**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**x ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended October 31,2005**

**Commission File Number 0-26670**

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**NORTH AMERICAN SCIENTIFIC, INC.**

(Exact name of Registrant as specified in its charter)

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

 

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

(Address of principalexecutive offices)

**(818) 734-8600**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant 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 ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. o Yes x No

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. x Yes o No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934). x Yes o 

Indicate by check markwhether registrant is a shell company (as defined in Rule 12b-2 ofthe Act. o Yes x No

The aggregate market valueof voting stock held by non-affiliates of the Registrant was approximately$35.7 million (based upon the price at which the common stock was last sold, asof the last business day of the Registrant’s most recently completed secondfiscal quarter).

As of December 31,2005, approximately 16,948,644 shares of the Registrant’s Common Stock, $.01par value per share, were outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portionsof the Registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholdersto be held on or about April 28, 2006, are incorporated by reference into Part IIIof this Form 10-K.

 

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**NORTH AMERICAN SCIENTIFIC, INC.**

**Table of Contents**

**Form 10-K**

|                   | ** ** | ** **                                                                                                          | ** ** | **Page** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                                |       |     |
| Item  1.          |       | Business                                                                                                            |       | 3        |
| Item  1A.         |       | Risk  Factors                                                                                                       |       | 23       |
| Item  2.          |       | Properties                                                                                                          |       | 41       |
| Item  3.          |       | Legal  Proceedings                                                                                                  |       | 41       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                 |       | 42       |
| Item 4a.          |       | Executive Officers of the Registrant                                                                                |       | 42       |
| **PART II**  |       |                                                                                                                |       |     |
| Item 5.           |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer  Purchases of Equity Securities |       | 43       |
| Item 6.           |       | Selected Consolidated Financial Data                                                                                |       | 44       |
| Item 7.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |       | 46       |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                         |       | 57       |
| Item 8.           |       | Consolidated Financial Statements and Supplementary  Data                                                           |       | 57       |
| Item 9.           |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               |       | 57       |
| Item 9A.          |       | Controls and Procedures                                                                                             |       | 57       |
| Item 9B.          |       | Other  Information                                                                                                  |       | 59       |
| **PART III** |       |                                                                                                                |       |     |
| Item 10.          |       | Directors and Executive Officers of the Company                                                                     |       | 60       |
| Item 11.          |       | Executive Compensation                                                                                              |       | 60       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |       | 60       |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                      |       | 60       |
| Item 14.          |       | Principal Accounting Fees and Services                                                                              |       | 60       |
| **PART IV**  |       |                                                                                                                |       |     |
| Item 15.          |       | Exhibits, Financial Statement Schedules                                                                             |       | 61       |
|              |       | Signatures                                                                                                          |       | 96       |

 

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**Item 1.**                        BUSINESS

**INTRODUCTION**

*Certain statementscontained in this Annual Report on Form 10-K, including, withoutlimitation, statements containing the words “believes,” “anticipates,” “estimates,”“expects,” “projections,” and words of similar import, are forward looking asthat term is defined by the Private Securities Litigation Reform Act of 1995,or 1995 Act, and releases issued by the Securities and Exchange Commission, orSEC. These statements are being made pursuant to the provisions of the 1995 Actand with the intention of obtaining the benefits of the “Safe Harbor”provisions of the 1995 Act. We caution that any forward looking statements madeherein are not guarantees of future performance and that actual results maydiffer materially from those in such forward looking statements as a result ofvarious factors, including, but not limited to, any risks detailed herein,including the “Risk Factors” section contained in this Item 1, or detailed inour most recent reports on Form 10-Q and Form 8-K andfrom time to time in our other filings with the SEC and amendments thereto. Weare not undertaking any obligation to update publicly any forward lookingstatements. Readers should not place undue reliance on these forward-lookingstatements.*

We are a Delaware corporation, incorporated in 1990that designs, develops and produces and sells innovative products for radiationtherapy treatment, including brachytherapy seeds, and treatment planning anddelivery technology for intensity modulated radiation therapy (“IMRT”) andimage guided radiation therapy (“IGRT”). In addition, since 1990, we haveapplied our expertise in radioisotopes to develop and market products for othermedical, environmental, research and industrial applications.

In 1996, we began to focus our research and productdevelopment activities primarily on medical products that are useful in thediagnosis, management and treatment of diseases such as cancer. This initiativeresulted in the development of our first two therapeutic products, iodine-basedand palladium-based implantable brachytherapy seeds for the treatment ofprostate cancer. We began manufacturing our Iodine-125 seed for commercial usein 1998, and introduced our Palladium-103 seed the following year, thusbecoming the first company to manufacture both iodine and palladiumbrachytherapy seeds. These products were initially marketed under an exclusivethird party distribution agreement, which terminated in January 2003. Wetransitioned to direct selling and marketing of our brachytherapy productsduring fiscal year 2003, and currently market and sell our Iodine-125 seedsunder the trade name Prospera® I-125, and our Palladium-103 seeds underthe trade name Prospera® Pd-103.

In August 2003, we acquired substantially all ofthe assets of Radiation Therapy Products (“RTP”), a manufacturer anddistributor of equipment, including steppers and stabilizers, used in prostatebrachytherapy procedures. We added RTP to our brachytherapy product portfolioto provide a more complete product offering to customers and prospects. (SeeNote 4 of the Notes to Consolidated Financial Statements)

On May 4, 2004, we acquired NOMOS Corporation (“NOMOS”),a developer, manufacturer and marketer of products and services for IMRT andIGRT. We believe that this acquisition further enhanced our portfolio ofproducts and technologies for the treatment of cancer by allowing us to expandinto the external beam radiation market. NOMOS was recognized as the pioneer ofthe IMRT and IGRT fields and its products are used to treat a variety ofcancers at hospitals and free-standing radiation oncology centers. As a resultof the acquisition, we now offer a broader complement of products and servicesto address the needs of the radiation oncologist. (See Note 4 of the Notes to ConsolidatedFinancial Statements)

In October 2000, weacquired Theseus Imaging Corporation (“Theseus”), a company engaged in theresearch and development of a proprietary radiopharmaceutical imaging agent(referred to as “Hynic-Annexin V”). Over the following four years, we madesubstantial investments in Theseus for clinical trials and additional research.In July and August 2004, we assessed the long-term prospects ofHynic-Annexin V and determined  that itssuccessful development and regulatory approval would not occur earlier than2007 

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and thatthe additional costs to achieve completion and approval would be substantial. Withlimited capital resources and the additional need to fund product developmentof our recently acquired IMRT and IGRT products, we explored alternativeoptions for Theseus. Discussions with potential financial and strategicpartners ceased in August 2004. As a direct result we shut-down theoperation in September 2004 (See Note 3 of the Notes to ConsolidatedFinancial Statements).

**IMRTAND IGRT RADIATION TREATMENT OF CANCER**

In contrast to conventional external beam radiationtherapy (“EBRT”), in which the patient is treated with relatively large, simpleshapes of radiation, IMRT delivers many smaller radiation beams, with theintensity and angle of these radiation beams varied, or modulated, across thetreatment target. This enables the doctor to deliver an elevated radiation doseto the tumor, while minimizing the amount of radiation directed at nearbyhealthy tissue. As a result, IMRT provides the potential for improved outcomesby more effectively treating tumors, and a better quality of life for patientsby avoiding the side effects and risks associated with EBRT.

Treatment planning for IMRT is extremely complex dueto the number of potential beam angles and intensities. Our IMRT planningsoftware system, CORVUS®, addresses this complexity through a technique calledinverse planning. CORVUS prompts the doctor to specify the desired radiationdose outcome, both for the tumor and for the surrounding healthy tissue, andthen generates a plan to achieve the desired outcome by testing and rejectingmillions of potential beam intensities and angles. This is in contrast toconventional radiation planning and those competing IMRT planning systems thatrely on a technique called forward planning, in which the doctor essentiallybuilds a treatment plan through a manual, iterative process. We believes thatour inverse planning approach results in better treatment plans and reduces theamount of time required for doctors to create these plans as compared to manyof the treatment planning systems of our competitors, including competing IMRTsystems that use inverse planning techniques.

A device known as a multileaf collimator defines thesize, shape and intensity of the radiation beams in IMRT treatments and is alsoused in some conventional radiation treatments. Our multileaf collimator, MIMiC®,was designed specifically for delivering IMRT, and we believe that it offers anumber of advantages over competing multileaf collimators, including theability to deliver radiation from a significantly greater number of angles.MIMiC is primarily sold as a component of our integrated PEACOCK® system, butis also sold to existing CORVUS customers.

Customers use IMRT products in conjunction with linearaccelerators, which are the machines that generate the energy beams used inradiation therapy. We do not produce linear accelerators. However, our productsare designed to be compatible with all linear accelerators currently sold bythe major manufacturers. We sell our products both to customers who have thenewest, most advanced linear accelerators and to customers with older linearaccelerators that do not have IMRT capabilities.

Our IGRT products, BAT®,BATCAMTM, and nTRAKTM are used in conjunction with external beam radiation tolocate targets, including tumors and surrounding organs that may move insidethe patient’s body from one treatment session to the next. Our customers usePEREGRINE®, our radiation dose calculation and simulation software product thatuses advanced statistical techniques to simulate the path of radiationparticles as they are absorbed by the patient’s body. Our IGRT products andPEREGRINE are designed to be used in connection with both IMRT and conventionalradiation therapy.

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***IMRT/IGRT Products***

We currently sellfive primary IMRT/IGRT products to the radiation therapy market:

*CORVUS.*   Thecore of our proprietary IMRT treatment planning system is CORVUS. Thissoftware-based product uses images from conventional imaging technologies, suchas computed tomography (“CT”), magnetic resonance imaging (“MRI”), or positronemission tomography (“PET”), to create a three-dimensional model of the tumorarea to be treated. CORVUS, through its three-dimensional on-screen model,prompts the doctor to specify the parameters of the dose outcome desired, bothfor the tumor and for the surrounding healthy tissues. CORVUS then tests andrejects millions of beam intensities and angles as it builds a plan to achievethe doctor’s desired objectives. This process, called inverse planning, startswith the desired outcome and then builds a plan to achieve it. Once the planhas been approved by the doctor, CORVUS works with the linear accelerator’smultileaf collimator during each treatment session to provide the radiationoutput in accordance with the plan by dividing its radiation output into alarge number of very small beams, each of which can carry a different level ofradiation intensity. By hitting the target with these small, variable intensitybeams from multiple angles, it becomes possible to deliver a high dose ofradiation to the target with great precision, regardless of the shape of thetarget, while limiting the delivery of high dosage radiation to surroundinghealthy structures, regardless of their proximity to the target. CORVUS can beused in conjunction with MIMiC, our multileaf collimator, and is alsocompatible with most other multileaf collimators on the market. Although thereis no reliable independent market data available, we believe that the multileafcollimators with which CORVUS is currently compatible represent a substantialmajority of all multileaf collimators in both the United States and worldwidemarkets. We believe that CORVUS, together with its predecessor, PEACOCK Plan,has been used to plan the treatment of a substantial majority of all IMRTpatients worldwide.

We believe the CORVUS process of inverse planning issuperior to conventional radiation technology and to competing IMRTtechnologies that rely on either forward planning or inverse planning. Inforward planning, the doctor manually develops a radiation delivery plan and thenuses a computer to calculate the results of that plan. This process is oftenrepeated several times until an acceptable plan is obtained. This process islabor-intensive, time-consuming and highly sensitive to the quality andexperience of the particular technician or doctor. All inverse planningsystems, including those used by our competitors, utilize an algorithm that isdesigned to replicate the clinical decision-making process of a radiationoncologist. Our algorithm has been developed using clinical feedback receivedfrom previous versions of the product, and we believe it represents moreclosely than our competitors’ systems the important factors used in anexperienced clinician’s evaluation. The CORVUS process results in increasedaccuracy and improved clinical outcomes over competing inverse planningsystems, whose optimization strategies and evaluation functions we believe donot have the sophistication embodied in CORVUS. We also believe that our CORVUSplanning software develops treatment plans more quickly and with less userinteraction than our competitors’ planning systems.

*MIMiC.*   Ourmultileaf collimator, MIMiC, is primarily sold as a component of our integratedPEACOCK system, but can also be sold to existing CORVUS customers. MIMiC is thefirst multileaf collimator on the market designed exclusively for IMRTdelivery. MIMiC was also the first multileaf collimator specifically designedfor dynamic or rotational mode treatment, where the head of the linearaccelerator is moving during the delivery of radiation. MIMiC can deliverradiation from approximately 54 angles, which is significantly greater than the5-9 angles of a typical commercial multileaf collimator. This contributesto MIMiC’s ability to conform the radiation beams to the size and shape of atumor in accordance with the treatment plan. Leakage refers to radiation thatescapes from the linear accelerator, or is transmitted through or between theleaves of the multileaf collimator, and is unintentionally absorbed by thepatient. A typical multileaf collimator has an average radiation leakage ofbetween 1% and 3%. The actual leakage for MIMiC is typically less than 1%.Although MIMiC can be added on to many linear 

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accelerators that comealready equipped with a multi-leaf collimator, the primary market for MIMiC isfor the older linear accelerators that do not have a multi-leaf collimator.

MIMiC has 40 tungsten leaves in two rows of 20. Eachleaf is capable of defining a beam approximately one centimeter square and candirect these radiation beams to the target. With the addition of our BEAKproduct, MIMiC’s beam size can be reduced to four-by-ten millimeters. Thisallows a customer with MIMiC to compete in the radiosurgery market.Radiosurgery is a form of specialized radiation therapy that involves thedelivery of radiation to a precise, often small target volume in a limitednumber of treatment sessions.

*PEACOCK.*   Ourintegrated IMRT planning and delivery system, PEACOCK, includes CORVUS as itssoftware-based planning component and MIMiC as its multileaf collimator. Withthese two components, PEACOCK helps the doctor create an optimized treatmentplan and then modulates the intensity of a radiation beam to fit the size andshape of a tumor in accordance with the plan. PEACOCK offers customers witholder linear accelerators, and others that lack a multileaf collimator, theability to upgrade their accelerators to enable them to deliver IMRTtreatments. PEACOCK typically sells for less than half the cost of a newIMRT-equipped linear accelerator and can be installed with significantly lessdown time to the treatment center. PEACOCK can be used in delivering IMRTtreatments both while the head of the linear accelerator is moving, known asrotational or dynamic mode, and while the head of the linear accelerator isstationary, known as fixed-angle mode.

*BAT.*   BATuses ultrasound images to confirm the location of target organs and tumor siteswithin the patient’s body. Some organs, such as the prostate, move within thepatient from day to day and even within a given day. As a result, a previouslydeveloped treatment plan may no longer be effective on a later treatment date.Treatments that require daily localization of this kind include those forcancers of the prostate, female pelvis, pancreas, breast and liver. Theconventional approach to this problem is to include in the treatment plan amargin of error, which inevitably leads to exposing healthy tissue toradiation. BAT reduces this margin of error from the currently acceptedstandard practice of within 2 centimeters to within 2 millimeters. BATdetermines the location of the target by means of either a jointed, mechanicalarm, at the end of which is an ultrasound probe, or with the BATCAM, by acamera mounted in the treatment room which tracks passive markers placed on theultrasound probe. Using a touch-screen monitor and ultrasound images, thepractitioner maneuvers the probe to the exact location of the tumor. BAT thencalculates the position of the target relative to the delivery point of theradiation beam. nTRAK expands the BAT and BATCAM capabilities by adding a headand neck positioning tool to provide more accurate patient positioning forradiation therapy treatments. BAT can be used in conjunction with IMRT as wellas conventional radiation treatment. Currently, BAT is predominantly used byhospitals and clinics in treating prostate cancer.

*PEREGRINE.*   Ourradiation dosage calculation software product, PEREGRINE, is used to estimatethe amount and distribution of the radiation dose in three dimensions thatwould be absorbed by a patient from a prescribed plan. The prevailing method ofdose calculation is to estimate the absorption of radiation by the patient’sbody based on the absorption of radiation by water. This method can bereasonably accurate for areas of homogeneous tissue. However, most tumors aresurrounded by heterogeneous tissue structures, such as bones, air sacs or othervariants in density, each of which absorbs radiation at a different rate.PEREGRINE is designed to improve the accuracy of both IMRT and conventionalradiation treatment planning systems by adjusting for these variables.

PEREGRINE is designed to work simultaneously andseamlessly with CORVUS to calculate and recommend adjustments to the dosedistribution determined by the planning software before the radiation treatmentplan is actually administered to the patient. In 1999, we acquired exclusiverights to the patents, trademarks and copyrights for the technology used inPEREGRINE through a 10-year licensing agreement with the LawrenceLivermore National Laboratory.

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Currently, PEREGRINE can only be used in conjunctionwith some linear accelerators and treatment planning systems. We are developingadditional upgrades for PEREGRINE that we believe, when completed, will allowPEREGRINE to operate with a broader range of linear accelerators, energy levelsand radiation planning systems. These upgrades are designed primarily toimprove the installation and commissioning process, as opposed to theunderlying software function, so as to make it easier for PEREGRINE customersto validate the correct operation of the system.

In addition to ourcore products discussed above, we also offer accessory products:

·       *BEAK®.  *To provide additional market opportunities forMIMiC and PEACOCK, we market BEAK, a device that attaches to MIMiC and reducesMIMiC’s beam size from approximately one centimeter square down to four-by-tenmillimeters. This allows MIMiC and PEACOCK to compete with more expensive anddedicated radiosurgery systems. Radiosurgery is a form of specialized radiationtherapy that typically involves the delivery of radiation to a small target ina limited number of treatment sessions.

·       *NOMOS CRANE® and AUTOCRANETM.  *Our NOMOS CRANE family ofproducts is a series of devices used to position patients during radiationtherapy. NOMOS CRANE, NOMOS MINI-CRANE, and NOMOS CRANE II are manuallyoperated patient positioning devices that are specifically suited to therequirements of treatments using PEACOCK, which deliver radiation in aslice-by-slice manner. The AUTOCRANE is our newest device, which remotelyadjusts the patient’s position during the course of a treatment session asnecessary to deliver the radiation in accordance with the treatment plan. Thiseliminates the need for the radiation therapist to repeatedly enter thetreatment room to manually adjust the patient’s position in connection withslice-by-slice IMRT treatments. The AUTOCRANE shortens the average IMRT treatmentsession using PEACOCK. We received FDA clearance for the NOMOS AUTOCRANE in December 2001,and we began offering it for commercial sale in 2002. We also offer two NOMOSMINICRANES that assist in the positioning of specific body parts such as the headand neck. We license some of the technology underlying our NOMOS CRANE familyof products from the University of Texas.

·       *Other System Accessories.  *We offer several othersystem accessories that assist in the positioning and verification of patientalignment. Our TALON® product is a device used to position the head duringradiation therapy and radiosurgery, which permits precise repositioning acrossmultiple treatment days. Our radiotherapy table adapter and our computedtomography table adapter are adjustable, rigid structures that attach to avariety of treatment tables and imaging couches to provide a stable andconsistent reference base for patient positioning. We also offer our TargetBox, which is a device that connects to our radiotherapy table adapter andprovides multiple means of achieving precise patient alignment, including theuse of laser positioning. We also offer a verification cassette that storesfilm and which can be used to verify the accuracy of patient treatment dosages.Although sales of these accessory products currently represent a small portionof our revenues, we believe that they enhance our core product offerings andpresent additional market opportunities for us.

