of Amendment of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-QSB for the quarterly period ended July 31, 1998.                                                                                               
|3.3         |  | Certificate of Domestication of the Registrant, incorporated by reference to Exhibit 3(i)(a) of the Registrant's Registration Statement on Form 10-SB, filed August 22, 1995.                                                                                    
|3.4         |  | Bylaws of the Registrant, incorporated by reference to Exhibit 3(ii) of the Registrant's Registration Statement on Form 10-SB, filed August 22, 1995.                                                                                                            
|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.

39

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|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.                                                                                                                                                                      
|10.10+ |  | Employment Agreement, dated April 1, 2002, by and between L. Michael Cutrer and the Company, 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 the Company, 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 the Company, 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 Company, 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 Company, 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 #333-110766), filed
November 26, 2003.                                                                                               
|14*    |  | Code of Ethics                                                                                                                                                                                                                                                                                                                                                         
|21.1*  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                        

40

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|23.1* |  | Consent of PricewaterhouseCoopers LLP, independent accountants.                  
|----- |  | ---------------------------------------------------------------------------------
|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.

---

41

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REPORT OF INDEPENDENT AUDITORS

To
the Board of Directors
and Stockholders of
North American Scientific, Inc.

In
our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 39 present fairly, in all material respects, the financial position of
North American Scientific, Inc. and its subsidiaries (the "Company") at October 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in
the period ended October 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) on page 39 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. 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 and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for variable interest entities during the year ended
October 31, 2003. As discussed in Note 8 to the consolidated financial statements, the Company changed the manner in which it accounts for asset retirement costs as of November 1,
2002.

/s/
PricewaterhouseCoopers LLP

Los
Angeles, California
December 18, 2003

42

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NORTH AMERICAN SCIENTIFIC, INC.    Consolidated Balance Sheets

|                                          |                                                                                                                                                                                   | October 31,                                |           
|----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------
|
|Assets                                    |                                                                                                                                                                                  
|Current assets                            |                                                                                                                                                                                   |                                            |           
|                                          | Cash and cash equivalents                                                                                                                                                         |                                            | $         
|                                          | Cash held in variable interest entity                                                                                                                                             |                                            |           
|                                          | Marketable securities                                                                                                                                                             |                                            |           
|                                          | Accounts receivable                                                                                                                                                               |                                            |           
|                                          | Inventories                                                                                                                                                                       |                                            |           
|                                          | Income tax receivable                                                                                                                                                             |                                            |           
|                                          | Prepaid expenses and other current assets                                                                                                                                         |                                            |           
|                                          |                                                                                                                                                                                   |                                            |           
|                                          |                                                                                                                                                                                   | Total current assets                       |           
|Non-current marketable securities         |                                                                                                                                                                                   |                                            | 14,767,000
|Equipment and leasehold improvements, net |                                                                                                                                                                                   |                                            | 2,996,000 
|Goodwill                                  |                                                                                                                                                                                   |                                            | 3,866,000 
|Intangible assets                         |                                                                                                                                                                                   |                                            | 813,000   
|Deferred income taxes                     |                                                                                                                                                                                   |                                            |          
|Other assets                              |                                                                                                                                                                                   |                                            | 1,334,000 
|                                          |                                                                                                                                                                                   |                                            |           
|                                          |                                                                                                                                                                                   | Total assets                               |           
|                                          |                                                                                                                                                                                   |                                            |           
|Liabilities and Stockholders' Equity      |                                                                                                                                                                                  
|Current liabilities                       |                                                                                                                                                                                   |                                            |           
|                                          | Accounts payable                                                                                                                                                                  |                                            | $         
|                                          | Accrued expenses                                                                                                                                                                  |                                            |           
|                                          |                                                                                                                                                                                   |                                            |           
|                                          |                                                                                                                                                                                   | Total current liabilities                  |           
|                                          |                                                                                                                                                                                   |                                            |           
|Commitments and contingencies (Note 15)   |                                                                                                                                                                                   |                                            |           
|Stockholders' equity                      |                                                                                                                                                                                   |                                            |           
|                                          | Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued                                                                                                    |                                            |           
|                                          | Common stock, $.01 par value, 40,000,000 shares authorized; 10,298,241 (2003) and 10,250,136 (2002) shares issued; and 10,279,241 (2003) and 10,250,136 (2002) shares outstanding |                                            |           
|                                          | Additional paid-in capital                                                                                                                                                        |                                            |           
|                                          | Treasury stock, at cost19,000 common shares                                                                                                                                      |                                            |           
|                                          | Accumulated deficit                                                                                                                                                               |                                            |           
|                                          |                                                                                                                                                                                   |                                            |           
|                                          |                                                                                                                                                                                   | Total stockholders' equity                 |           
|                                          |                                                                                                                                                                                   |                                            |           
|                                          |                                                                                                                                                                                   | Total liabilities and stockholders' equity |           
|                                          |                                                                                                                                                                                   |                                            |           