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**BRACHYTHERAPY SEEDS**

**Prostate Cancer**

The prostate gland, found only in men, is a smallwalnut-sized gland surrounding the urethra, located under the bladder andin front of the rectum. According to the American Cancer Society, prostatecancer is considered a slow growing cancer relative to other types of cancer.Symptoms of prostate cancer are often not noticed until the cancer hasprogressed past its early stages. A digital rectal examination during a routinephysical examination is the most commonly used test for identifying prostatecancer. Additionally, a blood test to detect a prostate specific antigen (“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 theamount of prostate specific antigen contained in an examinee’s blood. Elevatedlevels of PSA can result from benign symptoms such as inflammation but can alsobe indicative of the presence of cancerous cells in the prostate. The emergenceof PSA blood testing has greatly improved physicians’ ability to diagnose andtreat early stage prostate cancer.

Prostate cancer is the second most prevalent form ofcancer in men in the United States and is the second most common cause ofcancer death in men. The American Cancer Society estimated that in 2004approximately 230,000  new cases ofprostate cancer would be diagnosed in the United States and approximately30,000 deaths of men in the United States would be attributable to the disease.

There are several therapiesavailable for the treatment of prostate cancer.

**Prostate Brachytherapy**

*Overview*

Brachytherapy is a minimally invasive medicalprocedure in which sealed radioactive sources are temporarily (High Dose Rateor HDR) or permanently (Low Dose Rate or LDR) implanted into cancerous tissuein the prostate, delivering a therapeutically prescribed dose of radiation thatis lethal to the cancerous tissue. In the seeding procedure, generally 60 to120 rice-sized, low-level radioactive seeds, containing either Iodine-125or Palladium-103, are permanently implanted into the prostate by aradiation oncologist or urologist to irradiate and destroy cancerous prostatictissue. Insertion of the seeds is performed under ultrasound guidance thatallows the physicians to view the prostate for proper seed implantation. Atemplate, or grid, is positioned in front of the perineum and is fixed to thestabilization unit along with the ultrasound probe to facilitate correct needleplacement. Implant needles loaded with seeds are assigned to the appropriatetemplate holes as indicated in a computer generated treatment plan. Each needleis guided through the template and then through the perineum to itspredetermined position within the prostate under direct ultrasoundvisualization. The seeds are implanted as the needle is withdrawn from theprostate. Following completion of the procedure, an x-ray or CT image is viewedto verify seed placement.

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

LDR brachytherapy usually results in lower incidencesof impotence and incontinence compared to other therapies, and faster recoverytimes than radical prostatectomy (“RP”). Moreover, studies show that thedisease free survival rates ten years after brachytherapy treatment iscomparable to those after RP. Brachytherapy is most effective for localizedtumors treated in the early stages of the disease. Therefore, we believe thatthe growing use of PSA tests will help detect prostate cancer at an earlierstage and enhance the attractiveness of brachytherapy as a treatmentalternative.

The use of LDRbrachytherapy, the newest of the three primary techniques for the treatment ofprostate cancer, has grown significantly over the past several years due to itsadvantages over the other 

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primarytherapies, which include RP and EBRT. We believe that the increasing use ofthis technique reflects the growing acceptance in the medical community andamong patients.

*Our BrachytherapyProducts*

We were the first company to manufacture both iodineand palladium based brachytherapy seeds, the two most commonly used seeds forthe treatment of prostate cancer. These two products differ in the time eachtakes to decay, and, consequently, in the rate and intensity at which theradiation dose is delivered to the patient. Because some physicians may preferiodine seeds and others prefer palladium seeds, we believe that it isadvantageous to offer both in order to address the entire brachytherapy seedmarket.

In June 1997,we executed an exclusive worldwide marketing and distribution agreement withMentor Corporation (“Mentor”) which granted Mentor an exclusive license tomarket and sell our brachytherapy seeds for the treatment of prostate cancer.Sales under this five year agreement commenced in January 1998 andconcluded in January 2003. We now directly market and sell ourbrachytherapy seeds, and compete against Mentor. In connection with the January 2003termination of that agreement, we are now directly marketing and selling ourIodine-125 and Palladium-103 seeds under the trade names Prospera®I-125 and Prospera® Pd-103, respectively. Although our productshave primarily been marketed in the United States, in December 2000 wereceived a CE mark which allows for sales of our seeds in Europe.

·       *Iodine-125 (Prospera® I-125).*InJanuary 1998, we launched our first United States Food and DrugAdministration or FDA-approved brachytherapy source, an Iodine-125 basedseed, used primarily for the treatment of prostate cancer. Each seed consistsof a laser welded biocompatible titanium capsule approximately the size of agrain of rice, containing Iodine-125 absorbed onto four resin beads. Thecapsule also contains two inactive gold beads that serve as markers for x-rayor CT imaging to identify the source location within the prostate. I-125seeds have a half-life of 59 days; therefore, they utilize lower activitylevels to deliver a therapeutic dose over a longer period of time compared tothe Palladium-103 seeds.

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

The primary productsoffered by RTP are the STP-110 Precision Stepper and RTP-6000Precision Stabilizer. This equipment precisely positions and holds thetrans-rectal ultrasound probe during the LDR brachytherapy procedure. TheStepper also provides a stable platform for the Template Guide which is used toprecisely position the needles during seed implantation. Additional productsoffered by RTP include radiation shielding and needle loading accessories suchas the Horizontal Needle Box, Needle Loading Shield, Needle Loading Box andNeedle Loading Carousel. These products offer a natural complement to thebrachytherapy seeds. RTP has several active development projects which willprovide additional unique accessory products for brachytherapy.

**OtherProstate Cancer Treatment Modalities in addition to Brachytherapy and IMRT**

*RadicalProstatectomy*

Currently, the most common treatment option forprostate cancer, radical prostatectomy, or RP, is an invasive surgicalprocedure in which the entire prostate gland is removed. RP is performed undergeneral anesthesia and typically involves a hospital stay of several days forpatient observation and recovery.

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

*External BeamRadiation Therapy (“EBRT”)*

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

Studies have shown,however, that the ten-year disease free survival rates with treatment throughEBRT are not comparable to the disease free survival rates after RP orbrachytherapy treatment. In addition, because the radiation beam travelsthrough the body, affecting both healthy and cancerous tissue alike, other sideeffects are associated with EBRT. For instance, rectal wall damage caused bythe radiation beam is a noted negative side effect. Data suggests that between30% and 40% of the patients who undergo EBRT suffer problems with erectiledysfunction after treatment.

*Cryosurgery*

Cryosurgery, a procedurein which tissue is frozen to destroy tumors, is another treatment option forprostate cancer. Currently, this procedure is less widely used, althoughpromising treatment outcomes have been reported. Cryosurgery typically requiresa one to two day hospital stay and is associated with higher rates of impotencethan brachytherapy.

*Other Treatments.*

Other treatments include hormone therapy andchemotherapy, which may be used to reduce the size of cancerous tumors.However, these treatments are not intended to ultimately cure a patient ofprostate cancer. Instead, such treatment choices are made by physicians in anattempt to extend patients’ lives if the cancer has reached an advanced stageor as ancillary treatment methods used in conjunction with other treatmentmechanisms. Common side effects of hormone therapy are impotence, decreasedlibido and development of breasts, and common side effects of chemotherapy arenausea, hair loss and fatigue.

“Watchful waiting,” whilenot a treatment, is recommended by some physicians in certain circumstancesbased on the severity and growth rate of the disease, as well as upon the ageand life expectancy of the patient. Physicians and patients who choose watchfulwaiting are frequently seeking to avoid the negative side effects associatedwith RP or other treatment modalities. Through careful monitoring of PSA levelsand close examination for advancing symptoms of prostate cancer, physicians maychoose more active treatments at a later date.

**Prospera® for Ocular Melanoma**

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

Our line of high activitybrachytherapy seeds is also marketed and sold under the trademark Prospera® foruse in the treatment of ocular melanoma and other solid tumor applications. OurProspera® ocular melanoma seed is used with the ultimate goal of destroying thetumor while preserving 

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the eye.We directly market this product line to ophthalmologists and medicalphysicists. The number of cases occurring annually will limit Prospera® ocularmelanoma sales for this application, but we view it as a natural extension ofour brachytherapy business and as a service to the oncology community.

**OTHER PRODUCTS**

By utilizing our expertisein the design, development and manufacturing of radioisotopic products, we havedeveloped or jointly developed the following additional products.

**RadiationCalibration and Reference Source Products**

Radioactivity is a natural physical property. Eachradioisotope emits energy characteristics specific to that isotope. At sitespossessing or storing radioactive materials, radiation detection instrumentsare typically used to monitor the emitted radiation from a given sample (i.e.,soil, air, water, etc.) to identify and quantify the radioisotopes present inthat sample to help ensure safety to workers and the surrounding environment.In order to determine a particular instrument’s efficiency, an accuratelymeasured and contained amount of a radioactive isotope is required to serve asa calibration reference standard. Each type of sample being monitored by aninstrument typically requires a radiation standard of identical form andgeometry to the sample.

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

**Standards for Nuclear Medicine**

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

**Standardsfor Calibration and Control**

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

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

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

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**INTELLECTUAL PROPERTY**

**Patents**

We believe that patentsand other proprietary rights are important to our business. It is our policy toseek appropriate patent protection both in the United States and abroad for ourproprietary technology and to enter into license agreements with variouscompanies to obtain patent rights from them to develop and potentially sellproducts which use the compounds and technologies protected by those patents.

*IMRT/IGRT*

| **Name with Patent Number**                                                      | ** ** | **Subject**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Date of Issuance and    Expiration Date**          |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|
| Method and apparatus for patient positioning for  radiation therapy  (5,622,187) |       | A method and apparatus for positioning a patient  upon a treatment table of a linear accelerator includes a camera secured to  the gantry of the linear accelerator and a plurality of light emitting diodes  mounted with respect to the patient which are viewed by the camera.                                                                                                                                                                                                                                                                                                                                           |       | April 22, 1997 until September 30, 2014    |
| Planning method and  apparatus for radiation dosimetry (6,038,283)               |       | A method and apparatus  for determining an optimized radiation beam arrangement for applying  radiation to a tumor target volume while minimizing radiation of a structure  volume in a patient, which uses an iterative cost function based on a  comparison of desired partial volume data, which may be represented by  cumulative dose volume histograms and proposed partial volume data, which may  be represented by cumulative dose volume histograms for target tumors and  tissue structures for delivery of the optimized radiation beam arrangement to  the patient by a conformal radiation therapy apparatus. |       | March 14, 2000  until October 24, 2017     |
| Noninvasive head  fixation method and apparatus (5,207,688)                      |       | A noninvasive head  fixation method and apparatus uses a flexible and compressible bladder which  contacts and is deformed to conform to the shape of the patient’s nasion in  order to immobilize the patient’s head during a medical procedure.                                                                                                                                                                                                                                                                                                                                                                 |       | May 4, 1993 until  October 31, 2011        |
| Tissue compensation  method and apparatus (5,368,543)                            |       | A tissue compensation  system and method for making a tissue compensator utilizes a plurality of  elongate rods, one end of which contact the treatment surface on the patient,  and the other end of which contact and deform a flexible membrane containing  a quantity of a material substantially equivalent to tissue of the patient.                                                                                                                                                                                                                                                                                  |       | November 29, 1994  until June 17, 2013     |
| Tissue compensation  method and apparatus (5,242,372)                            |       | A tissue compensation  system and method for making a tissue compensator utilizes a plurality of  elongate rods, one end of which contact the treatment surface on the patient,  and the other end of which contact and deform a flexible membrane containing  a quantity of a material substantially equivalent to tissue of the patient.                                                                                                                                                                                                                                                                                  |       | September 7, 1993  until November 12, 2011 |

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| Method and apparatus  for conformal radiation therapy (5,596,619)  |   | A method and apparatus  for conformal radiation therapy, with a radiation beam having a  pre-determined, constant beam intensity, treats the entire tumor volume of a  patient’s tumor, and the beam intensity of the radiation beam is spatially  modulated across the tumor, by separating the radiation into a plurality of  treatment beam segments and independently modulating the beam intensity of  the plurality of radiation beam segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | January 21,  1997 until May 17, 2014    |
|--------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|
| Method and apparatus for  conformal radiation therapy (5,802,136)  |   | A method and apparatus for conformal radiation  therapy, with a radiation beam having a predetermined, constant beam  intensity, treats the entire tumor volume of a patient’s tumor, and the beam  intensity of the radiation beam is spatially modulated across the tumor, by  separating the radiation into an array of at least 3x3 treatment beam  segments and independently modulating the beam intensity of the plurality of  radiation beam segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | September 1, 1998  until April 19, 2016 |
| Method and apparatus for  target position verification (5,411,026) |   | A method and apparatus for verifying the position of  a lesion in a patient’s body compares the location of the lesion in CT slices  with the position of the lesion in ultrasound images taken while the patient  lies on the treatment table of a linear accelerator.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | May 2, 1995 until  October 8, 2013      |
| Planning method and  apparatus for radiation dosimetry (6,393,096) |   | A method and apparatus for determining an optimized  radiation beam arrangement for applying radiation to a tumor target volume  while minimizing radiation of a structure volume in a patient, comprising:  using a computer to computationally obtain a proposed radiation beam  arrangement; using the computer to computationally change the proposed  radiation beam arrangement iteratively, incorporating a cost function at each  iteration to approach correspondence of a CDVH associated with the proposed  radiation beam arrangement to a CDVH associated with a pre-determined desired  dose prescription; comparing the dose distribution to a prescribed dose for  the tumor volume and surrounding tissue structures; and increasing or  decreasing radiation beam intensity if the change of the proposed beam  arrangement leads to a greater correspondence to the desired dose  prescription to obtain an optimized radiation beam arrangement. |   | May 21, 2002 until  May 27, 2019        |

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| Method and  apparatus for target position verification (6,325,758) |   | A method and apparatus  for verifying the position of a target to be treated by a radiation therapy  device may include an ultrasound probe used to generate ultrasound images of  the target; a position sensing system for indicating the position of the  ultrasound probe with respect to the radiation therapy device, whereby the  location of the target with respect to the radiation therapy device is known;  and the ultrasound image of the target may be aligned with radiation  treatment data. |   | December 4,  2001 until October 27, 2018 |
|--------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|

 

*Radiation Sources & Brachytherapy Accessories*

| **Name with   Patent Number**                                                 | ** ** | **Subject**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Date of Issuance and    Expiration Date**      |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| Needle for Imaging and Sampling  (5,647,374)                                  |       | An instrument and method for the biopsy of tumors,  such as breast lesions, are disclosed. A stylus comprises a tube having  radioactive material in the tip capable of being imaged, the stylus contained  within a needle. An image of the tip of the needle can be traced as it  penetrates a human body, is guided toward an imaged tissue mass, and is  placed within the tumor.                                                                                                                                                                      |       | July 15, 1997 until December 30, 2014  |
| Laser Welded  Brachytherapy Source and Method of Making the Same (5,997,643)  |       | A brachytherapy source  for use in radiation treatment of the body includes radioactive material, and  a housing. The housing is used to contain the radioactive materials, and is  formed by at least one tube having two ends. The two ends of the tube are  sealed by welding such that a radiation distribution of the brachytherapy  source approximates a point source that is free of cold zones to minimize  underexposure or overexposure of the body to radiation and to simplify the  placement of the brachytherapy source in the body.        |       | December 7, 1999  until March 26, 2018 |
| Radioactive Seeds and  Method for Using Same (6,440,058)                      |       | A system and method of treating  an affected region of diseased tissue in a patient is described. A plurality  of first radioactive seeds and a plurality of second radioactive seeds are  implanted in the affected region.                                                                                                                                                                                                                                                                                                                               |       | August 27, 2002  until August 25, 2019 |
| Radioactive Seed with Multiple  Markers and Method for Using Same (6,503,186) |       | A radioactive seed which  discloses the orientation and the location of the seed when the seed is  exposed to X-ray photography is provided. The seed contains multiple X-ray  detectable markers which will disclose the orientation and the location of  the seed when the seed is exposed to X-ray photography. The seed can also  have a single marker which wraps around the external surface of the seed or  wraps around a carrier body within the seed. The single marker will also  disclose the orientation as well as the location of the seed. |       | January 7, 2003  until March 29, 2020  |

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| Radioactive Seed  with Multiple Markers and Method for Using Same (6,638,027)                                 |   | A radioactive  seed which discloses the orientation and the location of the seed when the  seed is exposed to X-ray photography is provided. The seed contains multiple  X-ray detectable markers which will disclose the orientation and the location  of the seed when the seed is exposed to X-ray photography. The seed can also  have a single marker which wraps around the external surface of the seed or  wraps around a carrier body within the seed. The single marker will also  disclose the orientation as well as the location of the seed.                                                                                                                                                                                                                             |   | October 28,  2003 until October 15, 2020  |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| Thin Radiation Source  and Method of Making the Same (6,787,786)                                              |   | The present invention  relates to radiation sources and a method for producing radiation sources.  Embodiments of the present invention are directed to radiation sources that  can be used to calibrate nuclear imaging equipment, such as flood sources.  According to embodiments of the invention, the radiation source includes an  outer housing that contains a substrate upon which a radioactive pattern is  deposited. The radioactive deposit may be placed on the surface of the  substrate in the form of a deposited solution and may be fixed to the surface  of the substrate by, for example, a binding agent and/or a sealing layer. The  deposited solution may also include a colorant to visually indicate the activity  distribution of the radioactive deposit. |   | September 7, 2004  until June 12, 2021    |
| Stepper apparatus for  use in the imaging/treatment of internal organs using an ultrasound probe  (5,871,448) |   | The stepper apparatus  for use in imaging/treatment of prostate cancer with radioactive seeds  includes a body portion, a support element for holding the ultrasound probe,  a slide portion for moving the support element relative to the body portion,  and a support element for holding a template which has a plurality of openings  therethrough, through which radiation seed insertion needles may be  positioned.                                                                                                                                                                                                                                                                                                                                                            |   | February 16, 1999  until October 14, 2017 |
| Stabilizer assembly for  stepper apparatus and ultrasound probe (6,179,262)                                   |   | The stabilizer assembly  is used to position a stepper assembly for an ultrasound probe. The  stabilizer includes two spaced apart swivel assemblies, each swivel assembly  including clamps at one end thereof locking the stabilizer to a table.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | January 30, 2001  until October 23, 2018  |
| Apparatus for loading radioactive  seeds and spacing elements into a brachytherapy needle (6,582,354)         |   | The loading apparatus  includes a tray assembly which receives radioactive seeds and spacer elements  from containers thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | June 24, 2003 until  July 23, 2020        |

 

In addition, as of December 31, 2005, we had 8additional United States pending patent applications. We have also been issued11 foreign patents and have 3 foreign patent applications still pending.

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**Third-Party License Agreements**

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

·       *Lawrence Livermore National Laboratory.  *In July 1999,we were granted a ten-year exclusive license by Lawrence Livermore NationalLaboratory, under the authority of The Regents of the University of California,to commercialize some of its advanced, proprietary statistical techniques thatare now incorporated in PEREGRINE. This license agreement also gave us rightsto the trademark PEREGRINE. Under this license agreement, we are required topay earned royalties equal to 8% of net sales of our PEREGRINE product, whichearned royalties are accrued and credited against the minimum annual royalty of$400,000. The license could be cancelled, renegotiated or made non-exclusive ifwe fail to meet specified performance obligations including gross revenues fromthe sale of our PEREGRINE product of at least $4 million per calendaryear. In addition, the United States government retains a royalty-free licenseto the technology covered by this agreement. In June 2002, we negotiatedan amendment to this license agreement that, among other things, eliminated theminimum annual royalty payments and the gross revenue performance obligationuntil March 2005.