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

43

---



NORTH AMERICAN SCIENTIFIC, INC.    Consolidated Statements of Operations

|                                                                |                                                                           | Year Ended October 31, |            
|--------------------------------------------------------------- | ------------------------------------------------------------------------- | ---------------------- | -----------
|
|Net sales                                                       |                                                                           | $                      | 14,683,000 
|Cost of goods sold                                              |                                                                           |                        | 6,944,000  
|                                                                |                                                                           |                        |            
|                                                                |                                                                           | Gross profit           |            
|                                                                |                                                                           |                        |            
|Selling, general and administrative expenses                    |                                                                           |                        | 11,266,000 
|Research and development                                        |                                                                           |                        | 7,351,000  
|Write-off of licenses and equipment                             |                                                                           |                        |           
|                                                                |                                                                           |                        |            
|Total operating expenses                                        |                                                                           |                        | 18,617,000 
|                                                                |                                                                           |                        |            
|Loss from operations                                            |                                                                           |                        | (10,878,000
|Interest and other income, net                                  |                                                                           |                        | 1,749,000  
|                                                                |                                                                           |                        |            
|Loss before provision (benefit) for income taxes                |                                                                           |                        | (9,129,000 
|Provision (benefit) for income taxes                            |                                                                           |                        |           
|                                                                |                                                                           |                        |            
|Loss before cumulative effect of change in accounting principle |                                                                           |                        | (9,129,000 
|Cumulative effect of change in accounting principle (Note 8)    |                                                                           |                        | 311,000    
|                                                                |                                                                           |                        |            
|Net loss                                                        |                                                                           | $                      | (9,440,000 
|                                                                |                                                                           |                        |            
|Basic and diluted loss per share:                               |                                                                           |                        |            
|                                                                | Loss per share before cumulative effect of change in accounting principle |                        | $          
|                                                                | Cumulative effect of change in accounting principle                       |                        |            
|                                                                |                                                                           |                        |            
|                                                                | Net loss                                                                  |                        | $          
|                                                                |                                                                           |                        |            
|Weighted average number of shares outstanding:                  |                                                                           |                        |            
|                                                                | Basic and diluted                                                         |                        |            
|                                                                |                                                                           |                        |            

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

44

---



NORTH AMERICAN SCIENTIFIC, INC.    Consolidated Statements of Changes in Stockholders' Equity

|                                                           |  | Common Stock |  |   |         |  |   |            |  | Accumulated
Other
Comprehensive
Income |          |   |  
|---------------------------------------------------------- |  | ------------ |  | - | ------- |  | - | ---------- |  | -------------------------------------- | -------- | - | -
|
|
|Balance at October 31, 2000                                |  | 7,301,702    |  | $ | 73,000  |  | $ | 27,550,000 |  | $                                      |         |   | $
|Common stock issued upon exercise of stock options         |  | 155,454      |  |   | 2,000   |  |   | 559,000    |  |                                        |         |   |  
|Common stock issued under employee stock purchase plan     |  | 11,314       |  |   |        |  |   | 137,000    |  |                                        |         |   |  
|Common stock issued upon follow-on offering                |  | 2,695,000    |  |   | 27,000  |  |   | 44,597,000 |  |                                        |         |   |  
|Unrealized gain on securities available for sale           |  |             |  |   |        |  |   |           |  |                                        |         |   |  
|Tax benefit related to exercise of stock options           |  |             |  |   |        |  |   | 587,000    |  |                                        |         |   |  
|Compensatory stock options, issued to non-employees        |  |             |  |   |        |  |   | 138,000    |  |                                        |         |   |  
|Net loss                                                   |  |             |  |   |        |  |   |           |  |                                        |         |   |  
|                                                           |  |              |  |   |         |  |   |            |  |                                        |          |   |  
|Balance at October 31, 2001                                |  | 10,163,470   |  |   | 102,000 |  |   | 73,568,000 |  |                                        |         |   |  
|Common stock issued upon exercise of stock options         |  | 73,340       |  |   | 1,000   |  |   | 232,000    |  |                                        |         |   |  
|Common stock issued under employee stock purchase plan     |  | 13,326       |  |   |        |  |   | 129,000    |  |                                        |         |   |  
|Change in unrealized gain on securities available for sale |  |             |  |   |        |  |   |           |  |                                        |         |   |  
|Net loss                                                   |  |             |  |   |        |  |   |           |  |                                        |         |   |  
|                                                           |  |              |  |   |         |  |   |            |  |                                        |          |   |  
|Balance at October 31, 2002                                |  | 10,250,136   |  |   | 103,000 |  |   | 73,929,000 |  |                                        |         |   |  
|Common stock issued upon exercise of stock options         |  | 7,100        |  |   |        |  |   | 34,000     |  |                                        |         |   |  
|Common stock issued under employee stock purchase plan     |  | 21,005       |  |   |        |  |   | 147,000    |  |                                        |         |   |  
|Purchase of treasury stock                                 |  |             |  |   |        |  |   |           |  |                                        | (129,000 | ) |  
|Shares issued upon acquisition                             |  | 20,000       |  |   |        |  |   | 186,000    |  |                                        |         |   |  
|Compensatory stock options, issued to non-employees        |  |             |  |   |        |  |   | 47,000     |  |                                        |         |   |  
|Net loss                                                   |  |             |  |   |        |  |   |           |  |                                        |         |   |  
|                                                           |  |              |  |   |         |  |   |            |  |                                        |          |   |  
|Balance at October 31, 2003                                |  | 10,298,241   |  | $ | 103,000 |  | $ | 74,343,000 |  | $                                      | (129,000 | ) | $
|                                                           |  |              |  |   |         |  |   |            |  |                                        |          |   |  

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

45

---



NORTH AMERICAN SCIENTIFIC, INC.    Consolidated Statements of Cash Flows

|                                                                                             |                                                                                           | Year Ended October 31,                                  |                                  
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------
|
|Cash flows from operating activities:                                                        |                                                                                           |                                                         |                                  
|                                                                                             | Net loss                                                                                  |                                                         | $                                
|                                                                                             | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                         |                                  
|                                                                                             |                                                                                           | Cumulative effect of change in accounting principle     |                                  
|                                                                                             |                                                                                           | Depreciation and amortization                           |                                  
|                                                                                             |                                                                                           | Provision for doubtful accounts                         |                                  
|                                                                                             |                                                                                           | Deferred income taxes                                   |                                  
|                                                                                             |                                                                                           | Write-off of licenses and equipment                     |                                  
|                                                                                             |                                                                                           | Non-cash stock compensation expense                     |                                  
|                                                                                             |                                                                                           | Tax benefit of stock option exercises                   |                                  
|                                                                                             |                                                                                           | Gain on sale of non-marketable securities               |                                  
|                                                                                             |                                                                                           | Other                                                   |                                  
|                                                                                             |                                                                                           | Changes in assets and liabilities, net of acquisitions: |                                  
|                                                                                             |                                                                                           |                                                         | Accounts receivable              
|                                                                                             |                                                                                           |                                                         | Inventories                      
|                                                                                             |                                                                                           |                                                         | Income taxes                     
|                                                                                             |                                                                                           |                                                         | Prepaid expenses and other assets
|                                                                                             |                                                                                           |                                                         | Accounts payable                 
|                                                                                             |                                                                                           |                                                         | Accrued expenses                 
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|Cash flows from investing activities:                                                        |                                                                                           |                                                         |                                  
|                                                                                             | Proceeds from sale of marketable securities                                               |                                                         |                                  
|                                                                                             | Purchases of marketable securities                                                        |                                                         |                                  
|                                                                                             | Proceeds from sales of non-marketable securities                                          |                                                         |                                  
|                                                                                             | Purchase of licenses                                                                      |                                                         |                                  
|                                                                                             | Proceeds from notes receivable                                                            |                                                         |                                  
|                                                                                             | Acquisitions, net of cash acquired                                                        |                                                         |                                  
|                                                                                             | Capital expenditures                                                                      |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|Cash flows from financing activities:                                                        |                                                                                           |                                                         |                                  
|                                                                                             | Net proceeds from stock options and stock purchase plan                                   |                                                         |                                  
|                                                                                             | Purchase of common stock as treasury stock                                                |                                                         |                                  
|                                                                                             | Net proceeds from follow-on offering                                                      |                                                         |                                  
|                                                                                             | Repayment of short-term debt                                                              |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             |                                                                                           |                                                         |                                  
|Net increase (decrease) in cash and cash equivalents                                         |                                                                                           |                                                         | (947,000                         
|Cash and cash equivalents at beginning of period                                             |                                                                                           |                                                         | 2,708,000                        
|                                                                                             |                                                                                           |                                                         |                                  
|Cash and cash equivalents at end of period (including cash held in variable interest entity) |                                                                                           | $                                                       | 1,761,000                        
|                                                                                             |                                                                                           |                                                         |                                  
|Supplemental disclosure of cash flow information:                                            |                                                                                           |                                                         |                                  
|                                                                                             | Income taxes paid                                                                         |                                                         | $                                
|                                                                                             |                                                                                           |                                                         |                                  
|                                                                                             | Interest paid                                                                             |                                                         | $                                
|                                                                                             |                                                                                           |                                                         |                                  

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

46

---



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, manufactures and markets a line of radioisotopic products for medical, scientific
and industrial uses. The Company operates in a single business segment with its primary products being (i) brachytherapy seeds for the treatment of prostate cancer and (ii) radioactive
reference sources used to calibrate a variety of medical and commercial equipment. The Company is also engaged in the research and development of a novel, proprietary radiopharmaceutical imaging
agent.

Principles of Consolidation

The consolidated financial statements include the accounts of North American Scientific and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles of the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially from those estimates.

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 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 remaining maturities of less than one year are considered to be short term and are classified as current assets.

47

---

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.

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


Goodwill

Goodwill represents the excess of cost over the value of net assets of businesses acquired pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" and is carried at cost unless write-downs for impairment are required. The Company evaluates the carrying value of goodwill on an annual basis and whenever
events and changes in circumstances indicate that the carrying amount may not be recoverable. To date, no such impairment has been recorded.

Intangible Assets

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

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

Revenue Recognition

The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" which provides guidance
on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 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.

48

---

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

The Company accounts for its stock option awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has provided additional disclosures required by SFAS
No. 123, "Accounting for Stock-Based Compensation."