             In July, 2005, weentered into a revised license agreement for the technology incorporated in ourPEREGRINE product with Lawrence Livermore National Laboratory. This agreementlasts until the last of the licensed patents expires in July, 2009. The rightsgranted in the renegotiated agreement give us non-exclusive rights to the sameadvanced, proprietary statistical techniques that the Company had previouslyheld exclusively. Under this license agreement, we are required to pay a flatper unit fee of $5,000 for each licensed product sold. Earned royalties arecredited against the minimum annual royalty of $25,000, which replaces theminimum annual royalty of $400,000 in the previous agreement. The license nolonger contains any minimum performance obligations. In addition, the UnitedStates government retains a royalty-free license to the technology covered bythis agreement.

·       *Wisconsin Alumni Research Foundation.  *We have anon-exclusive license to use specific patents owned by the Wisconsin AlumniResearch Foundation. These patents, which relate to delivery of IMRT treatmentsusing a dynamic or rotational mode, cover key components of, and are necessaryto the manufacture and sale of, our MIMiC and PEACOCK products. This licenseagreement is scheduled to expire on January 25, 2016, the expiration ofthe last patent covered by the agreement. In addition, the license willterminate if we fail to make royalty payments for a given calendar year. Underthis agreement, we were required to pay an initial fee of $25,000 and are topay ongoing royalties of $4,000 to $24,000 per product unit based on the numberand type of products sold, with aggregate minimum royalties of $15,000 peryear.

·       *University of Texas.  *In October 1998, we began tolicense specific patent rights from the Board of Regents of the University ofTexas System pursuant to a royalty-bearing, exclusive license agreement for aperiod of three years. These patent rights are related to a device that forms acritical component used in our NOMOS CRANE family of products. Effective March 31,2004, the term of this agreement was extended for an additional two years,until March 31, 2006. We are currently in negotiations for an additionalextension. In addition, the license will terminate upon 30 days notice from theBoard of Regents if we fail to make any scheduled royalty payments. Under thislicense agreement, we are required to pay a royalty of $6,000 for each NOMOSCRANE sold in conjunction with a PEACOCK, with aggregate minimum royalties of$50,000 per year.

·       *National Research Council of Canada.  *We have anon-exclusive license from the National Research Council of Canada to use theirBEAM 99 computer software in connection with PEREGRINE. This software,which allows us to develop beam characterization models for generic 

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accelerators, is a keycomponent of, and necessary to, our PEREGRINE product. Under this licenseagreement, we were required to pay an initial license fee of $30,000 and arerequired to pay an annual license fee of $30,000 as part of our annual renewalof this license. The initial term of the license agreement expired December 31,2000. However, the license agreement grants us the right to continue thislicense for one-year periods following the initial term by paying an annuallicense fee. We have continued to renew this license annually pursuant to theserenewal terms.

We also rely uponunpatented trade secrets and improvements, unpatented know-how and continuingtechnological innovation to develop and maintain our competitive position. Ourpolicy is to enter into confidentiality agreements with our employees,consultants and vendors, and we generally control access to our proprietaryinformation.

**COMPETITION**

Our most significant competitor for our IMRT planningand delivery products is Varian Medical Systems, Inc. (“Varian”). Varianproduces more linear accelerators than any other manufacturer and markets itsown line of IMRT products, including several models of multileaf collimators.Varian also markets an IMRT inverse planning software package that it hasdeveloped in coordination with Memorial Sloan-Kettering Cancer Center (“Sloan-Kettering”).Siemens Medical Systems, Inc. (“Siemens”) and Elekta A.B. (“Elekta”) arethe other major manufacturers of linear accelerators, each of which offers itsown multileaf collimators that compete with our MIMiC and PEACOCK products.

Sloan-Kettering has developed and treated asignificant number of patients with its own non-commercial, non-FDA cleared,IMRT treatment and planning system. To our knowledge, Sloan-Kettering has yetto commercialize this technology or license it to third parties forcommercialization.

TomoTherapy Inc. is another company that has developedand obtained FDA 510(k) clearance for a product that incorporates IMRTdelivery and imaging into one unit, including the radiation source. They claimthat their product will be able to verify the precise position of the patient’stumor before each treatment, much like our fixation devices and our BATproduct. To our knowledge, initial sales have been made to a number ofinstitutions and there is growing interest in this technology in the market.

Several treatment planning companies, including ADACLaboratories, Inc., which is a part of Royal Philips Electronics N.V.,Computerized Medical Systems, Inc. and Nucletron have also introducedtreatment planning systems that include IMRT capabilities.

Several other companies, including BrainLAB AG (“BrainLAB”),3Dline International and Siemens also compete with us in the multileafcollimator market.

We are facing increasing competition for BAT.Companies such as Varian and BrainLAB currently market, or in the past havemarketed, ultrasound localization devices. In addition, Computerized MedicalSystems, Inc., recently introduced a product that will compete with BAT.We anticipate additional competition in the future as the market for thisproduct continues to develop.

Due to the recent introduction of PEREGRINE, we havenot faced any significant competition from products using similar, advancedstatistical techniques. However, we do face competition in this market fromconventional radiation dose calculation products. In addition, we anticipatethat competition will develop in the future as the market for radiation dosecalculation software develops.

In addition, other products using alternativetechnologies may be developed which would compete with our brachytherapy, IMRTor IGRT products. For example, if treatment methods such as cryosurgery orhormone therapy gain increased acceptance among healthcare providers, patientsand payers, or if new technologies such as gene modification emerge to becomeleading treatment standards as alternatives to 

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traditional therapies, wemay lose market share for our brachytherapy seeds or may find that our productsare rendered non-competitive or obsolete by such market shifts andtechnological developments.

Our brachytherapy business is subject to intensecompetition. Our primary competitors in the brachytherapy seed businessinclude: Nycomed Amersham PLC (through its controlling interest of Oncura), C.RBard, Inc. and Mentor, each of which manufacture and sell Iodine-125brachytherapy seeds, as well as distribute Palladium-103 seeds manufactured bya third party, and Theragenics Corporation, which manufacturers Palladium-103seeds and sells both Palladium-103 and Iodine-125 brachytherapy seeds. Severaladditional companies currently sell brachytherapy seeds as well.

The radiation reference source business is alsosubject to intense competition. Our competitors in this industry include AEATechnology PLC and Eckert & Ziegler AG. We believe that thesecompanies have a dominant position in the market for radiation reference sourceproducts.

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

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

In addition to thecompetition from the procedures and companies noted above, many companies, bothpublic and private, are researching new and innovative methods of preventingand treating cancer. Furthermore, many companies, including many large,well-known pharmaceutical, medical device and chemical companies that havesignificant resources available to them, are engaged in radiologicalpharmaceutical and device research. These companies are located in the UnitedStates, Europe and throughout the world. Significant developments by any ofthese companies could have a material adverse effect on the demand for ourproducts.

**SALES AND MARKETING**

Since January 2003, we have developed an internalsales force to directly market and sell our brachytherapy products. In May 2004,we acquired additional sales personnel through our acquisition of NOMOS. Sinceboth companies market their products to the same call points within theradiation oncology community, we combined both sales organizations to increasemarket penetration and better leverage our sales and marketing efforts. In thesecond quarter of fiscal year 2005, we determined that we could achieve betterresults by organizing the sales force  byproduct segment, so we assigned the sales representatives to either ourRadiation Sources segment or our IMRT/IGRT segment. The domestic sales staffcurrently consists of twenty full-time dedicated regional salesrepresentatives, business development managers, product specialists and zonemanagers.

Each of our sales representatives sells products andservices to customers within an assigned territory. The sales representativespromote customer satisfaction with periodic service calls in addition toscheduled follow-up visits. Our products are principally marketed directly tothe end-user physicians or purchasing groups that act on their behalf. While wehave previously focused our sales efforts on the United States market, we arecurrently expanding in Europe and Asia through the sales offices obtained inthe NOMOS acquisition.

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

**GOVERNMENT REGULATION**

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

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

*United StatesRegulatory Process*

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

The Federal Food, Drug, and Cosmetic Act and otherfederal 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 withapplicable requirements can result in civil penalties, recall, injunction orseizure of products, refusal of the government to approve or clear productapproval applications, disqualification from sponsoring, or conducting clinicalinvestigations, prevent us from entering into government supply contracts,withdrawal of previously approved applications and criminal prosecution.

Approval of new medical devices is a lengthy procedureand can take a number of years and the expenditure of significant resources.There is a shorter FDA review and clearance process, the premarket notificationprocess, or the 510(k) process, whereby a company can market certainmedical devices that can be shown to be substantially equivalent to otherlegally marketed devices. We have been able to achieve market clearance forsome of our medical device products using the 510(k) process.

In the United States, medical devices are classifiedinto three different categories over which FDA applies increasing levels ofregulation: Class I, Class II and Class III. Most Class Idevices are exempt from premarket notification 510(k); most Class IIdevices require premarket notification 510(k) and most Class IIIdevices require premarket approval. All of our radiation therapy products are Class IIdevices and have received 510(k) clearance.

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

As a registered medical device manufacturer with theFDA, we are subject to inspection to ensure compliance with their current GoodManufacturing Practices, or cGMP. These regulations require that we and any ofour contract manufacturers design, manufacture and service products andmaintain 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 oreffectiveness 

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of a device or thatconstitute a major change to the intended use of the device require a new 510(k) noticefor any product modification. We may be prohibited from marketing the modifiedproduct until the 510(k) notice is cleared by the FDA.

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

As a medical device manufacturer, we are also subjectto laws and regulations administered by governmental entities at the federal,state and local levels. For example, our facilities are licensed as medicalproduct manufacturing facilities in the states of California, Pennsylvania andWashington and are subject to periodic state regulatory inspections. Ourcustomers are also subject to a wide variety of laws and regulations that couldaffect the nature and scope of their relationships with us.

Additionally, ourfacilities in the Los Angeles metropolitan area operate under a license issuedby the California Department of Health which allows us to manufacture andprocess radioactive materials. Our licenses, subject to renewal, expire in 2007and 2008. We are subject to a routine inspection by the California Departmentof Health Services for compliance with good manufacturing practice, health andsafety requirements, and other applicable regulations. Moreover, our use,management and disposal of certain radioactive substances and wastes aresubject to regulation by several federal and state agencies depending on thenature of the substance or waste material. We believe that we are in compliancewith all federal and state regulations for this purpose.

*Foreign RegulatoryProcess*

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

We hold a Quality Assurance certificate to ISO/EN13485, the European Union standard for medical product manufacturers. Thiscertificate is a prerequisite to applying the CE Mark to our products. The CEMark is required on all medical products sold and used in the European Union.It is also recognized by many countries outside the European Union, such asAustralia. The CE Mark indicates that a product was designed, released,produced, sold and serviced using a system that complies with the EU CouncilDirective 93/42/ECC for medical devices and EU Council 90/385/ECC for activeimplantable medical devices. All of our radiation therapy products arecurrently eligible to bear the CE marking.

Canada has a similar device classification system tothe FDA, although its system contains four classes (Class I through Class IV).Health Canada has granted us Class II licenses to distribute our BAT,CORVUS and PEREGRINE products throughout Canada. In 2003, our BAT product wasre-classified in Canada as a Class III device. Our PROSPERA brachytherapyproducts have been granted a class III license. The Quality System foreach facility is audited annually for compliance to the Canadian Medical DeviceRegulations. This allows us to sell our products in Canada.

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

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**MANUFACTURING**

**IMRT/IGRT**

We purchase all major components for our IMRT and IGRTproducts from third-party suppliers. We perform system design, final productassembly, testing and packaging at our facility in Pittsburgh, Pennsylvaniametropolitan area. We are required to meet and adhere to applicablerequirements of the United States and foreign regulatory agencies, includingthe Quality System Regulation of the FDA, the Medical Device Directive of theEuropean Union, and the Medical Device Regulations of Canada.

We generally produce our products based on firm ordersand on anticipated additional orders that we are relatively confident will beobtained. Lead times for materials and components required by us varysignificantly and depend on factors such as the specific supplier and theavailability and demand for the applicable components.

Currently, we utilize single source suppliers for anumber of significant components for each of our major products. Of the tensuppliers representing our highest dollar volume in 2005, five represent solesource suppliers. Other suppliers exist for each of our components provided bysingle source suppliers. We have not in the past experienced any significantdisruption in product availability because of single source suppliers, and wehave in the past successfully transitioned from single source suppliers to newsuppliers without significant disruptions in production. It is likely we willcontinue to change suppliers in the future as our products change and we lookfor ways to improve functionality and lower costs.

We have streamlined ourproduct assembly process to allow for increased flexibility to respond tochanges in business volume. In this regard, we have cross-trained our employeesto provide additional production flexibility to respond to shifts in demand. Asproduct line sales fluctuate from month to month, overlapping responsibilitiesand multi-tasked teams will enable us to provide quicker deliveries tocustomers while more effectively managing our costs.

**Radiation Sources**

We manufacture all of our brachytherapy seed productsat two facilities in the Los Angeles, California metropolitan area. Wemanufacture certain of our brachytherapy accessory products, including oursteppers and stabilizers, in our Seattle facility, and we manufacture ourcalibration and reference source products in one of our Los Angeles facilities.The equipment used to manufacture our products is purchased from a variety ofsuppliers. Additionally, we have developed an in-house capability to both buildand repair certain equipment used in the manufacturing of our products. Weconsider our manufacturing equipment to be in good condition.

The principal componentsin our marketed products are radioisotopes. Additionally, we use a variety ofmaterials for encapsulation or containment of the radioisotopes. Radioisotopesare available for purchase from a limited number of government or commercialfacilities around the world or are manufactured by irradiation of targetmaterials at commercially available sites. We also often process and purifythese isotopes in our laboratories. Once purified, we further process, containand calibrate these materials. Encapsulation and containment materials areavailable from commercial suppliers in the United States and internationally.

**RESEARCH AND DEVELOPMENT**

Research and development (“R&D”)expenses in continuing operations totaled $6.3 million, $3.2 million, and$0.5 million  during the years ended October 31,2005, 2004 and 2003, respectively. Development costs of IMRT and IGRT productswere $5.7 million and $2.5 million during the years ended October 31, 2005and 2004, respectively. Costs associated with the development of Hynic-AnnexinV the principal product candidate of our discontinued operation totaled $5.8million, and $6.9 million during the 

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yearsended October 31, 2004 and 2003, respectively. Our R&D spendingreflects our belief that to maintain our competitive position in a marketcharacterized by rapid rates of technological advancement, we must continue toinvest significant resources in new product development, as well as continue toenhance existing products. We expect that most of the R&D spending in thefuture will be focused on our IMRT and IGRT products.

**EMPLOYEES**

As of October 31,2005, we had a total of 173 full-time employees. None of our employees arerepresented by a labor union. We have not experienced a work stoppage inour history, and we believe that our employee relations are good.

**AVAILABLE INFORMATION**

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

You also may read and copy materials we file with theSEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,Washington, DC 20549. You may obtain information on the operation of thePublic Reference Room by calling the SEC at 1-800-SEC-0330.Our filings with the SEC are also available to you on the SEC’s Internet website at *www.sec.gov.*

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**Item 1A.**                RiskFactors

**We have experiencedsignificant losses and may continue to incur such losses in the future. As aresult, the amount of our cash, cash equivalents, and investments in marketablesecurities has materially declined. If we continue to incur significant lossesand are unable to access sufficient working capital from our operations orthrough external financings, we will be unable to fund future operations andoperate as a going concern.**

We have incurred substantial net losses in each of thelast six fiscal years. As reflected in our financial statements, we haveexperienced net losses of $55.5 million, $36.3 million, and $9.4 million in ourfiscal years ended October 31, 2005, 2004 and 2003, respectively. As aresult, the amount of our cash, cash equivalents, and investments in marketablesecurities has significantly declined from approximately $49.1 million at October 31,2003 to $3.6 million at October 31, 2005. The decrease over the past twoyear period was primarily attributed to net cash payments of $26.3 million usedin continuing operating activities, $13.2 million related to ouracquisition of NOMOS, $9.0 million used in the discontinued Theseusoperations, and $1.6 million used for capital expenditures, partiallyoffset by $4.6 million in cash received from the exercise of stock optionsand our employee stock purchase plan.

The negative cash flow we have sustained hasmaterially reduced our working capital, which in turn, could materially andnegatively impact our ability to fund future operations and continue to operateas a going concern. Management has and continues to take actions to improve ourresults. These actions include reducing cash operating expenses, developing newtechnologies and products, improving existing technologies and products, andexpanding into new geographical markets. The availability of necessary workingcapital, however, is subject to many factors beyond our control, including, ourability to obtain favorable financing, economic cycles, market acceptance of ourproducts, competitors’ responses to our products, the intensity of competitionin our markets, the level of demand for our products etc.

The amount ofworking capital that we will need in the future will also depend on our effortsand many factors, including:

·       Ourability to successfully market and sell our products;

·       Continuedscientific progress in our discovery and research programs;

·       Levelsof sales and marketing that will be required to launch future products andachieve and maintain a competitive position in the marketplace for bothexisting and new products;

·       Levelsof inventory and accounts receivable that we maintain;

·       Levelof capital expenditures;

·       Acquisitionor development of other businesses, technologies or products;

·       Thetime and costs involved in obtaining regulatory approvals;

·       Thecosts involved in preparing, filing, prosecuting, maintaining, defending, andenforcing patent claims; and

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

If we are unsuccessful inthese efforts or if any or some of these factors negatively impact us, we willneed to raise additional capital, reduce operations or take other steps toachieve positive cash flow. Although we cannot assure you that we will besuccessful in these efforts or that any or some of these factors will notnegatively impact us, we believe that we will have sufficient cash to sustainus at least through the fiscal year ending October 31, 2006.

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**We may be unable toobtain capital on favorable terms or at all.**

Continued operating losseswould materially reduce our remaining cash, cash equivalents and investments inmarketable securities. We have had to restructure our $5 Million credit linefinancing arrangement with Silicon Valley Bank into an asset based loanarrangement with warrants. Should we need to secure additional debt or equityfinancing and are unable to obtain it on acceptable terms or at all, we may berequired to further reduce expenses or to take other steps which could have amaterial adverse effect on our future performance, including but not limitedto, the premature sale of some or all of our assets or product  lines on undesirable terms, merger with oracquisition by another company on unsatisfactory terms,  or the cessation of operations.

**Future financingtransactions will have a dilutive effect on our existing shareholders.**

The Company is currentlyconsidering certain financing arrangements that include a significant number ofwarrants, which will result in dilution of the Company’s current shareholders. Inthe future, the Company anticipates issuing equity, debt or convertiblesecurities to raise capital. If the Company does so, the percentage ownershipof the Company held by existing shareholders would be further reduced, andexisting shareholders would experience significant dilution. In addition, newinvestors in the Company may demand rights, preferences or privileges thatdiffer from, or are senior to, those of our existing shareholders, such aswarrants in addition to the securities purchased and other protections againstfuture dilutive transactions. In addition, any capital we may be able to raisecould result in increased debt on our balance sheet, additional interest andfinancing expense and/or decreased operating income.