On
December 31, 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock Based CompensationTransition and
Disclosure," which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation, which the Company has adopted as of
November 1, 2002. The Company has elected to continue to account for its stock-based compensation using the intrinsic value method of accounting according to the provisions of APB Opinion
No. 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 31,2003

2002

2001Net loss, as reported

$
(9,440,000
)
$
(5,244,000
)
$
(1,985,000
)Less: total stock-based compensation (1)


(2,151,000
)

(2,298,000
)

(1,889,000
)Net loss, as adjusted

$
(11,591,000
)
$
(7,542,000
)
$
(3,874,000
)Basic and diluted loss per share, as reported

$
(0.92
)
$
(0.51
)
$
(0.20
)Basic and diluted loss per share, as adjusted

$
(1.13
)
$
(0.74
)
$
(0.40
)


---

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 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.

49

---

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 31,2003

2002

2001Net loss

$
(9,440,000
)
$
(5,244,000
)
$
(1,985,000
)Weighted average shares outstandingBasic


10,257,688


10,209,584


9,782,562Dilutive effect of stock options and warrants








Weighted average shares outstandingDilutive


10,257,688


10,209,584


9,782,562Basic loss per share

$
(0.92
)
$
(0.51
)
$
(0.20
)Dilutive loss per share

$
(0.92
)
$
(0.51
)
$
(0.20
)


Stock
options and warrants to purchase 2,313,726, 2,001,750 and 1,623,404 common shares for the years ended October 31, 2003, 2002 and 2001, respectively, were not included in the
computation of diluted earnings per share for those years because their effect would have been anti-dilutive.

Income Taxes

The Company accounts for income taxes under the liability method. 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.

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

The Company had an exclusive agreement with a third party for the distribution of its brachytherapy products which terminated in January 2003. This
customer represented 27%, 78% and 79% of total revenues for the years ended October 31, 2003, 2002 and 2001, respectively. In addition, two other customers each represented 11% of total
revenues for the year ended October 31, 2003. As of October 31, 2003, the Company had one customer that accounted for 14% of gross trade receivables.

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.

50

---

Reclassifications

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

Recent Accounting Pronouncements

In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entitiesan Interpretation of ARB No. 51.
The Interpretation clarified the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. The provisions of this Interpretation are effective for all enterprises with variable interest entities created after January 31, 2003 and are required to be fully implemented no later
than the third quarter of 2003. The adoption of FIN No. 46 resulted in the Company consolidating a third party entity as a variable interest entity (see Note 4 of Notes to Consolidated
Financial Statements).

In
February 2003, FASB issued EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 requires revenue
arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated
among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria should be considered separately for separate units of accounting. The guidance in
EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No 00-21 did
not have a material impact on the Company's financial position, results of operations or cash flows.

In
April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the
accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for all contracts entered into or modified after June 30, 2003, with certain exceptions, and for
hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. If we elect to enter into structured stock repurchase transactions after June 30, 2003,
in accordance with SFAS No. 149, those transactions will be required to be marked to market with related gains and losses being recorded in the statement of operations. The impact of such
transactions on our financial position and results of operations would be dependent upon whether we chose to enter into such transactions, the size of the transactions, as well as changes in the
market value of our common stock.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 changes
the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity by now requiring those instruments to be classified as
liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's financial position, results of operations or cash flows.

NOTE 2ACQUISITIONS

In August 2003, the Company 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, for total consideration consisting of $500,000 in cash and $186,000 in common stock (20,000 shares). The cost of the
acquisition, including approximately $68,000 in direct transaction

51

---

costs,
was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. The Company recorded the fair value of assets and
liabilities acquired, which consisted primarily of net tangible assets ($236,000), purchased technology ($233,000), other intangible assets ($78,000), and goodwill ($207,000). RTP's historical
operations were not considered material to the Company's financial position or results of operations. The intangible assets are being amortized over periods ranging from three to ten years.

In
October 2003, the Company entered into an agreement to acquire NOMOS Corporation. Under the terms of the merger agreement, the Company will issue approximately
5.3 million shares of common stock and pay cash of approximately $12 million, in exchange for all of the outstanding capital stock of NOMOS. The acquisition is subject to approval by
shareholders of both companies and regulatory authorities and is expected to close in the second quarter of fiscal 2004. If the merger is not consummated, a party may become obligated to pay the other
party a termination fee. The agreement provides for the Company to pay a termination fee to NOMOS of $1.5 million and NOMOS to pay the Company a termination fee of $3.0 million under
certain conditions set forth in the merger agreement. As of October 31, 2003, the Company has incurred approximately $1.3 million in acquisition related costs which are included in Other
Assets on the Balance Sheet.

NOTE 3MARKETABLE SECURITIES

Marketable securities consist of the following:

October 31,2003

2002Securities held to maturity:Corporate and government bonds

$
43,016,000

$
42,393,000Annuity contract


545,000


529,000Commercial paper


1,793,000


8,315,00045,354,000


51,237,000Securities available for sale


2,000,000


2,000,00047,354,000


53,237,000Less: current portion


32,587,000


36,144,000Non-current portion

$
14,767,000

$
17,093,000


The
amortized cost of all held to maturity securities approximates fair value. At October 31, 2003, investments in debt securities with scheduled maturities within one year were
$30,587,000 and for one to three years were $14,767,000.