**We may be requiredto record additional goodwill impairment in the future.**

Under SFAS 142 and SFAS 144, goodwill and intangibleassets having an indefinite life are not amortized but are subject to testingat least annually, or more often if an event occurs or circumstances indicatethat the carrying values for goodwill and/or intangible assets may be impaired,using a fair value based approach. Accounting for impairment containsuncertainty because management must use judgment in determining appropriateassumptions to be used in the measurement of fair value. The Company engaged anappraisal firm to perform an analysis of the goodwill and intangible assetsacquired from NOMOS, to determine the fair value thereof under the applicablestandards as of the Company’s annual test date of September 30, 2005. As aresult of this testing, in the fourth quarter of 2005, the Company recordedimpairments of goodwill and intangible assets of NOMOS in the amount of$39,884,000, and impairments of goodwill and intangible assets of RadiationTherapy Products (“RTP”) in the amount of $329,000, in each case due tonegative operating performance indications including declining sales andcontinued operating losses of the respective business segments.

The Company will continueto monitor impairment indicators in any of our reporting segments. If ourfuture financial performance or other events indicate that the value of ourrecorded goodwill or intangible assets is further impaired, we may recordadditional impairment charges that could have a material adverse effect on ourreported results.

**Allof our product lines are subject to intense competition. Our most significantcompetitors have greater resources than we do. As a result, we cannot becertain that our competitors will not develop superior technologies orotherwise be able to compete against us more effectively. If we fail tomaintain our competitive position in key product areas, we may lose significantsources of revenue.**

We expect that our intensity-modulated radiation therapy,or IMRT, and image-guided radiation therapy, or IGRT, product lines, includingCORVUS, PEACOCK and BAT, will generate a substantial part of our revenues forthe foreseeable future. We will need to continue to develop enhancements tothese products and improvements on our core technologies in order to competeeffectively. Rapid change 

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and technologicalinnovation characterize the marketplace for medical products, and ourcompetitors could develop technologies that are superior to our products orthat render such products obsolete. We anticipate that expenditures forresearch and development will continue to be significant. The domestic andforeign markets for radiation therapy equipment are highly competitive. Many ofour competitors and potential competitors have substantial installed bases ofproducts and significantly greater financial, research and development,marketing and other resources than we do. Competition may increase as emergingand established companies enter the field. In addition, the marketplace couldconclude that the tasks our products were designed to perform are no longerelements of a generally accepted treatment regimen. This could result in ushaving to reduce production volumes or discontinue production of one or moreIMRT/IGRT products.

Our single largest competitor in the IMRT/IGRT marketis Varian Medical Systems, Inc. (“Varian”). Varian is the largestworldwide manufacturer, in terms of market share, of linear accelerators.Linear accelerators are the machines that generate the radiation energy beamsused in both IMRT and conventional radiation treatment. Varian also markets itsown line of IMRT products, including several models of multileaf collimatorsand an IMRT inverse planning software package, which it often includes with itslinear accelerators. Varian is also one of the principal providers of recordand verification systems, which are systems that keep track of all criticalinformation in the treatment of radiation therapy patients and which allow theplanning system to communicate with the linear accelerator. Varian recentlyacquired Zmed, Inc., one of our principal competitors for BAT. Varianexpects the acquisition to enhance its 3-D ultrasound imagingcapabilities and offer radiation oncology departments a new line of stereotacticpositioning accessories and planning software, allowing Varian to directlycompete against BAT.

We also compete with Siemens and Elekta, each of whichmanufactures one or more multileaf collimators that compete with MIMiC and,therefore, with our integrated system, PEACOCK. There are several othercompanies that currently offer or plan to offer IMRT modules, which typicallyadd IMRT functionality to conventional radiation treatment planning products.

Finally, we compete with all manufacturers ofconventional radiation therapy products many of which are devoting substantialresources to promoting their products.

Our brachytherapy business is also subject to intensecompetition. Our primary competitors in the brachytherapy seed businessinclude: Nycomed Amersham PLC (through its control of Oncura) and C.R Bard, Inc.,both of whom manufacture and sell Iodine-125 brachytherapy seeds, as well asdistribute Palladium-103 seeds manufactured by a third party (in the case ofOncura, we currently manufacture a portion of its Palladium-103 seedrequirements pursuant to a distribution agreement reached in July, 2005);Mentor, which manufactures and sells Iodine-125 brachytherapy seeds andcurrently distributes third party manufactured Palladium-103 brachytherapyseeds; and Theragenics Corporation, which manufacturers Palladium-103 seeds andsells Palladium-103 and Iodine-125 brachytherapy seeds directly and itsPalladium-103 brachytherapy seeds through marketing relationships with thirdparties. Several additional companies currently sell brachytherapy seeds aswell. Recent market changes have also provided additional competition forbrachytherapy-related services, such as pre-loading needles with seeds andplacing seeds in so-called “strands.”

Our radiation reference source business also issubject to intense competition. Competitors in this industry include AEATechnology PLC and Eckert & Ziegler AG. We believe that thesecompanies have a dominant position in the market for radiation reference sourceproducts.

Because we are arelatively small company, there is a risk that potential customers willpurchase products from larger manufacturers, even if our products aretechnically superior, based on the perception that a larger, more establishedmanufacturer may offer greater certainty of continued product improvements,support and service, which could cause our revenues to decline. In addition, many of our competitors are substantially largerand have greater sales, marketing and financial resources than we do. 

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Developments by any of these or other companies oradvances by medical researchers at universities, government facilities orprivate laboratories could render our products obsolete. Moreover, companieswith substantially greater financial resources, as well as more extensiveexperience in research and development, the regulatory approval process,manufacturing and marketing, may be in a better position to seize marketopportunities created by technological advances in our industry.

**Weare highly dependent on our direct sales organization, which is small comparedto many of our competitors and which has relatively limited marketing and salesexperience in brachytherapy and IMRT/IGRT products. We have also experienced ahigh degree of turnover in our sales organization. Any failure to build ,manage and maintain our direct sales organization could negatively affect ourrevenues.**

Our current domestic direct sales force is smallrelative to many of our competitors. There is intense competition for skilledsales and marketing employees, particularly for people who have experience inthe radiation oncology market. Accordingly, we could find it difficult to hireor retain skilled individuals to sell our products. Any failure to build ourdirect sales force could adversely affect our growth and our ability to meetour revenue goals.

In addition, we have experienced higher thananticipated turnover in our domestic direct sales force following ouracquisition of NOMOS Corporation, which has resulted in a relative lack of experiencein selling IMRT/IGRT products.

As a result of ourrelatively small sales force and the lack of continuity in our sales force,there can be no assurance that our direct sales and marketing efforts will besuccessful. If we are not successful in our direct sales and marketing, oursales revenue and results of operations are likely to be materially adverselyaffected.

**Wedepend partially on our relationships with distributors and other industryparticipants to market some of our products, and if these relationships arediscontinued or if we are unable to develop new relationships, our revenuescould decline.**

We currently rely, and will continue to rely, uponcollaborative relationships with agents and distributors and other industryparticipants to maintain IMRT/IGRT market access to potential customers,particularly in Asia and Europe, and our business strategy includes enteringinto more of these relationships in the future. Some of the entities with whomwe have relationships to help market and distribute our products also produceor distribute products that directly compete with our IMRT/IGRT products.

We cannot assure you that we will be able to maintainor develop these relationships with agents and distributors and other industryparticipants or that these relationships will continue to be successful. If anyof these relationships is terminated, not renewed or otherwise unsuccessful, orif we are unable to develop additional relationships, our product sales coulddecline, and our ability to grow our IMRT/IGRT business could be adverselyaffected. This is particularly the case with respect to foreign sales of ourIMRT/IGRT products, where we currently rely, and we will continue to rely, onour distributors’ expertise regarding foreign regulatory matters and theiraccess to actual and potential customers.

In addition, our 2005 agreement with Oncura fordistribution of our Palladium-103 brachytherapy seeds may be an importantcomponent of that business.

We do not have a directsales force for our non-therapeutic radiation source products, and relyentirely on the efforts of agents and distributors for sales of thosenon-brachytherapy products. We cannot assure you that we will be able tomaintain our existing relationships with our agents and distributors for thesale of our non-therapeutic radiation source products.

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**Oneof our primary markets in our IMRT product line is the market for upgradinglinear accelerators that do not have IMRT capabilities to provide them withIMRT capabilities. This market will shrink over time, thereby limiting ourpotential revenues from the upgrading of linear accelerators.**

To date, a majority of ourrevenues from the sale of our IMRT products has been derived from the sale ofthese products to customers who decide to upgrade linear accelerators that donot have IMRT capabilities to enable them to deliver IMRT treatments. Most ofthese linear accelerators are older models. Selling CORVUS to customers withnewer multileaf collimator-equipped linear accelerators can be difficultbecause these linear accelerators may be offered with IMRT planning software atlittle or no additional cost. Accordingly, to make a sale, we often mustconvince these potential customers that CORVUS is sufficiently superior to theIMRT or conventional radiation treatment planning software products offered bythe manufacturer to justify the additional costs of purchase. Selling PEACOCKand MIMiC to potential customers with newer multileaf collimator-equippedlinear accelerators is even more difficult because, in addition to theincremental costs of purchase, these potential customers may be reluctant toincur the additional effort required to retrofit the factory installedmultileaf collimator with MIMiC. Over time, if more institutions purchase newlinear accelerators that are IMRT-equipped or upgrade their older acceleratorswith technology from us or our competitors, the market for upgrading linearaccelerators that do not have IMRT capabilities will shrink and may becomesaturated, which could adversely affect our sales and limit our potentialrevenues from our products.

**We may be unable tosuccessfully integrate NOMOS’ operations with our operations.**

The acquisition ofNOMOS in May 2004 has required the integration of NOMOS with our Company. Thisintegration has taken longer and demanded more financial and other resourcesthat we had originally anticipated. Though virtually all of theinfrastructure-related integration tasks have been completed, integration inother areas, such as sales and marketing and certain operational areas remainongoing. As the integration continues, it remains a complex, costly andtime-consuming process. The challenges of combining the two companies’operations have included and may continue to involve, among other things:

·       Requiringthe diversion of management resources to facilitate the integration;

·       Implementingcompatible information communication systems, common operating procedures,compatible financial controls and comparable human resources practices;

·       Coordinatingsales and marketing functions;

·       Preservingour research and development, collaboration, distribution, marketing, promotionand other important relationships and those of NOMOS;

·       Thenecessity of coordinating geographically disparate organizations, systems andfacilities;

·       Integratingpersonnel with diverse business backgrounds;

·       Consolidatingcorporate and administrative functions; and

·       Retainingkey employees.

The process of continuedintegration of NOMOS and the historic Company operations could cause aninterruption of, or loss of momentum in, the activities of our business and theloss of key personnel. The diversion of management’s attention and any delaysor difficulties encountered in connection with the integration of the twocompanies’ operations could harm our business, results of operations, financialcondition or future prospects.

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**If weare unable to complete current developments or to develop new enhancements andnew generations of IMRT/IGRT and/or brachytherapy products, we may be unable toretain our existing customers or attract new customers.**

Rapid and significant technological change, evolvingindustry standards and new product introductions characterize the market forour products. Many of our products are technologically innovative and requiresignificant planning, design, development and testing. These activities requiresignificant capital commitments and investment. If we are unable to raiseneeded capital on favorable terms or at all, we may be unable to maintain ourcompetitive advantage in the marketplace.

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

·       failureto prove feasibility;

·       timerequired from proof of feasibility to routine production;

·       timingand cost of regulatory approvals and clearances;

·       competitors’response to new product developments;

·       manufacturing,installation, warranty and maintenance cost overruns;

·       failureto obtain customer acceptance and payment;

·       customerdemands for retrofits of both old and new products; and

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

The high cost of technological innovation is coupledwith rapid and significant change in the regulations governing the productsthat compete in our market, by industry standards that could change on shortnotice, and by the introduction of new products and technologies that couldrender existing products and technologies uncompetitive. We cannot be sure thatwe will be able to successfully develop new products or enhancements to ourexisting products. Without successful new product introductions, our revenueswill likely suffer. Even if customers accept new or enhanced products, thecosts associated with making these products available to customers, as well asour ability to obtain capital to finance such costs, could reduce or prevent usfrom increasing our operating margins. We are currently awaiting FDA 510(k) clearancefor our nomosSTAT product, which represents the next generation of ourcurrently marketed PEACOCK product. The successful introduction of nomosSTAT iscritical to our ability to achieve our sales targets for fiscal 2006. Anyunforeseen delay in 510(k) clearance from the FDA, or lack of acceptancein the market following such clearance, may result in a materially adverseimpact on our financial results.

In addition, although wehave received FDA 510(k) clearance for our PEREGRINE dose calculationsoftware product, and it may now be used clinically to treat patients for onelinear accelerator beam modifier combination,, we are still in the process of finalizingthe development of PEREGRINE in order to allow it to be used with a broaderrange of linear accelerators, energy levels with those linear accelerators, andtreatment planning systems without the need for extensive commissioning andtesting. An inability to complete these developments on a timely basis couldadversely affect our relationship with the early purchasers of PEREGRINE, andcould adversely impact our ability to sell PEREGRINE to new customers. Anyfailure to successfully complete these developments could also hurt ourreputation and, therefore, adversely impact sales of other our products.

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**We might not beable to make our IMRT products compatible with some existing linearaccelerators and other radiation therapy products. In addition, any futurechanges in the configuration of the most common linear accelerators couldrequire costly and time-consuming modifications to our products that could harmour business.**

OurIMRT products are designed to be used in conjunction with most linear acceleratorscurrently in use. Our products are not currently compatible with all linearaccelerators. However, when manufacturers modify the design or functionality oftheir machines, we are often required to modify our products to ensurecompatibility. Future changes cannot be predicted and, in the case of changesinitiated by linear accelerator manufacturers who are our competitors, could bemade or timed to place us at a competitive disadvantage. Responding to thesechanges can be costly and time-consuming. In addition, we could be required toobtain additional regulatory clearances for any modifications of our products.It is also possible that, despite our best efforts, we might be unable to makeour products compatible with new or modified versions of linear accelerators ormight only be able to do so at a prohibitive expense.

Our PEREGRINE product is not currently fullycompatible with the majority of the linear accelerators in the United Statesand worldwide markets. We cannot assure you that we will be successful inmaking PEREGRINE compatible with additional linear accelerators, and any futurechanges in the design of any linear accelerators could require us to redesignthe functionality of PEREGRINE. We may not be successful at any such effort.

**If alternativetechnologies prove to be superior to IMRT/IGRT or brachytherapy, physicianadoption of our products could substantially decrease.**

Our IMRT/IGRT products face competition from companiesthat sell conventional radiation therapy products as well as from companiesthat are developing, marketing and manufacturing alternative therapies toradiation for the treatment of solid tumor cancers. It is possible thatadvances in the pharmaceutical, bio-medical or gene-therapy fields could rendersome or all radiation therapies, whether conventional or based on IMRT/IGRT andbrachytherapy, obsolete. Even incremental advances in competing technologiescould result in the rejection of our products as a part of a generally accepteddiagnostic or treatment regimen. If alternative therapies are proven orperceived to offer treatment options that are superior or more cost effectivethan the treatments our products provide, physician adoption of our productscould be negatively affected and our revenues from our products could decline.

**There is currentlya lack of long-term data regarding the safety and effectiveness of IMRTproducts and negative data or the continued lack of adequate supporting datacould adversely affect market acceptance of our IMRT products.**

Althoughwe estimate that our IMRT products have been used to treat thousands ofpatients worldwide, this is still a statistically small number, and thesetreatments have primarily involved tumors of the prostate, head, neck andspinal cord. Much of the data produced in current studies using IMRT and ourproducts have involved small patient sample sizes, and any positive results ofthese studies may not be representative of the results that will be achieved instudies involving larger patient sample sizes. If we are unable to obtainadditional and more comprehensive clinical studies, or if long-term clinicalstudies fail to confirm the effectiveness of IMRT or our products, our salescould fail to increase or could decrease.

Sometheoretical and non-clinical studies, meaning studies that are not based onsignificant empirical evidence, have suggested that the use of IMRT andpotentially our products may cause serious negative side effects, such as arisk of induced cancer, as a result of the increased radiation delivered to thepatient. At present, not enough time has passed to determine conclusively thelong-term side effects. If future clinical studies confirm that these negativeside effects occur as a result of IMRT treatments, our sales could fail to growor could decline. In addition, if it is shown that our products cause harmfulside effects, the U.S. Food and Drug Administration, or FDA, could require usto change our product labeling to describe these potential side effects orcould even rescind the clearances for our products and potentially require arecall of our products.

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IMRT, whether using ourproducts or those of our competitors, requires a substantial departure fromcustomary quality assurance practices. The complexity and dynamic nature ofIMRT deliveries make new demands on patient plan and dose verification. These difficultiesand departures from customary practices may impede market acceptance of IMRT ingeneral and our products in particular, which could adversely affect ourability to increase sales of our products and achieve our desired growth rate.

**IMRTtreatments expose patients to increased radiation leakage, which couldpotentially cause long-term deleterious side effects, including induced cancer.**

In both IMRT and conventional radiation therapy, thereis radiation leakage, which means radiation that escapes from the linearaccelerator and is absorbed by the patient outside the area of the patient’sbody being treated. Linear accelerators are the machines that generate theradiation energy beams used in both IMRT and conventional radiation treatment.Leakage occurs at all times when the linear accelerator is producing radiation.In IMRT treatments, the linear accelerator is required to produce radiation fora longer period of time overall as compared to conventional radiationtreatments. Also, in IMRT treatments there is additional leakage that istransmitted through or between the leaves of the multileaf collimator itself.As a result, there is an increase in the overall radiation leakage to which thepatient is exposed due to the longer periods of radiation delivery.

The increased radiation leakage associated with IMRTtreatments could require additional room shielding to protect clinic personnel.In addition, concerns have been raised by some researchers that the increase inoverall radiation leakage to which IMRT patients are exposed may havedeleterious long-term effects, including the potential for inducing cancer.

These same studies suggestthat an increase in the long-term risk of induced cancers from IMRT may bepossible. The risk, or perceived risk, of induced cancers could slow or preventexpanded use of IMRT to treat additional types of cancers and could even resultin decreased usage of IMRT to treat cancers currently treated with IMRT if theincreased risk is shown or believed to be significant, which could cause ourrevenues from our products to decline and our business to suffer.

**OurIMRT/IGRT products are used in connection with the delivery of intenseradiation. Defects in, or misuse of, our products, or any detrimental sideeffects that result from the use of our products, could result in seriousinjury or death and could require costly recalls or subject us to costly andtime-consuming product liability claims. This could harm future sales andrequire us to pay substantial damages.**

Our IMRT/IGRT products are used in connection with thedelivery of high-powered external beam radiation to cancer patients. One ormore of our IMRT/IGRT products could malfunction or be misused and causeserious injury or death to a patient. In addition, our IMRT/IGRT products mightotherwise be determined to cause serious injury or other detrimental sideeffects. There is an inherent risk in our industry that we could be sued if oneof our products results in, or is alleged to result in, a personal injury.Although we believe that we currently have adequate insurance to addressanticipated potential liabilities associated with product liability, anyunforeseen product liability, exposure in excess of, or outside the scope of,such insurance coverage could adversely affect our operating results. Any suchclaim brought against us, with or without merit, could result in significantdamage to our business.

The FDA’s medical device reporting regulations requireus to report any incident in which our products may have caused or contributedto a death or serious injury, or in which our products malfunctioned in a waythat would be likely to cause or contribute to a death or serious injury if themalfunction recurred. Any required filing could result in an investigation ofour products and possibly subsequent regulatory action against us if it isfound that one of our products caused the death or serious injury of a patient.

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Because of the nature of our IMRT/IGRT products andtheir use, the tolerance for error in the design, manufacture or use of ourIMRT/IGRT products may be small or nonexistent. If a product designed ormanufactured by us is defective, whether due to design or manufacturingdefects, or improper assembly, use or servicing of the product or otherreasons, the product may need to be recalled, possibly at our expense.Furthermore, the adverse effect of a product recall might not be limited to thecost of the recall. For example, a product recall could cause applicableregulatory authorities to investigate us as well as cause our customers toreview and potentially terminate their relationships with us. Recalls,especially if accompanied by unfavorable publicity or termination of customercontracts, could cause us to suffer substantial costs, lost revenues and a lossof reputation, each of which could harm our business. Products as complex asour planning and dose calculation software systems may also contain undetectedsoftware errors or defects when they are first introduced or as new versionsare released. Our products may not be free from errors or defects even afterthey have been tested, which could result in the rejection of our products byour customers and damage to our reputation, as well as lost revenue, diverteddevelopment resources and increased support costs. We may also be subject toclaims for damages related to any errors in our products.

We currently maintainproduct liability insurance, which has deductible amounts and per claim andaggregate limits. However, we cannot assure you that this insurance will continueto be available on terms acceptable to us or in sufficient amounts if at all,or that it will provide adequate coverage in the event that any productliability is actually incurred.

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

Currently, our IMRT/IGRTproducts are predominantly used in the treatment of tumors of the prostate,head, neck and spinal cord, while our brachytherapy products are used almostexclusively for the treatment of prostate cancer. Further research, clinicaldata and years of experience will likely be required before there can be broadacceptance for the use of both our IMRT/IGRT as well as our brachytherapyproducts for additional types of cancer. In particular, some recognized membersof the radiation oncology community have expressed skepticism as to therelative benefits of IMRT treatments other than for limited types of cancersuch as prostate cancer, where mortality is closely linked to recurrence of thelocal tumor. They point out that in many types of cancer, such as breastcancer, mortality is usually a result of metastasis, meaning the expansion ofthe cancer to other parts of the patient’s body, and that eliminating orcontrolling the growth of the local tumor, which is the goal of IMRTtreatments, does little to prevent this from occurring. If our products do notbecome more widely accepted in treating other types of cancer, our sales couldfail to increase or could decrease.

**Werely on several sole source suppliers and a limited number of other suppliersto provide raw materials and significant components used in our products. Amaterial interruption in supply could prevent or limit our ability to acceptand fill orders for our products.**

Although we perform final product assembly of ourIMRT/IGRT products, we purchase all major components for those products fromthird-party suppliers. We currently rely on a single source of supply forseveral key materials and components, the most important of which are thetungsten leaves used in our MIMiC multi-leaf collimator and all major componentsused in our BAT targeting system. We also obtain various other components forour IMRT/IGRT products from a limited number of sources. We cannot produceIMRT/IGRT products without these components. In the event of any extended orrecurring interruption in supply, or if any of the significant components toour IMRT/IGRT products become obsolete or are no longer manufactured, we couldbe required to redesign our products or seek alternative supply sources, whichcould significantly impair our ability to sell these products. In some cases,we expect 

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that it would take severalmonths, or longer, for a new supplier to begin providing components tospecification. In addition, we could be required to make a new or supplementalfiling with the FDA and other applicable regulatory authorities and might haveto obtain clearance or other regulatory approvals prior to marketing a productcontaining new components. We may be unable to obtain the necessary regulatoryclearances or approvals on a timely basis, if at all, which could cause ourrevenues to decline and our business to suffer.

We also depend upon alimited number of outside unaffiliated suppliers for our radioisotopes. Ourprincipal suppliers are Nordion International, Inc. and a company inRussia. We also utilize other commercial isotope manufacturers located in theUnited States and overseas. To date, we have been able to obtain the requiredradioisotopes for our products without any significant delays or interruptions.Currently, we rely exclusively upon Nordion International for our supply of thePalladium-103 isotope; if Nordion International ceases to supply isotopesin sufficient quantity to meet our needs, there may not be adequate alternativesources of supply. If we lose any of these suppliers (including any single-sourcesupplier), we would be required to find and enter into supply arrangements withone or more replacement suppliers. Obtaining alternative sources of supplycould involve significant delays and other costs and these supply sources may notbe available to us on reasonable terms or at all. Any disruption of suppliescould delay delivery of our products that use radioisotopes, which couldadversely affect our business and financial results and could result in lost ordeferred sales.

**If weare unable to attract and retain qualified employees, we may be unable to meetour growth and revenue needs.**

Our success is materially dependent on a limitednumber of key employees, and, in particular, the continued services of L.Michael Cutrer, our president and chief executive officer, and James W.Klingler, our chief financial officer. We carry key employee insurance for Mr. Cutrerin the amount of $2.5 million. Our future business and financial resultscould be adversely affected if the services of Messrs Cutrer or Klingler orother key employees cease to be available. To our knowledge, none of our keyemployees have any plans to retire or leave in the near future.

Our future success and ability to grow our businesswill depend in part on the continued service of our skilled personnel and ourability to identify, hire and retain additional qualified personnel. Althoughsome employees are bound by a limited non-competition agreement that they signupon employment, few of our employees are bound by employment contracts, and itis difficult to find qualified personnel, particularly medical physicists andcustomer service personnel, who are willing to travel extensively. We competefor qualified personnel with medical equipment manufacturers, universities andresearch institutions. Because the competition for these personnel is intense,costs related to compensation may increase significantly.

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

**Themedical device industry is characterized by competing intellectual property,and we could be sued for violating the intellectual property rights of others.**

The medical device industry is characterized by asubstantial amount of litigation over patent and other intellectual propertyrights. Our competitors, like companies in many high technology businesses,continually review other companies’ products for possible conflicts with theirown intellectual property rights. Determining whether a product infringes apatent involves complex legal and factual issues, and the outcome of patentlitigation actions is often uncertain. Our competitors could assert that ourproducts and the methods we employ in the use of our products are covered byUnited States or foreign patent rights held by them. In addition, becausepatent applications can take many years to issue, there could be 

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applications now pendingof which we are unaware, which could later result in issued patents that ourproducts infringe. There could also be existing patents that one or more of ourproducts could inadvertently be infringing of which we are unaware.

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

To address patentinfringement or other intellectual property claims, we may have to enter intolicense agreements and technology cross-licenses or agree to pay royalties at asubstantial cost to us. We may be unable to obtain necessary licenses. A validclaim against us and our failure to obtain a license for the technology atissue could prevent us from selling our products and materially adverselyaffect our business, financial results and future prospects.

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

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

If a competitor infringes upon our patent or otherintellectual property rights, enforcing those rights could be difficult,expensive and time-consuming, making the outcome uncertain. Competitors couldalso bring actions or counterclaims attempting to invalidate our patents. Evenif we are successful, litigation to enforce our intellectual property rights orto defend our patents against challenge could be costly and could divert ourmanagement’s attention.

In 1998 (prior to our acquisition of NOMOSCorporation), NOMOS became involved in a lawsuit, which NOMOS initiated,involving a NOMOS patent relating to the ultrasound localization techniquesthat is used in BAT. In January 2003, the district court entered judgmentagainst NOMOS on its infringement claims. NOMOS appealed this judgment to theUnited States Court of Appeals for the Federal Circuit. In February 2004,the circuit court upheld the district court’s judgment and we filed a petitionfor rehearing, which was denied on March 11, 2004. We cannot predict whatthe adverse effect the result of this litigation will have on our future salesof related products.

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Even if we are able to effectively enforce ourexisting proprietary rights to the fullest extent permitted by law, this wouldnot protect us from competition. We do not have any patents on IMRT delivery orplanning generally, and we have competitors that currently market and sell IMRTplanning and delivery products including inverse planning systems similar toour CORVUS product. In addition, our competitors could design around ourpatents or develop products that provide comparable or superior outcomes withoutinfringing on our patents or other proprietary rights. The confidentialityagreements with our employees, consultants and other third parties may not beenforceable or may not provide meaningful protection for our trade secrets orother proprietary information in the event of unauthorized use or disclosure.

In 2006, we licensedintellectual property which is currently the subject of litigation brought byWorldWide Medical Technologies in U.S. District Court against both the Companyas well as their former employee, Richard Terwilliger, who is currently ourVice-President of New Product Development. This intellectual property relatesto the Company’s brachytherapy business, specifically, certain needle-loadingand stranding technologies. While the Company does not believe that it has anyliability in this matter, and is vigorously defending itself in the litigation,we cannot predict what effect an adverse result from this litigation would haveon our future sales of the products at issue.

**We use radioactivematerials which are subject to stringent regulation and which may subject us toliability if accidents occur.**

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

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

**Healthcarereforms, changes in health-care policies and unfavorable changes to third-partyreimbursements for use of our products, could cause declines in therevenues  of our products.**

Hospitals and freestanding clinics may be less likelyto purchase our products if they cannot be assured of receiving favorablereimbursement for treatments using our products from third-party payors, suchas Medicare, Medicaid and private health insurance plans. Generally speaking,Medicare pays hospitals, freestanding clinics and physicians a fixed amount forservices using our products, regardless of the costs incurred by thoseproviders in furnishing the services. Such providers may perceive the setreimbursement amounts as inadequate to compensate for the costs incurred andthus may be reluctant to furnish the services for which our products aredesigned. Moreover, third-party payors are increasingly challenging the pricingof medical procedures or limiting or prohibiting reimbursement for someservices or devices, and we cannot be sure that they will reimburse ourcustomers at levels sufficient to enable us to achieve or maintain sales andprice levels for our products. There is no uniform policy on reimbursementamong third-party payors, and we can provide no assurance that procedures usingour products will qualify for reimbursement from third-party payors or thatreimbursement rates will not be reduced or eliminated. 

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For example, we havepreviously been informed that some private third-party payors regard IMRT asinvestigational or experimental and do not provide reimbursement for theseservices at this time. A reduction in or elimination of third-party payorreimbursement for treatments using our products would likely have a materialadverse effect on our revenues.

Our results from operations arising out of ourrelationship with Prostate Centers of America (PCA) has been negativelyimpacted by administrative difficulties in reimbursement of our brachytherapyproducts in ambulatory surgical centers, despite recent changes inreimbursement for brachytherapy products in non-hospital settings. Our abilityto receive payment for purchases already made by customers of PCA’s has beensignificantly impacted by these administrative difficulties, and we cannot besure that full payment, or any payment, will be made on these past sales ofbrachytherapy seeds.

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

The federal Medicare program currently reimburseshospitals and freestanding clinics for both IMRT/IGRT and brachytherapytreatments. Medicare reimbursement amounts typically are reviewed and adjustedat least annually. Medicare reimbursement policies are reviewed and revised onan ad hoc basis. Adjustments could be made to these reimbursement policies oramounts, which could result in reduced or no reimbursement for IMRT/IGRT and brachytherapyservices. Changes in Medicare reimbursement policies or amounts affectinghospitals and freestanding clinics could negatively affect market demand forour products.

With respect to brachytherapy in particular, Medicarereimbursement amounts for seeding are currently significantly less than forradical prostatectomy, or RP. Although seeding generally requires lessphysician time than RP, lower reimbursement amounts, when combined withphysician familiarity with RP, may create disincentives for urologists toperform seeding.

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

Acceptance of our products in foreign markets could beaffected by the availability of adequate reimbursement or funding, as the casemay be, within prevailing healthcare payment systems. Reimbursement, fundingand healthcare payment systems vary significantly by country and include bothgovernment-sponsored healthcare and private insurance. We can provide noassurance that third-party reimbursement will be made available with respect totreatments using our products under any foreign reimbursement system.

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

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

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

We and some of our suppliers and distributors aresubject to extensive and rigorous government regulation of the manufacture anddistribution of our products, both in the United States and in foreigncountries. Compliance with these laws and regulations is expensive andtime-consuming, and changes to or failure to comply with these laws andregulations, or adoption of new laws and regulations, could adversely affectour business.

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

In the United States, medical devices are classifiedinto three different categories, over which the FDA applies increasing levelsof regulation: Class I, Class II, and Class III. The FDA hasclassified all of our IMRT/IGRT products to date as Class II devices. Ourbrachytherapy products have been classified as Class I devices. Before anew device can be introduced into the United States market, the manufacturermust obtain FDA clearance or approval through either a 510(k) premarketnotification or a premarket approval, unless the product is otherwise exemptfrom the requirements. Class I devices are statutorily exempt from the 510(k) process,unless the device is intended for a use which is of substantial importance inpreventing impairment of human health or it presents a potential unreasonablerisk of illness or injury.

A 510(k) premarket notification clearance willtypically be granted for a device that is substantially equivalent to a legallymarketed Class I or Class II medical device or a Class IIImedical device for which the FDA has not yet required submission of a premarketapproval. A 510(k) premarket notification must contain informationsupporting the claim of substantial equivalence, which may include laboratoryresults or the results of clinical studies. Following submission of a 510(k) premarketnotification, a company may not market the device for clinical use until theFDA finds the product is substantially equivalent for a specific or generalintended use. FDA clearance generally takes from four to twelve months, but itmay take longer, and there is no assurance that the FDA will ultimately grant aclearance. The FDA may determine that a device is not substantially equivalentand require submission and approval of a premarket approval or require furtherinformation before it is able to make a determination regarding substantialequivalence.

Most of the products that we are currently marketinghave received clearances from the FDA through the 510(k) premarketnotification process. For any devices already cleared through the 510(k) process,modifications or enhancements that could significantly affect safety oreffectiveness, or constitute a major 

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change in intended userequire a new 510(k) submission and a separate FDA determination ofsubstantial equivalence. We have made minor modifications to our products and,using the guidelines established by the FDA, have determined that thesemodifications do not require us to file new 510(k) submissions. If the FDAdisagrees with our determinations, we may not be able to sell one or more ofour products until the FDA has cleared new 510(k) submissions for thesemodifications, and there is no assurance that the FDA will ultimately grant aclearance. In addition, the FDA may determine that future products require themore costly, lengthy and uncertain premarket approval process under Section 515of the FDC. The approval process under Section 515 generally takes fromone to three years, but in many cases can take even longer, and there can be noassurance that any approval will be granted on a timely basis, if at all. Underthe premarket approval process, an applicant must generally conduct at leastone clinical investigation and submit extensive supporting data and clinicalinformation establishing the safety and effectiveness of the device, as well asextensive manufacturing information. Clinical investigations themselves aretypically lengthy and expensive, closely regulated and frequently require priorFDA clearance. Even if clinical investigations are conducted, there is noassurance that they will support the claims for the product. If the FDArequires us to submit a new premarket notification under Section 510(k) formodifications to our existing products, or if the FDA requires us to go throughthe lengthier, more rigorous Section 515 premarket approval process, ourproduct introductions or modifications could be delayed or cancelled, whichcould cause our revenues to be below expectations.

In addition to FDA-required market clearances andapprovals, our manufacturing operations are required to comply with the FDA’sQuality System Regulation, or QSR, which addresses the quality programrequirements, such as a company’s management responsibility for the company’squality 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 theQSR is necessary to receive FDA clearance or approval to market new productsand is necessary for us to be able to continue to market cleared or approvedproduct offerings. There can be no assurance that we will not incur significantcosts to comply with these regulations in the future or that the regulationswill not have a material adverse effect on our business, financial conditionand results of operations. Our compliance and the compliance by some of oursuppliers with applicable regulatory requirements is and will continue to be monitoredthrough periodic inspections by the FDA. The FDA makes announced andunannounced inspections to determine compliance with the QSR’s and may issue us483 reports listing instances where we have failed to comply with applicableregulations and/or procedures or Warning Letters which, if not adequatelyresponded to, could lead to enforcement actions against us, including fines,the total shutdown of our production facilities and criminal prosecution.

If we or any of oursuppliers fail to comply with FDA requirements, the FDA can institute a widevariety of enforcement actions, ranging from a public warning letter to moresevere sanctions such as:

·       fines,injunctions and civil penalties;

·       therecall or seizure of our products;

·       theimposition of operating restrictions, partial suspension or total shutdown ofproduction;

·       therefusal of our requests for 510(k) clearance or premarket approval of newproducts;

·       thewithdrawal of 510(k) clearance or premarket approvals already granted; and

·       criminalprosecution.

Similar consequences couldarise from our failure, or the failure by any of our suppliers, to comply withapplicable foreign laws and regulations. Foreign regulatory requirements varyby country. In general, our products are regulated outside the United States asmedical devices by foreign governmental agencies similar to the FDA. However,the time and cost required to obtain regulatory approvals from foreign 

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countriescould be longer than that required for FDA clearance and the requirements for licensinga product in another country may differ significantly from the FDArequirements. We rely, in part, on our foreign distributors to assist us incomplying with foreign regulatory requirements. We may not be able to obtainthese approvals without incurring significant expenses or at all, and thefailure to obtain these approvals would prevent us from selling our products inthe applicable countries. This could limit our sales and growth.

**Doctorsand hospitals may not adopt our products and technologies at levels sufficientto sustain our business or to achieve our desired growth rate.**

Intensity modulatedradiation therapy and image-guided radiation therapy are both relatively newtechnologies and, to date, we have attained only limited penetration of thetotal potential worldwide market. Our future growth and success depends uponcreating broad awareness and acceptance of IMRT/IGRT generally and our productsin particular by doctors, hospitals and freestanding clinics, as well aspatients. This will require substantial marketing and educational efforts,which will be costly and may not be successful. The target customers for ourIMRT/IGRT products may not adopt these technologies or may adopt them at a ratethat is slower than desired. In addition, as described above, potentialcustomers who decide to utilize IMRT/IGRT may choose to purchase competitors’products. Important factors that will affect our ability to attain broad marketacceptance of our IMRT/IGRT products include:

·       doctorand patient awareness and acceptance of IMRT/IGRT and our products;

·       thereal or perceived effectiveness and safety of IMRT/IGRT and our products;

·       therelationship between the cost of our products and the real or perceived medicalbenefits of IMRT/IGRT and our products;

·       therelationship between the cost of our products and the financial benefits to ourcustomers of using our products, which will be greatly affected by the coverageof, and reimbursement for, IMRT/IGRT treatment and ultrasound guidance bygovernmental and private third-party payors; and

·       marketperception of our ability to continue to grow our business and develop enhancedIMRT/IGRT products.

Failure of our products togain broad market acceptance could cause our revenues to decline and ourbusiness to suffer.