NOTE 4CASH HELD IN VARIABLE INTEREST ENTITY

On October 27, 2003, the Company advanced $350,000 to a third party pursuant to a Secured Loan Agreement. The secured note bears interest at 6% per annum
and is repayable in four installments commencing on December 1, 2004 with all unpaid principal and interest due on September 1, 2005. The Company is obligated to lend up to an additional
$850,000 in 2004 subject to the borrower achieving certain milestones as set forth in the agreement. The Company has no equity interest in the third party entity.

The
funds will be used for general working capital to provide various brachytherapy services to ambulatory surgical centers. A distributor who has agreed to procure all of its
brachytherapy seeds exclusively from the Company for a period of five years has a majority interest in the third party entity. Based on the terms of the lending and supply agreements with the above
entities, the Company determined that the third party entity is a variable interest entity ("VIE") and the Company is the primary

52

---

beneficiary
under Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entitiesan interpretation of ARB No. 51" ("FIN
No. 46"). FIN No. 46 is effective for a VIE created after January 31, 2003 and to a VIE in which an enterprise obtains an interest after that date.

The
Company determined that the third party entity was a VIE since it did not have sufficient equity at risk for the entity to finance its activities. FIN No. 46 requires that an
enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur. Accordingly, the Company adopted FIN No. 46 in
October 2003 and consolidated the third party entity as a VIE, regardless of the Company not having an equity interest in the third party entity and its creditors have no recourse against the
Company.

Consolidation
of the VIE as of October 31, 2003 resulted in the consolidation of $350,000 cash, which was received by the VIE on October 27, 2003 from the Company, with an
offset to the Company's note receivable balance of $350,000. Other assets, liabilities and results of operations of the VIE as of October 31, 2003 and for the period from October 27,
2003 to October 31, 2003 were insignificant.

NOTE 5ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

October 31,2003

2002Accounts receivable

$
2,270,000

$
2,866,000Less: allowance for doubtful accounts and returns


(103,000
)

(450,000
)$
2,167,000

$
2,416,000


NOTE 6INVENTORIES

Inventories consist of the following:

October 31,2003

2002Raw materials

$
639,000

$
459,000Work in process


25,000


42,000Finished goods


28,000


95,000$
692,000

$
596,000


NOTE 7EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

October 31,2003

2002Furniture, fixtures and equipment

$
4,383,000

$
4,349,000Leasehold improvements


2,306,000


1,870,0006,689,000


6,219,000Less: accumulated depreciation and amortization


(3,693,000
)

(2,955,000
)$
2,996,000

$
3,264,000


Depreciation
and amortization expense was $905,000, $707,000, and $741,000 for the fiscal years ended October 31, 2003, 2002 and 2001, respectively.

53

---

NOTE 8ASSET RETIREMENT OBLIGATIONS

During 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" for recording future decommissioning costs related to its
leased manufacturing and research facilities. Under SFAS No. 143, a future retirement obligation is recorded at present value by discounting the Company's estimated future asset retirement
obligation using the Company's estimated credit-adjusted borrowing rate. The resultant capitalized costs are recorded as part of equipment and leasehold improvements and are amortized ratably over the
term of the leased facilities. The asset retirement
obligation has been recorded in accrued expenses and will be adjusted to fair value over the lease term as an accretion expense. On November 1, 2002, the Company adopted SFAS No. 143 and
recorded a liability for asset retirement obligations of $383,000, increased net equipment and leasehold improvements by $72,000 and recognized a charge of $311,000 which is reported in the caption
"Cumulative effect of change in accounting principle."

Had
the asset retirement obligations been recognized in previous periods as presented by SFAS No. 143, the Company's net loss and loss per share would have been as follows:

Year Ended October 31,2003

2002

2001Net loss, as reported

$
(9,440,000
)
$
(5,244,000
)
$
(1,985,000
)Cumulative effect of change in accounting principle


311,000





(9,129,000
)

(5,244,000
)

(1,985,000
)Amortization and accretion expense





(33,000
)

(33,000
)Net loss, as adjusted

$
(9,129,000
)
$
(5,277,000
)
$
(2,018,000
)Basic and diluted loss per share, as reported

$
(0.89
)
$
(0.51
)
$
(0.20
)Basic and diluted loss per share, as adjusted

$
(0.89
)
$
(0.51
)
$
(0.21
)


NOTE 9WRITE-OFF OF LICENSES AND EQUIPMENT

Results of operations for the fiscal year ended October 31, 2002 include a charge of approximately $2.7 million to reflect the total
write-off of abandoned licenses and related equipment associated with technology licensed from third parties for the development of its Apomate technology platform. In 2001,
the Company licensed additional technology and patent rights from a third party for the development of an improved version of its Apomate kit, or Hynic-Annexin V. During the second
quarter of 2002, the Company decided to exclusively pursue the development of its Apomate technology with the newly licensed technology and to write-off the prior technology.

Results
of operations for the fiscal year ended October 31, 2001 included a charge of approximately $3.7 million to reflect the total write-off of the
construction in progress costs of two linear particle accelerators that were intended to produce Palladium-103 for use in the Company's brachytherapy products. Based on the uncertainty of
the estimated costs to complete the units coupled with an increasingly reliable commercial supply of Palladium-103, the Company ceased development efforts and disposed of the equipment.