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

Our futureprofitability will depend in part on our ability to establish, grow andultimately maintain our product sales in foreign markets, particularly in Asiaand Europe. However, we have limited experience in marketing, servicing anddistributing our products in other countries. In 2005, less than 5% of ourproduct revenues and less than 5% of our total revenues were derived from salesto customers outside the United States and Canada. Our foreign operationssubject us to additional risks and uncertainties, including:

·       ourcustomers’ ability to obtain reimbursement for procedures using our products inforeign markets;

·       theburden of complying with complex and changing foreign regulatory requirements;

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·       languagebarriers and other difficulties in providing long-range customer support andservice;

·       longeraccounts receivable collection times;

·       significantcurrency fluctuations, which could cause our distributors to reduce the numberof products they purchase from us because the cost of our products to themcould fluctuate relative to the price they can charge their customers;

·       reducedprotection of intellectual property rights in some foreign countries; and

·       theinterpretation of contractual provisions governed by foreign laws in the eventof a contract dispute.

Our foreign sales of ourproducts could also be adversely affected by export license requirements, theimposition of governmental controls, political and economic instability, traderestrictions, changes in tariffs and difficulties in staffing and managingforeign operations. In addition, we are subject to the Foreign CorruptPractices Act, any violation of which could create a substantial liability forus and also cause a loss of reputation in the market.

**Aspart of our business strategy, we intend to pursue transactions that may causeus to experience significant charges to earnings that may adversely affect ourstock price and financial condition.**

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

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

The results ofoperations for any fiscal quarter or fiscal year are not necessarily indicativeof results to be expected in future periods. Our operating results have in thepast been, and will continue to be, subject to quarterly and annualfluctuations as a result of a number of factors. As a consequence, operatingresults for a particular future period are difficult to predict. Such factorsinclude the following:

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

·       Ourbrachytherapy product lines may experience some variability in revenue due toseasonality. This is primarily due to three major holidays occurring in ourfirst fiscal quarter and the apparent reduction in the number of proceduresperformed during summer months, which could affect our third fiscal quarterresults;

·       Estimateswith respect to the useful life and ultimate recoverability of our carryingbasis of assets, including goodwill and purchased intangible assets, couldchange as a result of such assessments and decisions;

·       Asa result of our growth in past periods, our fixed costs have increased. Withincreased levels of spending and the impact of long-term commitments, we maynot be able to quickly reduce these fixed expenses in response to short-termbusiness changes;

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·       Acquisitionsthat result in in-process research and development expenses may be chargedfully in an individual quarter;

·       Salesof our IMRT/IGRT products are typically heavier in the final month of a fiscalquarter, leading to a disproportionately high use of cash in the first twomonths of a quarter;

·       Changesor anticipated change in third-party reimbursement amounts or policiesapplicable to treatments using our products;

·       Timingof the announcement, introduction and delivery of new products or productenhancements by us and by our competitors;

·       Thepossibility that unexpected levels of cancellations of orders or backlog mayaffect certain assumptions upon which we base our forecasts and predictions offuture performance;

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

·       Unfavorableoutcome of any litigation; and

·       Accounting adjustments suchas those relating to reserves for product recalls, stock option expensing asrequired under SFAS No. 123R and changes in interpretation of accountingpronouncements.

**Beinga public company significantly increases our administrative costs.**

The Sarbanes-Oxley Act of2002, as well as rules subsequently implemented by the SEC and listingrequirements subsequently adopted by NASDAQ in response to Sarbanes-Oxley, haverequired changes in corporate governance practices, internal control policiesand audit committee practices of public companies. These rules, regulations,and requirements have significantly increased our legal, financial, complianceand administrative costs, and have made certain other activities more time consumingand costly, as well as requiring substantial time and attention of our seniormanagement. The Company expects its continued compliance with these and future rules andregulations to continue to require significant resources. These new rules andregulations also may make it more difficult and more expensive for us to obtaindirector and officer liability insurance in the future, and could make it moredifficult for us to attract and retain qualified members for our Board ofDirectors, particularly to serve on our audit committee.

**Ourpublicly-filed SEC reports are reviewed by the SEC from time to time and anysignificant changes required as a result of any such review may result inmaterial liability to us and have a material adverse impact on the tradingprice of our common stock.**

The reports ofpublicly-traded companies are subject to review by the SEC from time to timefor the purpose of assisting companies in complying with applicable disclosurerequirements and to enhance the overall effectiveness of companies publicfilings, and comprehensive reviews of such reports are now required at leastevery three years under the Sarbanes-Oxley Act of 2002. While we believe thatour previously filed SEC reports comply, and we intend that all future reportswill comply in all material respects with the published rules andregulations of the SEC, we could be required to modify or reformulateinformation contained in prior filings as a result of an SEC review. Anymodification or reformulation of information contained in such reports could besignificant and result in material liability to us and have a material adverseimpact on the trading price of our common stock.

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**Theliquidity of our common stock could be adversely affected if we are delistedfrom The Nasdaq National Market.**

In the event that we are unable maintain compliancewith all relevant Nasdaq Listing Standards, our securities may be subject todelisting from the Nasdaq National Market. If such delisting occurs, the marketprice and market liquidity of our common stock may be adversely affected.

Alternatively, if faced with such delisting, we maysubmit an application to transfer the listing of our common stock to the NasdaqSmallCap Market. The Nasdaq SmallCap Market also has a $1.00 minimum bid pricerequirement.

If our common stock is delisted by Nasdaq, our commonstock may be eligible to trade on the OTC Bulletin Board maintained by Nasdaq,the American Stock Exchange, another over-the-counter quotation system, or onthe pink sheets where an investor may find it more difficult to dispose of orobtain accurate quotations as to the market value of our common stock. Inaddition, we would be subject to a rule promulgated by the Securities andExchange Commission that, if we fail to meet criteria set forth in such rule,imposes various practice requirements on broker-dealers who sell securitiesgoverned by the rule to persons other than established customers andaccredited investors. Consequently, such rule may deter broker-dealersfrom recommending or selling our common stock, which may further affect theliquidity of our common stock.

Delisting from Nasdaqwould make trading our common stock more difficult for investors, potentiallyleading to further declines in our share price. It would also make it more difficultfor us to raise additional capital.

**Item 2.**                        PROPERTIES

We are headquartered inthe Los Angeles, California metropolitan area where we occupy two propertiestotaling approximately 40,000 square feet used for manufacturing andadministration. Our leases for each of these facilities expire in November 2006,with renewal options. We also have leased manufacturing and administrationoffices in the Pittsburgh, Pennsylvania metropolitan area of approximately35,000 square feet. The lease expires in February 2013 with an extensionoption and the option to obtain additional space within the building. Inaddition, we have a small manufacturing facility in Seattle, Washington andsmall sales offices in Germany, the Netherlands and China. We believe that ourfacilities are adequate, suitable and of sufficient capacity  to support our current operations.

**Item 3.**                        LEGALPROCEEDINGS

In December, 2004, an individual plaintiff, StevenWeeks, filed a complaint in the Coos County Circuit Court of the State ofOregon against Bay Area Health District, North American Scientific, Inc.,NOMOS Corporation and Carl Jenson, M.D., alleging the defendants caused Mr. Weeksto receive excessive radiation during the course of his IMRT treatment, as aresult of a manufacturing and/or design defect(s) in our CORVUS and BATproducts. InSeptember, 2005, prior to the case going to trial, the Company was party to asettlement agreement and the lawsuit is no longer an ongoing matter. Under thesettlement agreement, the parties mutually agreed to dismiss all claims andcounterclaims against each other without admitting any wrongdoing.

In November, 2005, the Company was served with acomplaint filed in U.S. District Court in Hartford, Connecticut by World WideMedical Technologies (WWMT). WWMT’s six count complaint alleges breach of aconfidentiality agreement, fraud, patent infringement, wrongful interferencewith contractual relations, violation of the Connecticut Uniform Trade SecretsAct, and violation of the Connecticut Unfair Practices Act. WWMT alleges thatthe Company fraudulently obtained WWMT’s confidential information duringnegotiations to purchase WWMT in 2004 and that once the Company acquired thatinformation, it 

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allegedly learned thatRichard Terwilliger, (our current Vice President of New Product Development)owned certain patent rights and that we began trying to inappropriately gainproperty rights by hiring him away from WWMT. We were served with this matterat approximately the same time Mr. Terwilliger was served with a statecourt claim seeking, among other things, a preliminary injunction preventingTerwilliger from engaging in certain conduct in connection with his employmentwith us. The Company has agreed to defend Mr. Terwilliger. Mr. Terwilligerand a company of which he is a part-owner, IdeaMatrix, Inc., have removedthe state court claim to federal court and the case is pending before the samecourt as the case against us. We have also removed the complaint in the actionagainst us. The schedule and scope of the preliminary injunction proceedings inthe Terwilliger action have not been established by the court. The Companydenies liability and intends to vigorously defend this case as it progresses*.*

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

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

None.

**Item 4A.**                EXECUTIVEOFFICERS OF THE REGISTRANT

**L.Michael Cutrer 49,**   has been the President andChief Executive Officer and a Director of the Company since 1990. Previously, Mr. Cutrerwas a Manager of Isotope Products Laboratory, Inc., a radioisotopemanufacturing company, where he was responsible for industrial product manufacturing,research and development.

**JamesW. Klingler 58,**   joined North American Scientific, Inc.in July, 2004 as Senior Vice President and Chief Financial Officer. Previously,he was Vice President-Finance and Chief Financial Officer of Troy Group, Inc.,a provider of secure check printing products and wireless connectivitysolutions, from January 2002 to July 2004. From February 2001 toNovember 2001, he served as Senior Vice President, Business Operations andChief Financial Officer of Trinagy, Inc., a software company that wasmerged into Hewlett-Packard Company. In prior positions, Mr. Klingler wasVice President, Finance and Administration of Triconex Corporation, a supplierof products, systems and services for safety, critical control andturbomachinery applications and a subsidiary of Invensys plc, from February 1999to February 2001, and Vice President and Chief Financial Officer ofWilshire Technologies Inc., a company that manufactures polyurethaneproducts, from October 1994 to February 1999. Mr. Klingler holdsa B.A. from The Ohio State University and an M.B.A. from the Columbia UniversityGraduate School of Business.

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**PART II**

**Item 5.**                        MARKETFOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES

TheCompany’s common stock is listed on the Nasdaq National Market stock exchangeunder the ticker symbol “NASI”. The following table sets forth, for the periodsindicated, the high and low sales prices for our common stock, as reported onthe Nasdaq National Market.

| ** **      | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------|------------|------------|------------|------------|------------|
| **Fiscal 2005** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter   |       | 6.20       |       | 4.10       |       |
| Second Quarter  |       | 5.94       |       | 2.55       |       |
| Third Quarter   |       | 3.62       |       | 1.85       |       |
| Fourth Quarter  |       | 4.13       |       | 1.90       |       |
| **Fiscal 2004** | ** ** | ** ** | ** ** |       |       |   |   |
| First Quarter   |       | 12.24      |       | 7.00       |       |
| Second Quarter  |       | 10.94      |       | 7.59       |       |
| Third Quarter   |       | 10.05      |       | 6.85       |       |
| Fourth Quarter  |       | 7.85       |       | 4.91       |       |

 

As of  December 31,2005, we had approximately 264 shareholders of record.

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

 

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**Item 6.**                        SELECTEDCONSOLIDATED FINANCIAL DATA

Thefollowing data should be read in conjunction with the consolidated financialstatements, related notes and other financial information appearing elsewhereherein.

| ** **                                                 | ** ** | **Year Ended October 31,**                                      | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                                                       | ** ** | **2004(1)** | ** ** | **2003(2)** | ** ** | **2002** | ** ** | **2001(3)** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except for per share amounts)** | ** ** |
| **Statement of Operations:**                               |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net sales                                                  |       | $                                                                              | 32,224     |   | $ | 24,737 |   | $ | 14,683 |   | $ | 20,780 |   | $ | 19,343 |   |
| Cost of goods  sold                                        |       | 20,056                                                                         |       | 15,818 |   | 6,944 |   | 7,581 |   | 6,862 |   |
| Gross profit                                               |       | 12,168                                                                         |       | 8,919 |   | 7,739 |   | 13,199 |   | 12,481 |   |
| Operating  expenses                                        |       | 68,164                                                                         |       | 33,525 |   | 10,086 |   | 6,382 |   | 9,453 |   |
| Income (loss)  from operations                             |       | (55,996                                                                        | )          | (24,606 | ) | (2,347 | ) | 6,817 |   | 3,028 |   |
| Interest and  other income, net                            |       | 121                                                                            |       | 579 |   | 1,749 |   | 1,834 |   | 2,078 |   |
| Income (loss)  before provision (benefit) for income taxes |       | (55,875                                                                        | )          | (24,027 | ) | (598 | ) | 8,651 |   | 5,106 |   |
| Provision  (benefit) for income taxes                      |       | —                                                                         |       | (257 | ) | — |   | 2,087 |   | (1,090 | ) |
| Income (loss)  from continuing operations                  |       | (55,875                                                                        | )          | (23,770 | ) | (598 | ) | 6,564 |   | 6,196 |   |
| Income (loss)  from discontinued operations (4)            |       | 362                                                                            |       | (12,537 | ) | (8,536 | ) | (11,808 | ) | (8,181 | ) |
| Cumulative effect  of change in accounting principle       |       | —                                                                         |       | — |   | (306 | ) | — |   | — |   |
| Net loss                                                   |       | $                                                                              | (55,513    | ) | $ | (36,307 | ) | $ | (9,440 | ) | $ | (5,244 | ) | $ | (1,985 | ) |
| Basic earnings (loss)  per share:                          |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                   |       | $                                                                              | (3.38      | ) | $ | (1.81 | ) | $ | (0.06 | ) | $ | 0.65 |   | $ | 0.64 |   |
| Income (loss) from discontinued operations(4)              |       | 0.02                                                                           |       | (0.95 | ) | (0.83 | ) | (1.16 | ) | (0.84 | ) |
| Cumulative effect of change in accounting principle        |       | —                                                                         |       | — |   | (0.03 | ) | — |   | — |   |
| Net loss                                                   |       | $                                                                              | (3.36      | ) | $ | (2.76 | ) | $ | (0.92 | ) | $ | (0.51 | ) | $ | (0.20 | ) |
| Diluted earnings (loss)  per share:                        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                   |       | $                                                                              | (3.38      | ) | $ | (1.81 | ) | $ | (0.06 | ) | $ | 0.57 |   | $ | 0.57 |   |
| Income (loss) from discontinued operations(4)              |       | 0.02                                                                           |       | (0.95 | ) | (0.83 | ) | (1.02 | ) | (0.75 | ) |
| Cumulative effect of change in accounting principle        |       | —                                                                         |       | — |   | (0.03 | ) | — |   | — |   |
| Net loss                                                   |       | $                                                                              | (3.36      | ) | $ | (2.76 | ) | $ | (0.92 | ) | $ | (0.45 | ) | $ | (0.18 | ) |
| Shares used in per share  calculation                      |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                      |       | 16,502                                                                         |       | 13,139 |   | 10,258 |   | 10,210 |   | 9,783 |   |
| Diluted                                                    |       | 16,502                                                                         |       | 13,139 |   | 10,258 |   | 11,596 |   | 10,961 |   |

 

| ** **                                        | ** ** | **As of October 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2005**                             | ** ** | **2004(1)** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                        | ** ** | **(In thousands)**              | ** ** |
| **Balance  Sheet Data:**                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and marketable securities |       | $                                    | 3,623      |   | $ | 14,980 |   | $ | 49,115 |   | $ | 55,945 |   | $ | 54,342 |   |
| Total assets                                      |       | 22,333                               |       | 80,539 |   | 62,532 |   | 69,135 |   | 72,681 |   |
| Total debt                                        |       | —                               |       | — |   | — |   | — |   | — |   |
| Total stockholders’  equity                  |       | 10,801                               |       | 65,377 |   | 55,746 |   | 64,901 |   | 69,873 |   |
|                                                   |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

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(2)          The2003 results include a $0.3 million charge for the cumulative effect of achange in accounting principle to recognize future decommissioning costs ofleased manufacturing facilities. This item had a ($0.03) impact on basic anddiluted loss per share. See Note 6 to the Consolidated FinancialStatements.

(3)          The2001 results include the write-off of costs incurred related to two linearparticle accelerators of $3.7 million. This item had a ($0.38) impact onbasic and diluted loss per share.

(4)          InSeptember 2004, the Company’s Theseus operation was shut down. TheStatement of Operations data include Theseus as a discontinued operation. The2004 results include a loss on discontinued operations of $5.2 million and lossfrom operations of $7.3 million. Loss from operations consisted primarily ofresearch and development expenses.

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis providesinformation which we believe is relevant to an assessment and understanding ofour financial condition and results of operations. The discussion should beread in conjunction with the Consolidated Financial Statements contained hereinand 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, areforward looking as that term is defined by the Private Securities LitigationReform Act of 1995, or 1995 Act, and releases issued by the Securities andExchange Commission, or SEC. These statements are being made pursuant to theprovisions of the 1995 Act and with the intention of obtaining the benefits ofthe “Safe Harbor” provisions of the 1995 Act. We caution that any forwardlooking statements made herein are not guarantees of future performance andthat actual results may differ materially from those in such forward lookingstatements as a result of various factors, including, but not limited to, anyrisks detailed herein, including the “Risk Factors” section contained in Item 1of this Form 10-K, or detailed in our most recent reports on Form 10-Qand Form 8-K and from time to time in our other filings with the SECand amendments thereto. We are not undertaking any obligation to updatepublicly any forward-looking statements. Readers should not place unduereliance on these forward-looking statements.

**Overview**

We manufacture, market and sell products for theradiation oncology community, including brachytherapy seeds and ancillary devicesused primarily in the treatment of prostate cancer, as well as intensitymodulated and image guidance radiation therapy products and services forlocalization and treatment of cancer. Our business is organized into twooperating segments: IMRT/IGRT, and Radiation Sources.

IMRT/IGRT develops and markets intensity modulatedradiation therapy (“IMRT”) and image guided radiation therapy (“IGRT”) productsused in the treatment of cancer. Radiation Sources develops and marketsradioisotopic products including brachytherapy seeds, accessories andcalibration sources used in the treatment of cancer and in medical,environmental, research and industrial applications.

From 1998 to January 2003, our brachytherapyseeds were distributed under an exclusive agreement with a third partydistributor. In January 2003, the agreement terminated and we began tomarket and sell our brachytherapy products directly to health care providers.

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

On May 4, 2004, we acquired NOMOS Corporation (“NOMOS”),a privately held developer, manufacturer, and marketer of IMRT and IGRTproducts and services. This acquisition was intended to significantly expandour product offerings to radiation oncologists. Under the terms of theagreement and plan of merger we paid approximately $58 million consisting of$11.5 million in cash, the issuance of 5.2 million shares of the Company’scommon stock with a fair value of approximately $37.3 million, the assumption of1.4 million of stock options and warrants with a fair value of $4.6 million,direct transaction costs of $3.0 million and the assumption of acquisitionrelated liabilities of $1.6 million in exchange for all of the outstandingcapital stock of NOMOS. We manage this business as our IMRT/IGRT operatingsegment. Our financial results include 12 months of IMRT/IGRT operating resultsin fiscal 2005 and 6 months in fiscal 2004.

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In October 2000, weacquired Theseus Imaging Corporation (“Theseus”), a company that had beenengaged in the research and development of a proprietary radiopharmaceuticalagent (referred to as “Hynic-Annexin V”). Over the following four years, wespent over $33 million on clinical trials and additional research. In July andAugust 2004, we assessed the long-term prospects of the Theseus productcandidate and confirmed our previous estimates that the successful completionof development and receipt of regulatory approvals of Hynic-Annexin V would notoccur earlier than 2007 and that the additional costs to achieve successfulcompletion would be substantial. With limited capital resources and theadditional need to fund product development of our recently acquired IMRT andIGRT products, we decided to explore alternative options for Theseus. Discussionswith potential financial and strategic partners ceased in August 2004. Asa direct result we shut-down the operation in September 2004.