54

---

NOTE 10GOODWILL

Goodwill consists of the following:

October 31,2003

2002Goodwill

$
4,265,000

$
4,058,000Less: accumulated amortization


(399,000
)

(399,000
)$
3,866,000

$
3,659,000


In
connection with the acquisition of RTP, the Company recorded goodwill of $207,000 in fiscal 2003.

The
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", in fiscal 2002. Under this standard, goodwill and other intangible assets with indefinite lives are no
longer amortized, but rather are reviewed for impairment annually or more frequently if certain indicators arise.

The
following table presents the impact of SFAS No. 142 on net loss and loss per share had the standard been in effect at the beginning of fiscal 2001.

Year Ended October 31,2003

2002

2001Net loss, as reported

$
(9,440,000
)
$
(5,244,000
)
$
(1,985,000
)Goodwill amortization








368,000Net loss, as adjusted

$
(9,440,000
)
$
(5,244,000
)
$
(1,617,000
)Basic and diluted loss per share, as reported

$
(0.92
)
$
(0.51
)
$
(0.20
)Basic and diluted loss per share, as adjusted

$
(0.92
)
$
(0.51
)
$
(0.17
)


NOTE 11INTANGIBLE ASSETS

Intangible assets consist of the following:

October 31,2003

2002Patents and licenses

$
592,000

$
530,000Purchased technology related to RTP acquisition


233,000


Other intangible assets related to RTP acquisition


78,000


903,000


530,000Less: accumulated amortization


(90,000
)

(61,000
)$
813,000

$
469,000


Amortization
expense was $34,000, $26,000, and $36,000 for the fiscal years ended October 31, 2003, 2002 and 2001, respectively

NOTE 12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.

55

---

Follow-on Offering

In December 2000, the Company completed a follow-on offering of 2,320,000 shares of its common stock. The Company's underwriters also exercised
their option to purchase an additional 375,000 shares to cover over-allotments. The net proceeds to the Company from the sale were approximately $44.6 million.

Stock Options

The Company's 1996 Stock Option Plan ("1996 Plan"), as amended through April 6, 2001, provides for the issuance of incentive stock options to employees of
the Company and non-qualified options to employees, directors and consultants of the Company with exercise prices equal to the fair market value of the Company's stock on the date of
grant. Certain options are immediately exercisable while other options vest over periods up to four years. The options expire ten years from the date of grant. The 1996 Plan provides 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. However, the aggregate number of shares of Common Stock available for issuance as incentive
options under the 1996 Plan shall not exceed 4,000,000 shares. The options available for grant increased by 358,899 and 356,387 in fiscal 2003 and 2002, respectively. At October 31, 2003, a
total of 3,465,286 shares of the Company's common stock were reserved for issuance.

In
March 2003, the Company's shareholders approved the 2003 Non-Employee Directors' Equity Compensation Plan ("Directors' Plan"). The Directors' Plan supercedes 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 options 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.

The
following table summarizes stock option activity for both plans:

Options OutstandingOptions
Available
for Grant

Number
Outstanding

Weighted
Average
Exercise priceBalance at October 31, 2000

964,417

1,284,333

$
9.03Granted

(816,000
)
816,000


9.17Canceled or expired

66,184

(66,184
)

15.16Exercised



(155,454
)

3.61Balance at October 31, 2001

214,601

1,878,695


9.84Granted

(595,900
)
595,900


9.32Canceled or expired

112,117

(112,117
)

12.43Exercised



(73,340
)

3.18Additional shares reserved

356,387

Balance at October 31, 2002

87,205

2,289,138


9.80Granted

(566,300
)
566,300


7.34Canceled or expired

169,384

(169,384
)

12.29Exercised



(7,100
)

4.83Additional shares reserved

858,899

Balance at October 31, 2003

549,188

2,678,954

$
9.13


56

---

There
were 1,530,468, 1,080,043 and 740,756 options exercisable with weighted average exercise prices of $9.56, $9.30 and $7.95 at October 31, 2003, 2002, and 2001, respectively.

The
following table summarizes significant options outstanding at October 31, 2003 and the related weighted average exercise price and remaining contractual life information:

Options Outstanding

Options ExercisableRange of
Exercise Prices

Shares

Weighted Avg.
Remaining
Contractual
Life (Years)

Weighted
Avg.
Exercise
Price

Shares

Weighted
Avg.
Exercise
Price$  0.03 - $  7.00

462,070

4.65

$
4.12

462,070

$
4.12$  7.17 - $  7.94

1,111,900

8.60


7.43

387,850


7.67$  8.30 - $10.85

595,284

8.10


10.31

280,013


10.50$11.81 - $16.75

419,700

7.08


14.29

310,535


14.99$23.50 - $24.54

90,000

5.08


23.97

90,000


23.972,678,954

7.46

$
9.13

1,530,468

$
9.56


The
average fair value for accounting purposes of options granted was $4.45, $5.86 and $4.04 per share for the years ended October 31, 2003, 2002 and 2001, respectively.

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 using the following assumptions:

Year Ended October 31,2003

2002

2001Dividend yield

0
%
0
%
0
%Expected volatility

76
%
80
%
50
%Risk-free interest rate

3.6
%
4.1
%
4.3
%Expected life

5 years

5 years

4 years


Stockholders' Rights Plan

In October 1998, the Board of Directors of the Company implemented a rights agreement to protect stockholders' rights in the event of a proposed takeover
of the Company. In the case of a triggering event, each right entitles the Company's stockholders to buy, for $80, $160 worth of common stock for each share of common stock held. The rights will
become exercisable only if a person or group acquires, or commences a tender offer to acquire, 15% or more of the Company's common stock. The rights, which expire in October 2008, are
redeemable at the Company's option for $0.001 per right. The Company also has the ability to amend the rights, subject to certain limitations.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan ("the ESPP") under which 300,000 shares of the Company's common stock are reserved for issuance. Eligible
employees may authorize payroll deductions of up to 15% of their salary to purchase shares of the Company's common stock at a discount of up to 15% of the market value at certain
plan-defined dates. In fiscal 2003, 2002 and 2001, the shares issued under the ESPP were 21,005, 13,326 and 11,314 shares, respectively. At October 31, 2003, 254,355 shares were
available for issuance under the ESPP.

57

---

Common Stock Warrants and Stock Options Issued to Third Parties

In fiscal 1998, the Company granted 96,000 warrants to a third party in connection with a private placement of the Company's common stock at an exercise price of
$14.41 per share. The fair value of the warrants was recorded at the grant date as an offset to the proceeds received from the private placement. These warrants were not exercised and expired in
November 2002.

The
Company may grant stock options to consultants for services performed. In fiscal 2000, the Company granted 20,000 options to third parties. The Company recognized $138,000 in
compensation expense in fiscal 2001 related to such options.

In
fiscal 2003, the Company granted 20,000 options to a third party. Fifty percent of such options vested immediately and the remaining fifty percent vest upon the achievement of certain
objectives. The Company recognized $47,000 in compensation expense in fiscal 2003 related to the vested options.

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, 2003, 19,000 shares had been repurchased by the Company at a cost of $129,000.

NOTE 13INCOME TAXES

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

Year Ended October 31,2003

2002

2001Current:Federal

$


$
(1,286,000
)
$
State





2,000


2,000


(1,284,000
)

2,000Deferred:Federal





3,109,000


(876,000
)State





262,000


(216,000
)


3,371,000


(1,092,000
)$


$
2,087,000

$
(1,090,000
)


58

---

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 31,2003

2002Net current assets:Accrued liabilities

$
371,000

$
334,000Accrued decommissioning


161,000


Allowance for doubtful accounts


44,000


171,000Inventory reserve and capitalized inventory


33,000


36,000Deferred revenue


19,000


25,000Other


1,000


629,000


566,000Less: valuation allowance


(629,000
)

(566,000
)$


$
Net non-current assets:Net operating loss carryforwards

$
6,704,000

$
3,707,000Depreciation and amortization


163,000


8,000Tax credits


2,091,000


1,661,0008,958,000


5,376,000Less: valuation allowance


(8,958,000
)

(4,532,000
)$


$
844,000


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 that the Company believes that it is more likely than not, based upon available evidence, that such assets will not be realized.

At
October 31, 2003, the Company had federal net operating loss carryforwards of approximately $17 million which begin to expire in 2017. The Company also has state NOL
carryforwards of
approximately $9 million which begin to expire in 2011. The Company has federal research and experimentation credits of approximately $2 million which begin to expire in 2020. The use of
net operating loss carryforwards is subject to statutory limitations.

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

Year Ended October 31,2003

2002

2001Federal tax provision at U.S. statutory rate

(34
)%
(34
)%
(34
)%State income taxes, net of federal tax benefit

(4
)
(3
)
(3
)Tax-exempt interest income





(2
)Amortization of goodwill





4Tax credits

(5
)
(52
)
Valuation allowance

43

155


%
66
%
(35
)%


59

---

NOTE 14RETIREMENT PLAN

The Company has a 401(k) retirement plan that allows eligible employees to contribute up to 15% of their salary, subject to 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 $167,000, $149,000, and $135,000, for the years ended October 31, 2003, 2002, and 2001, respectively.

NOTE 15COMMITMENTS AND CONTINGENCIES

License Agreements

The Company is a party to a license agreement with Stanford University ("Stanford") relating to the license of a patent for techniques for imaging cell death in
vivo. The Company has agreed to pay Stanford a royalty based upon the amount of licensed Technetium Tc-99m labeled Annexin V product
sold. Additionally, the Company has agreed to certain predetermined milestone payments over the life of the agreement, including $250,000 upon receipt of marketing approval in either the U.S. or the
European Union. The Company's obligation to pay royalties continues for so long as the Company, by its activities, would infringe a valid claim of an unexpired licensed patent of Stanford.

The
Company holds a license agreement with AnorMed Inc., for the rights to use its patented linker technology relating to the modification of proteins with a chemical compound and
with other compounds useful in protein labeling to prepare Technetium Tc-99m labeled Annexin V, among other uses. As consideration for the license, the Company has agreed to pay AnorMed
royalties based upon the amount of licensed product sold, and such obligation continues in effect for the duration of the agreement. Furthermore, the Company is obligated to make a $500,000 milestone
payment upon receipt of the first regulatory approval to market a product using AnorMed technology.