**Critical Accounting Policies**

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make judgments, assumptions and estimates that affect the amountsreported in the consolidated financial statements and accompanying notes.Note 1 to the consolidated financial statements describes the significantaccounting policies and methods used in the preparation of the consolidatedfinancial statements. Estimates are used for, but not limited to, theaccounting for revenue recognition, allowance for doubtful accounts, goodwilland long-lived asset impairments, loss contingencies, and taxes. Estimates andassumptions about future events and their effects cannot be determined withcertainty. We base our estimates on historical experience and on various otherassumptions believed to be applicable and reasonable under the circumstances.These estimates may change as new events occur, as additional information isobtained and as our operating environment changes. These changes havehistorically been minor and have been included in the consolidated financialstatements as soon as they became known. The following critical accountingpolicies are impacted significantly by judgments, assumptions and estimatesused in the preparation of the consolidated financial statements and actualresults could differ materially from the amounts reported based on thesepolicies.

*Revenue Recognition*

We sell products for theradiation oncology community, including brachytherapy seeds used in thetreatment of cancer, as well as IMRT and IGRT products and services. Productrevenue consists of brachytherapy, non-therapeutic sources, and certain IMRThardware devices, including our MiMIC and Crane products. Software revenuesconsist of IMRT treatment planning software Corvus, Peregrine and Peacock andour IGRT products. Service revenue consists of warranty revenue and maintenanceservice agreements.

*Product revenue*

We apply the provisions of SEC Staff AccountingBulletin (“SAB”) No. 104, “Revenue Recognition” for the sale ofnon-software products. SAB No. 104 which supercedes SAB No. 101, “RevenueRecognition in Financial Statements”, provides guidance on the recognition,presentation and disclosure of revenue in financial statements. SAB No. 104outlines the basic criteria that must be met to recognize revenue and providesguidance for the disclosure of revenue recognition policies. In general, werecognize revenue related to product sales when (i) persuasive evidence ofan arrangement exists, (ii) delivery has occurred, (iii) the fee isfixed or determinable, and (iv) collectibility is reasonably assured.

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

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*Software revenue*

Our software revenue is generated from the sale ofadvanced medical equipment products. The software element of our products isdeemed an essential element of the functionality of the product. Maintenanceand support are provided with the initial product sale for a twelve monthperiod. The maintenance and support is renewable annually or longer, at thecustomer’s discretion.

We recognize revenue in accordance with the provisionsof Statement of Position 97-2 (“SOP 97-2”), “Software RevenueRecognition”, as amended by Statement of Position 98-9 (“SOP 98-9”),“Modification of SOP 97-2, Software Revenue Recognition, with respect toCertain Transactions”. Under the provisions of SOP 97-2, we recognizesoftware revenue upon delivery and acceptance, provided all significantobligations have been met, persuasive evidence of an arrangement exists, feesare fixed or determinable, collection is probable, and we are not involved inproviding services that are essential to the functionality of the product.

Our software sales aregenerally multiple element arrangements, which could include the product, firstyear annual maintenance and support, and training and installation. Revenuesfrom the multiple element arrangements are allocated to each element based onthe relative fair value of the elements. If the fair value of the elementexists, the determination is based on vendor specific objective evidence. Ifsuch evidence of fair value for each element of the arrangement does not exist,all revenue from the arrangement is deferred until such time that evidence offair value of each element does exist or until all elements of the arrangementare delivered. If in a multiple element arrangement, fair value does not existfor one or more of the undelivered elements, the residual method of accountingis applied. Under the residual method, the fair value of the undeliveredelements is deferred, and the remaining portion of the arrangement fee isrecognized as revenue.

*Service revenue*

Service revenues arederived mainly from maintenance and support contracts and are recognized on astraight-line basis over the term of the contract. Payments for maintenancerevenues are normally received in advance and are nonrefundable.

*Allowance forDoubtful Accounts and Sales Returns*

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

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

*Inventory Reserves*

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

The Company’s RadiationSources products are subject to shelf-life expiration periods, which arecarefully monitored by the Company. Provision is made for inventory items whichmay not be sold because 

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ofexpiring dates. The Company routinely reviews other inventories for evidence ofimpairment of value and makes provision as such impairments are identified.

*Goodwill*

Our methodology forallocating the purchase price related to purchase acquisitions is determinedthrough established valuation techniques. Goodwill is measured as the excess ofthe cost of the acquisition over the amounts assigned to identifiable assetsacquired less assumed liabilities. We perform goodwill impairment tests on anannual basis and between annual tests in certain circumstances. In response tochanges in industry and market conditions, we may strategically realign ourresources and consider restructuring, disposing of, or otherwise exitingbusinesses, which could result in an impairment of goodwill.

*Impairment ofLong-lived Assets*

We assess the impairment of long-lived assets, whichinclude equipment and leasehold improvements and identifiable intangibleassets, whenever events and circumstances indicate that such assets might beimpaired. In the event the expected undiscounted future cash flow attributableto the asset is less than the carrying amount of the asset, an impairment lossequal to the excess of the asset’s carrying value over its fair value isrecorded.

TheCompany engaged an appraisal firm to perform an analysis of the goodwill andintangible assets acquired from NOMOS Corporation on May 4, 2004 todetermine the fair value thereof under SFAS 142 and SFAS 144 as of the Company’sannual test date of September 30, 2005. The Company’s management and AuditCommittee of the Board have reviewed and agree with the appraisal firm’sconclusions that the NOMOS goodwill and intangible assets are impaired, due tonegative operating performance indicators of our IMRT/IGRT business, includingthree successive years of declining sales and continued net operating losses.As a result, the Company wrote down the NOMOS goodwill and intangible assets totheir fair value in the quarter ended October 31, 2005, as follows:

| ** **               | ** ** | **Sept. 30, 2005** | ** ** | **Sept. 30, 2005** | ** ** | ** **     | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| **($000)**               | ** ** | **Carrying Value**      | ** ** | **Fair Value**          | ** ** | **Impairment** | ** ** |
| NOMOS Goodwill           |       |                         | $          | 18,525                       |       |           |       | $ | 2,564 |   |   |   | $ | 15,961 |   |   |
| NOMOS Intangible  Assets |       |                         | 27,103     |                         |       |           | 3,180      |   |   |   | 23,923 |   |   |
| TOTAL                    |       |                         | $          | 45,628                       |       |           |       | $ | 5,744 |   |   |   | $ | 39,884 |   |   |

 

In addition, the Companyperformed an internal analysis under SFAS 142 and SFAS 144 as of the Company’sannual test date of September 30, 2005 of the goodwill and intangibleassets acquired from Radiation Therapy Products (RTP) in August, 2003 todetermine the fair value thereof under the applicable standards. The Companyconcluded that the goodwill and intangible assets acquired from RTP wereimpaired due to negative operating performance indicators, including the RTPproducts lower sales and net operating losses. As a result, the Company wrotedown the RTP goodwill by $207,000 and the RTP intangible assets by $122,000 totheir fair value in the quarter ended October 31, 2005.

*Loss Contingencies*

We record liabilitiesrelated to pending litigation when an unfavorable outcome is probable and wecan reasonably estimate the amount of the loss. We are subject to various legalproceedings and claims, either asserted or unasserted, that arise in theordinary course of business. We evaluate, among other factors, the degree ofprobability of an unfavorable outcome and an estimate of the amount of theloss. Significant judgment is required in both the determination of theprobability and as to whether an exposure can be reasonably estimated. When wedetermine that it is probable that a loss has been incurred, 

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theeffect is recorded promptly in the consolidated financial statements. Althoughthe outcome of these claims cannot be predicted with certainty, we do notbelieve that any of the existing legal matters will have a material adverseeffect on our financial condition or results of operations.

*Income Taxes*

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

**Results of Operations**

**Fiscal 2005 vs. Fiscal 2004**

**Netsales.****  **Netsales increased $7.5 million, or 68%, to $32.2 million for the year ended October 31,2005 from $24.7 million for the year ended October 31, 2004. The increasein sales is attributed an additional $8.5 million of net sales from ourIMRT/IGRT business segment acquired in the purchase of NOMOS in May 2004,reflecting a full year’s results from that business segment, offset by a $1.0million decrease of net sales in our Radiation Sources business. The decreasein our Radiation Sources business reflects a decline in average selling pricesdue to competition. Our service revenue is related to our IMRT/IGRT business,and increased $6.1 million, or 115%, to $11.4 million for the full year ended October 31,2005 from $5.3 million for the six months ended October 31, 2004.

**Grossprofit.****  **Grossprofit increased $3.2 million, or 36%, to $12.2 million for the year ended October 31,2005 from $8.9 million for the fiscal year ended October 31, 2004. Theincrease in our gross profit is attributed to a full year’s results from ourIMRT/IGRT business which was acquired in May 2004 partially offset by adecline in sales of our Radiation Sources business. Gross profit for fiscalyear 2005 consisted of $8.3 million from our IMRT/IGRT business and $3.9million from our Radiation Sources business. The gross profit on our servicerevenue related to our IMRT/IGRT business increased $4.1 million, or 41%, to$7.0 million for the full year ended October 31, 2005 from $2.9 millionfor the six months ended October 31, 2004, reflecting a full year’sresults.

Gross profit as a percent of sales increased from 36%in fiscal year 2004 to 38% in fiscal year 2005 primarily due to a higherproportion of service revenue relative to product revenue in fiscal 2005compared to fiscal 2004. Service revenue has a higher gross profit as a percentof sales than product revenue. Gross profit as a percent of sales by businesssegment for fiscal year 2005 consisted of 41% of sales from our IMRT/IGRTbusiness and 32% of sales from our Radiation Sources business. The gross profitas a percent of sales of our IMRT/IGRT business was impacted by an increase inthe reserve for excess and obsolete inventory of $0.7 million, or 3% of sales.We plan that gross profit margins of both businesses will improve over timewith the anticipated increase in sales volumes as new products are introduced.

**Selling expenses.  **Sellingexpenses comprised primarily of salaries, commissions, and marketingcosts,  increased $2.2 million or 32%, to$8.9 million for the fiscal year ended October 31, 2005, from $6.7 millionfor the fiscal year ended October 31, 2004. The increase in sellingexpenses is attributed to the additional selling expense related to the salesof IMRT/IGRT products as a result of our acquisition of the IMRT/IGRT businessin May 2004.

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**Generaland administrative expenses (“G&A”).****  **G&A decreased $1.8 million or14%, to $10.4 million for the fiscal year ended October 31, 2005,from $12.2 million for the fiscal year ended October 31, 2004. Thedecrease in G&A is primarily attributed to expenses in fiscal year 2004which did not recur in fiscal year 2005, including severance costs associatedwith the resignation of our former chief financial officer ($0.9 million), andthe consolidation of Prostate Centers of America ($1.0 million). See Note 5 tothe consolidated financial statements for a discussion of Prostate Centers ofAmerica.. The increase in G&A expense in fiscal year 2005 resulting fromthe acquisition of our IMRT/IGRT business was offset by cost reductions inG&A expense in Radiation Sources.

**Research and development (“R&D”).  **R&Dincreased $3.1 million or 97%, to $6.3 million for the fiscal year ended October 31,2005, from $3.2 million for the fiscal year ended October 31, 2004. Theincrease in R&D spending is primarily due to the acquisition of IMRT/IGRTbusiness in May 2004. Our R&D spending reflects our belief that tomaintain our competitive position in a market characterized by rapid rates oftechnological advancement, we must continue to invest significant resources innew product development, as well as continue to enhance existing products. Weexpect that the majority of our R&D expense will be related to ourIMRT/IGRT business segment.

**Amortizationof intangible assets.****  **Amortizationof intangible assets increased by $1.1 million to $2.3 million for thefiscal year ended October 31, 2005 from $1.2 million for the fiscal yearended October 31, 2004. The increase resulted from a full year ofamortization of the intangible assets in our IMRT/IGRT business in the yearended October 31, 2005 compared to six months of amortization in the yearended October 31, 2004.

**Write-downof goodwill and intangible assets.****  **A $40.2million impairment charge was recorded in our fiscal fourth quarter ended October 31,2005 to write-down the goodwill and intangible assets acquired in the NOMOSacquisition in May, 2004 ($40.0 million), and the RTP acquisition in August,2003 ($0.2 million). See Notes 11 and 12 to the consolidated financialstatements for a discussion of the impairment charge.

**Interestand other income, net.****  **Interest and other income, net decreased $0.5 million,or 79% to $0.1 million for the fiscal year ended October 31, 2005 from$0.6 million for the fiscal year ended October 31, 2004. This decreasereflects lower interest income as a result of a reduced portfolio of marketablesecurities in fiscal 2005.

**Provision(benefit) for income taxes.****  **Results of operations for the year ended October 31,2004 included a benefit for income taxes of $0.3 million for an income taxrefund received during 2004. No benefits were recognized for losses incurred in2005, 2004 and 2003 due to the uncertainty of our ability to realize the futurebenefit of our deferred tax assets.

**Gainfrom discontinued operation.  **A gain of $0.4 million wasrecorded on the discontinued Theseus operation for the fiscal year ended October 31,2005 compared to a loss of $12.5 million for the fiscal year ended October 31,2004. The gain in fiscal year 2005 resulted from actual shut-down expenses thatwere below estimated expenses that we had previously accrued.

**Fiscal 2004 vs. Fiscal 2003**

**Net sales.  **Netsales increased $10.0 million, or 68%, to $24.7 million for the year ended October 31,2004 from $14.7 million for the year ended October 31, 2003. The increasein sales is attributed to the addition of $11.7 million of net sales fromproduct ($6.4 million) and services ($5.3 million) in our IMRT/IGRT businesssegment acquired in the purchase of NOMOS in May 2004, offset by a$1.7 million decrease of net sales in our Radiation Sources business. Thedecrease in our Radiation Sources business reflects a decline in unit volumethat we attribute to the transition in the second quarter 2003 from selling 

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our brachytherapy productsthrough a distributor to selling them directly to end customers. During thisperiod our average selling price of our Radiation Sources’ products remainedconstant.

Our service revenue includes primarily revenues frommaintenance and support contracts. The increase in service revenue in thefiscal year ended October 31, 2004 is due to the acquisition of ourIMRT/IGRT business in May 2004.

**Gross profit.  **Grossprofit increased $1.2 million or 15% to $8.9 million for the year ended October 31,2004 from $7.7 million for the fiscal year ended October 31, 2003. Theincrease in our gross profit is attributed to the acquisition of our IMRT/IGRTbusiness in May 2004 offset by a decline in unit volume of RadiationSources business. Gross profit as a percent of sales decreased from 53% to 36%during this period. Gross profit for fiscal 2004 consisted of $3.4 million or29% of sales from our IMRT/IGRT business and $5.5 million or 43% of sales fromour Radiation Sources business. The gross profit as a percent of sales of ourIMRT/IGRT business was impacted by a charge for excess product inventory of$0.7 million and a charge for excess product warranty replacement parts of $0.5million.

Our gross profit on service revenues was $2.9 millionor 56% percent of sales. The increase in gross profit on service revenues inthe fiscal year ended October 31, 2004 is due to the acquisition of ourIMRT/IGRT business in May 2004.

In July, 2004, we introduced our next generation BAT,and in the fourth quarter 2004 we initiated a trade-in program for previous BATversions, resulting in an increase in excess inventory of older  BAT models. Sales price discounts and returnsassociated with the BAT trade-in program unfavorably impacted sales and grossprofit by $0.2 million. The decrease in gross profit as a percentage of salesis also due to a reduction in unit volume as we transitioned in the secondquarter of 2003, to a direct sales force for our brachytherapy business and theaddition of certain low margin brachytherapy accessories that are contractedout. We expect margins of both businesses to improve over time with theanticipated increase in sales volumes as our sales team becomes more fullyintegrated and new products are introduced.

**Selling expenses.  **Sellingexpenses comprised primarily of salaries, commissions, and marketingcosts,  increased $3.3 million or 97%, to$6.7 million for the fiscal year ended October 31, 2004, from $3.4 millionfor the fiscal year ended October 31, 2003. The increase in sellingexpenses is attributed to the acquisition of our IMRT/IGRT business in May 2004.We expect selling expenses to continue to increase as we expand our businessinternationally.

**Generaland administrative expenses (“G&A”).****  **G&A increased $6.0 million or98%, to $12.2 million for the fiscal year ended October 31, 2004,from $6.2 million for the fiscal year ended October 31, 2003. The increasein G&A is primarily attributed to (i) the acquisition of IMRT/IGRTbusiness ($2.3 million), (ii) severance costs associated with theresignation of our former chief financial officer ($0.9 million), (iii) increasedaccounting fees ($1.0 million), (iv) an increase in the allowance fordoubtful accounts ($0.5 million), and (v) the consolidation of ProstateCenters of America (“PCA”) ($1.0 million). See Note 5 to the consolidatedfinancial statements for a discussion of PCA.

**Research and development (“R&D”).  **R&Dincreased $2.7 million or 543%, to $3.2 million for the fiscal year ended October 31,2004, from $0.5 million for the fiscal year ended October 31, 2003. Theincrease in R&D spending is primarily due to the acquisition of IMRT/IGRTbusiness in May 2004. Our R&D spending reflects our belief that tomaintain our competitive position in a market characterized by rapid rates oftechnological advancement, we must continue to invest significant resources innew product development, as well as continue to enhance existing products.

**Amortizationof intangible assets.****  **Amortizationof intangible assets increased to $1.2 million for the fiscal year ended October 31,2004 from $13,000 for the fiscal year ended October 31, 2003, primarilydue to the acquisition of our IMRT/IGRT business in May 2004.

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**In-process research and development (“IPR&D”).**   Duringthe fiscal year ended October 31, 2004, we purchased NOMOS, and as aresult incurred a charge of $9.2 million for IPR&D. See Note 4 to theconsolidated financial statements for a discussion of IPR&D.

**Mergerand integration costs.****  **Asa result of our purchase of NOMOS, we incurred $1.1 million in merger andintegration costs related to severance and information technology costs.

**Interestand other income, net.****  **Interest and other income, net decreased $1.1 million,or 67% to $0.6 million for the fiscal year ended October 31, 2004 from$1.7 million for the fiscal year ended October 31, 2003. This decreasereflects lower interest income as a result of a reduced portfolio of marketablesecurities in fiscal 2004 and a gain of approximately $0.6 million resultingfrom the sale of our remaining shares of RadioMed Corporation, a privately heldcompany in fiscal 2003.

**Provision(benefit) for income taxes.****  **Results of operations for the year ended October 31,2004 included a benefit for income taxes of $0.3 million for an income taxrefund received during 2004. No benefits were recognized for losses incurred in2004 and 2003 due to the uncertainty of our ability to realize the futurebenefit of our deferred tax assets.

**Loss from discontinued operation.  **Losson discontinued Theseus operation increased $4.0 million, or 47% to $12.5million for the fiscal year ended October 31, 2004 from $8.5 million forthe fiscal year ended October 31, 2003. The increase in loss is attributedto the cost of shutting down the Theseus operation consisting primarily ofimpairment of goodwill ($3.6 million), loss on disposal of fixed assets ($0.5million), abandonment of licenses and severance ($1.1 million) offset by areduction of clinical trial and other research costs ($1.2 million). Loss fromdiscontinued Theseus operation included $5.8 million and $6.9 million ofR&D expenses for the years ended October 31, 2004 and 2003, respectively.