The
Company has also engaged in various other licensing agreements arising in the ordinary course of business. Management does not expect that the ultimate costs associated with the
various licenses will have a material adverse effect on the consolidated financial position, results of operations, or cash flows.

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. Future minimum lease payments under all operating leases in each of the next five years from fiscal 2004 to 2008 are $751,000, $243,000, $21,000,
$0 and $0, respectively. Total rent expense for the years ended October 31, 2003, 2002 and 2001 was $705,000, $524,000, and $389,000, respectively.

Contractual Commitments

The Company has minimum commitments for various contract services with unrelated parties totaling approximately $1.1 million. The agreements provide for
various payments to be made over a one to three year period as services are provided and contain provisions to terminate the payment obligations with 30 to 90 day notification. The Company also
has an obligation to fund an additional $850,000 on an installment note receivable upon the achievement of certain milestones by a third party.

Employment Agreements

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

60

---

Litigation

In October 2002, Mentor Corporation ("Mentor") filed suit in Los Angeles Superior Court against the Company alleging breach of the exclusive marketing and
distribution agreement arising out of the Company's newly initiated direct sales efforts for Prospera® Pd-103.
Mentor also alleged that the Company breached the agreement by marketing its Prospera® I-125 seeds while still subject to the agreement, for sales after the expiration of the
agreement. Mentor's suit further alleged that the Company had misappropriated purported trade secrets and that the Company engaged in unfair competition. Mentor sought unspecified monetary damages and
injunctive relief. In January 2003, the Company filed a responsive pleading, as well as counterclaims against Mentor that sought monetary damages for breach of contract, misappropriation of
confidential information and trade secrets, trade libel, intentional and negligent misrepresentation, unfair competition, and violation of the Lanham Act. In June 2003, the Company agreed to a
settlement arrangement to resolve all claims and counterclaims in the lawsuit involving Mentor. Under the arrangement, the parties mutually agreed to dismiss all claims and counterclaims against each
other without admitting any wrongdoing.

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

NOTE 16SELECTED QUARTERLY FINANCIAL DATA

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

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterFiscal 2003Net sales

$
5,141

$
2,904

$
3,011

$
3,627Gross profit


3,298


1,492


1,278


1,671Net loss


(1,027
)

(2,425
)

(2,837
)

(3,151
)Diluted loss per share

$
(0.10
)
$
(0.24
)
$
(0.28
)
$
(0.31
)Fiscal 2002Net sales

$
4,936

$
4,957

$
5,267

$
5,620Gross profit


3,164


3,087


3,355


3,593Net income (loss)


126


(4,878
)

(350
)

(142
)Diluted income (loss) per share

$
0.01

$
(0.48
)
$
(0.03
)
$
(0.01
)


61

---



SCHEDULE II        NORTH AMERICAN SCIENTIFIC, INC.        VALUATION AND QUALIFYING ACCOUNTS

|                                            |  |   |           | Additions |   |           |  |  
|------------------------------------------- |  | - | --------- | --------- | - | --------- |  | -
|
|Fiscal 2003                                 |  |   |           |           |   |           |  |  
|Allowance for doubtful accounts and returns |  | $ | 450,000   |           | $ | 65,000    |  | $
|Deferred tax asset valuation
allowance      |  | $ | 5,098,000 |           | $ |          |  | $
|Fiscal 2002                                 |  |   |           |           |   |           |  |  
|Allowance for doubtful accounts and returns |  | $ | 107,000   |           | $ | 293,000   |  | $
|Deferred tax asset valuation
allowance      |  | $ |          |           | $ | 5,098,000 |  | $
|Fiscal 2001                                 |  |   |           |           |   |           |  |  
|Allowance for doubtful accounts             |  | $ | 27,000    |           | $ | 80,000    |  | $

---

62

---



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.
|---------------- |  | -------------------------------
|                 |  |                                
|January 22, 2004 |  | By:                            

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/IRWIN J. GRUVERMANIrwin J. Gruverman       |  | Chairman of the Board of Directors                                                             |  | January 22, 2004
|/s/L. MICHAEL CUTRERL. Michael Cutrer         |  | President, Chief Executive Officer and Director (Principal Executive Officer)                  |  | January 22, 2004
|/s/ALAN I. EDRICKAlan I. Edrick               |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | January 22, 2004
|/s/ALLAN M. GREENDr. Allan M. Green           |  | Chief Technology Officer and Director                                                          |  | January 22, 2004
|/s/DONALD ECKERDonald Ecker                   |  | Director                                                                                       |  | January 22, 2004
|/s/JONATHAN P. GERTLERDr. Jonathan P. Gertler |  | Director                                                                                       |  | January 22, 2004
|/s/MITCHELL H. SARANOWMitchell H. Saranow     |  | Director                                                                                       |  | January 22, 2004
|/s/GARY N. WILNERDr. Gary N. Wilner           |  | Director                                                                                       |  | January 22, 2004

63

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