**Cumulative effect ofchange in accounting principle.****  **During 2003, we adopted Statement ofFinancial Accounting Standards (SFAS) No. 143, “Accounting for AssetRetirement Obligations,” for recording future decommissioning costs related toour leased manufacturing and research facilities. Under SFAS No. 143, afuture retirement obligation is recorded at present value by discounting theCompany’s estimated future asset retirement obligation. In adopting thispronouncement, we recognized a charge of $0.3 million which is reported in thecaption “Cumulative effect of change in accounting principle.”

**Liquidity and Capital Resources**

To date, our short-term liquidity needs have generallyconsisted of working capital to fund our ongoing operations and to financegrowth in inventories, trade accounts receivable, new product research anddevelopment, capital expenditures, acquisitions and strategic investments inrelated businesses. We have satisfied these needs primarily through acombination of cash generated by operations, public offerings and from privateplacements of our common stock. We expect that we will be able tosatisfy our longer term liquidity needs for research and development,capital expenditures, and acquisitions through a combination of cash generatedby operations, public offerings and private placements of our common stock, andbank lines of credit.

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand liquidation of liabilities in the normal course of business. We haveincurred net losses of $55.5 million, $36.3 million, and $9.4 million for theyears ended October 31, 2005, 2004 and 2003, respectively and have usedcash in operations of $12.0 million, $23.3 million and $6.3 million forthe years ended October 31, 2005 2004 and 2003, respectively. As of October 31,2005, we had cash, cash equivalents and marketable securities of $3.6 millionand an accumulated deficit of $110.4 million.

Based on our current operating plans, we believe thatthe existing cash resources, cash forecasted by our plans to be generated byoperations, the issuance of our common stock and/or debt as well as our 

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anticipated available banklines of credit will be sufficient to meet working capital and capitalrequirements through at least the next twelve months. Also, our plans to attainprofitability and generate additional cash flows include increasing revenuesfrom existing and new products and services and a focus on cost control. Thereis no assurance that we will be successful with these plans. However, if eventsand circumstances occur such that we do not meet our current operating plan asexpected, and we are unable to raise additional debt or equity financing, wemay be required to further reduce expenses or take other steps which could havea material adverse effect on our future performance, including but not limitedto, the premature sale of some or all of our assets or product  lines on undesirable terms, merger with oracquisition by another company on unsatisfactory terms,  or the cessation of operations.

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

**Balance Sheet and Cash Flows**

*Cash,cash equivalents, and investments in marketable securities.*   AtOctober 31, 2005, we had cash and cash equivalents, and investments inmarketable securities aggregating approximately $3.6 million, a decrease ofapproximately $11.3 million from $15.0 million at October 31, 2004. Thedecrease was primarily attributed to $10.9 million used in continuing operatingactivities, $0.6 million used in discontinued Theseus operations, $0.3 millionused for capital expenditures, and a $0.5 million reduction from thede-consolidation of PCA, partially offset by $0.9 million in cash receivedfrom the exercise of stock options and the employee stock purchase plan.

We expect that cash used in operating activities mayfluctuate in future periods as a result of a number of factors, includingfluctuations in our operating results, accounts receivable collections,inventory management, research and development expenses, and the timing ofpayments.

During the year ended October 31, 2005, wereceived $0.9 million from the exercise of stock options and the purchase ofshares related to our employee stock purchase plan. Proceeds from the exerciseof stock options and the employee stock purchase plan will vary from period toperiod based upon, among other factors, fluctuations in the market value of ourstock relative to the exercise price of such options.

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

*Equipmentand leasehold improvements.*   Equipment andleasehold improvements (“Fixed Assets”) decreased approximately $1.3 million to$2.8 million at October 31, 2005, from $4.1 million at October 31,2004. The decrease in Fixed Assets reflects capital expenditures of $0.3million offset by $1.1 million in depreciation expense, and a $0.5 millionreduction from the de-consolidation of PCA.

*Accountspayable and accrued expenses.**  *Accountspayable and accrued expenses decreased approximately $2.0 million to $6.9million as of October 31, 2005, from $8.9 million at October 31,2004, primarily due to a $1.1 million reduction from the de-consolidationof PCA and a reduction in accrued expenses, including accrued shut-downexpenses related to the discontinued operations.

*Deferred revenue.**  *Deferred revenue decreased approximately $1.6 millionas of October 31, 2005 from October 31, 2004. The decrease wasattributable to a reduction in the sales of products and services in ourIMRT/IGRT business acquired in May 2004. Deferred revenue consists ofunearned service revenue and the deferral of software product revenue wherecustomer acceptance has not been received or for new products where acceptanceby our customers has not been clearly established.

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**Liquidity andCapital Resource Requirements**

Wehave operating lease obligations for facilities and equipment undernon-cancelable operating lease agreements. Future minimum lease payments aresubject to annual adjustment for increases in the Consumer Price Index. We alsohave purchase commitments to suppliers under blanket purchase orders.

| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Operating leases                 |       | $                                         | 4,005,000  |   | $ | 748,000 |   | $ | 1,002,000 |   | $ | 984,000 |   | $ | 1,271,000 |   |
| Purchase  commitments            |       | 168,000                                   |       | 168,000 |   | — |   | — |   | — |   |
|                             |       | $                                         | 4,173,000  |   | $ | 916,000 |   | $ | 1,002,000 |   | $ | 984,000 |   | $ | 1,271,000 |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Based on our current operating plans, we believe thatthe existing cash resources, cash forecasted by our plans to be generated byoperations, and our anticipated available bank lines of credit will besufficient to meet working capital and capital requirements through at leastthe next twelve months.

However, the amountof capital that we will need in the future will depend on many factorsincluding:

·       Ourfuture operating results;

·       Levelsof sales and marketing that will be required to launch future products andachieve and maintain a competitive position in the marketplace for bothexisting and new products;

·       Marketacceptance of our products;

·       Levelsof inventory and accounts receivable that we maintain;

·       Competitors’responses to our products;

·       Levelof capital expenditures; and

·       Acquisitionor development of other businesses, technologies or products.

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

**Recent Accounting Pronouncements**

In December 2004, the FASB issued SFAS No. 123(Revised 2004) “Share-Based Payment” (“SFAS No. 123R”) that addresses theaccounting for share-based payment transactions in which a Company receivesemployee services in exchange for (a) equity instruments of the Company or(b) liabilities that are based on the fair value of the Company’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS No. 123R addresses all forms of share-based payment awards, includingshares issued under employee stock purchase plans, stock options, restrictedstock and stock appreciation rights. SFAS No. 123R eliminates the abilityto account for share-based compensation transactions using APB Opinion No. 25,“Accounting for Stock Issued to Employees”, that was provided in Statement 123as originally issued. Under SFAS No. 123R companies are required to recordcompensation expense for all share based payment award transactions measured atfair value. This statement is effective for quarters ending after June 15,2005. The Company will implement SFAS 123R in our fiscal year beginning November 1,2005. We are currently evaluating the impact of this new standard, but weestimate the 

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impact of applying thevarious provisions of SFAS No. 123R will result in an expense ofapproximately $1.3 million during each of the next four years if allcurrent unvested stock options vest on the scheduled dates and the assumptionsin the Black-Scholes model remain the same (See Notes 1 and 13 to the consolidatedfinancial statements).

In November 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 151 “Inventory Costs”. ThisStatement  amends  the guidance in ARB No. 43, Chapter 4, “InventoryPricing,” to clarify the  accounting  for abnormal amounts of idle  facility expense, freight,  handling  costs, and wasted  material  (spoilage). In addition,  this Statement  requires  that allocation  of  fixed production  overhead to the costs of conversion bebased  on the normal capacity of the production facilities. The provisions of thisStatement will be effective for fiscal years beginning after June 15,2005. The Company will implement SFAS No. 151 in our fiscal year beginningNovember 1, 2005. We are currently evaluating the impact this newStandard, but believe that it will not have a material impact on our financialposition, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153“Exchanges of Non-monetary Assets—an amendment of APB Opinion No. 29”.This Statement amended APB Opinion 29 to eliminate the exception fornon-monetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of non-monetary assets that do not havecommercial substance. A non-monetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. The provisions of this Statement are effective forfiscal periods beginning after June 15, 2005. The Company  implemented SFAS No. 153 in our fiscalperiod beginning August 1, 2005. The implementation of SFAS No. 153did not have a material impact upon our financial position, results ofoperations or cash flows.

In March 2005, the FASB issued FASBInterpretation (“FIN”) No. 47, “Accounting for Conditional AssetRetirement Obligations.” FIN No. 47 clarifies that the term conditionalasset retirement asset obligation as used in FASB Statement No. 143, “Accountingfor Asset Retirement Obligations,” refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and/ or method ofsettlement. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN No. 47 iseffective no later than the end of fiscal years ending after December 15,2005 (December 31, 2005 for calendar-year companies). Retrospectiveapplication of interim financial information is permitted but is not required.The Company will implement FIN No. 47 in its fiscal year beginning November 1,2005. Management does not expect adoption of FIN No.47  to have a material impact on the Company’sfinancial statements.

In May 2005, the FASBissued Statement of Accounting Standards (SFAS) No. 154, “AccountingChanges and Error Corrections”, an amendment to Accounting Principles Bulletin(APB) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”. Though SFAS No. 154carries forward the guidance in APB No.20 and SFAS No.3 with respect toaccounting for changes in estimates, changes in reporting entity, and thecorrection of errors, SFAS No. 154 establishes new standards on accountingfor changes in accounting principles, whereby all such changes must beaccounted for by retrospective application to the financial statements of priorperiods unless it is impracticable to do so. SFAS No. 154 is effective foraccounting changes and error corrections made in fiscal years beginning after December 15,2005, with early adoption permitted for changes and corrections made in yearsbeginning after May 2005. The Company will implement SFAS No. 154 inits fiscal year beginning November 1, 2006. We are currently evaluatingthe impact  of this new 

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standard,but believe that it will not have a material impact upon the Company’sfinancial position, results of operations or cash flows.

**Related Party Transactions**

In October 2003, we entered into a Secured LoanAgreement with Prostate Centers of America (“PCA”). Based on the terms of theagreement, we determined that PCA is a variable interest entity (“VIE”) asdefined in Financial Accounting Standards Board Interpretation (“FIN”) No. 46,“Consolidation of Variable Interest Entities—an interpretation of ARB No. 51.,and, therefore we were required to include the operations of PCA in ourconsolidated financial statements for the fiscal years ended October 31,2003 and 2004, even though we did not have an equity interest in PCA. In thefiscal year ended October 31, 2005, the Company determined that PCA is nolonger a VIE, because: (i) during the year ended October 31, 2005,other outside parties provided additional funding to PCA which resulted in theCompany no longer being the holder of the variable interest that would hold themajority of the entity’s losses, (ii) PCA’s other creditors have norecourse against the Company, (iii) the Company has no equity interest inPCA, and (iv) PCA has informed the Company that it likely will ceaseoperations in 2006. As a result, the Company did not consolidate PCA as a VIEin its financial statements for the fiscal year ended October 31, 2005.(See Note 5).

In October 2003, wealso entered into a sales agreement with TC2B, LLC, the majority shareholder ofPCA to provide brachytherapy seeds. On October 31, 2005, total trade receivablesdue from TC2B were $1.0 million and sales to TC2B during the year ended October 31,2005 were $0.8 million. The trade receivable balance is fully reserved in theallowance for doubtful accounts, and we recognized $0.4 million of the revenuefrom sales to TC2B in the fiscal year ended October 31, 2005.

**Item 7A.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and marketablesecurities. At October 31, 2005, the carrying values of our financialinstruments approximated their fair values based on current market prices andrates. These securities are subject to interest rate risk and will decline invalue if interest rates increase. Due to the short duration of our investmentportfolio, changes in interest rates are not expected to have a material effecton our near-term financial condition or results of operations.

Our policy is to not enterinto derivative financial instruments. We do not have any significant foreigncurrency exposure. In addition, we do not enter into any futures or forwardcontracts and therefore do not have significant market risk exposure withrespect to commodity prices.

**Item 8.**                        CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

**None**

**Item 9A.**                CONTROLSAND PROCEDURES.

**(a)****         ****Evaluation of disclosurecontrols and procedures.**

As required by Rule 13a-15(b) underthe Exchange Act, we have carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officer(“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as ofthe end of the period covered by this report, of the design and operation ofour “disclosure controls and procedures” as 

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defined in Rule 13a-15(e) promulgatedby the SEC under the Exchange Act. Based upon that evaluation, our CEO and ourCFO concluded that our disclosure controls and procedures, as of the end ofsuch period, were adequate and effective to ensure that information required tobe disclosed by us in the reports that we file or submit under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the Commission’s rules and forms.

**Management’s Reporton Internal Control Over Financial Reporting**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting. The Company’sinternal control framework and processes were designed to provide reasonableassurance to management and the Board of Directors regarding the reliability offinancial reporting and the preparation of the Company’s consolidated financialstatements for external purposes in accordance with accounting principlesgenerally accepted in the United States of America.

Managementrecognizes its responsibility for fostering a strong ethical climate so thatthe Company’s affairs are conducted according to the highest standards ofpersonal and corporate conduct. The Company’s internal control over financialreporting includes those policies and procedures that:

·       pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·       providereasonable assurance that transactions are recorded properly to allow for thepreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and Directorsof the Company; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the consolidated financial statements.

Because of its inherent limitations, a system ofinternal control over financial reporting can provide only reasonable assuranceand may not prevent or detect misstatements. Further, because of changingconditions, effectiveness of internal control over financial reporting may varyover time. The Company’s processes contain self-monitoring mechanisms, andactions are taken to correct deficiencies as they are identified.

To comply with therequirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Companydesigned and implemented a structured and comprehensive compliance process toevaluate its internal control over financial reporting across the enterprise.

*Management’sProcess to Assess the Effectiveness of Internal Control Over FinancialReporting*

Management’sconclusion on the effectiveness of internal control over financial reporting isbased on a thorough and comprehensive evaluation and analysis of the fiveelements of the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (“COSO”) in *InternalControl—Integrated Framework*. (shown in italics below), and is basedon, but not limited to, the following:

·       Documentationof entity-wide controls establishing the culture and “tone-at-the-top” of theorganization, in support of the Company’s *ControlEnvironment, Risk Assessment* Process, *Information and Communication* policies and the ongoing *Monitoring* of these control processes andsystems.

·       Anevaluation of *Control Activities*by work process. Key controls and compensating controls were documented andtested by each work process within the Company, including controls over all 

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relevant financialstatement assertions related to all significant accounts and disclosures.Internal control deficiencies were identified and prioritized, and appropriateremediation action plans were defined, implemented and retested.

·       Acentralized review and analysis of all internal control deficiencies across theenterprise to determine whether such deficiencies, either separately or in theaggregate, represented a significant deficiency or material weakness.

·       Anevaluation of any changes in work processes, systems, organization or policythat could materially impact internal control over financial reporting.

Management assessed the effectiveness of the Company’sinternal control over financial reporting and concluded that, as of October 31,2005, such internal control is effective. In making this assessment, managementused the criteria set forth by COSO. In coming to the conclusion that theinternal controls over financial reporting are effective, managementconsidered, among other things, some control deficiencies identified in themonitoring of certain processes. None of these deficiencies, either alone oraggregated with other deficiencies, resulted in a material misstatement of thefinancial statements. Management’s assessment of the effectiveness of ourinternal control over financial reporting has been audited by Singer LewakGreenbaum & Goldstein LLP, an independent registered public accountingfirm, as stated in their report which is included herein.

**(b)****          Changesin internal controls.**

There were no significant changes in our internalcontrols over financial reporting during the quarter ended October 31,2005, that have materially affected or are reasonably likely to materiallyaffect our internal control over financial reporting.

**Item 9B.**               OTHERINFORMATION.

**None**

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**PART III**

**Item 10.**                 DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Other than the information with respect to ourexecutive officers, which is set forth in Item 4A of  Part I, the information required underthis Item is incorporated by reference to our definitive proxy statementpursuant to Regulation 14A to be filed with the Commission no later than120 days after the close of our fiscal year ended October 31, 2005.

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

**Item 11.**                 EXECUTIVECOMPENSATION

The information requiredunder this Item is incorporated by reference to our definitive proxy statementpursuant to Regulation 14A to be filed with the Commission no later than120 days after the close of our fiscal year ended October 31, 2005.

**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information requiredunder this Item is incorporated by reference to our definitive proxy statementpursuant to Regulation 14A to be filed with the Commission no later than120 days after the close of our fiscal year ended October 31, 2005.

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredunder this Item is incorporated by reference to our definitive proxy statementpursuant to Regulation 14A to be filed with the Commission no later than120 days after the close of our fiscal year ended October 31, 2005.

**Item 14.**                 PRINCIPALACCOUNTING FEES AND SERVICES

The information required under this Item isincorporated by reference to our definitive proxy statement pursuant toRegulation 14A to be filed with the Commission no later than 120 daysafter the close of our fiscal year ended October 31, 2005.

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**PART IV**

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

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

|        | ** ** |                                                                                                                                                      | ** ** | **Page** |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| 1.     |       | Financial Statements of  the Company                                                                                                                 |       |     |
|   |       | Report of Independent Registered Public Accounting  Firm—  Singer Lewak Greenbaum & Goldstein LLP                                      |       | 64       |
|   |       | Report of Independent Registered Public Accounting  Firm—  PricewaterhouseCoopers LLP                                                           |       | 66       |
|   |       | Consolidated Balance Sheets                                                                                                                          |       | 67       |
|   |       | Consolidated Statements of Operations                                                                                                                |       | 68       |
|   |       | Consolidated Statements of Changes in Stockholders’  Equity                                                                                     |       | 69       |
|   |       | Consolidated Statements of Cash Flows                                                                                                                |       | 70       |
|   |       | Notes to Consolidated Financial Statements                                                                                                           |       | 71       |
| 2.     |       | Financial  Statement Schedule                                                                                                                        |       |     |
|   |       | Report of Independent Registered Public Accounting  Firm—  Singer Lewak Greenbaum & Goldstein LLP                                      |       | 94       |
|   |       | Schedule II—Valuation and Qualifying Accounts                                                                                                   |       | 95       |
|   |       | 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(b) of this Annual  Report on Form 10-K.                                                                       |       |     |

 

**(b)****          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. |
| 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.                                              |

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| 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 Registrant, AM Capital, Inc. and NOMOS  Corporation, dated as of October 26, 2003, incorporated by reference to  Exhibit 2 to the Registrant’s Form 8-K filed October 27,  2003.                                                                                                                                          |
| 10.15  |   | First Amendment  to Agreement and Plan of Merger by and among the Registrant, AM Capital  I, Inc. and NOMOS Corporation, incorporated by reference to  Exhibit 2.2 to the Registrant’s Registration Statement on Form S-4  (Registration #333-110766), filed November 26, 2003.                                                                                               |
| 10.16  |   | Employment  Agreement dated May 5, 2004, by and between John W. Manzetti. and the  Company, incorporated by reference to the Registrant’s Registration Statement  on Form S-4 (Registration #333-110766), filed  November  26, 2003.                                                                                                                                          |

62

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| 10.17  |   | Second Amendment  to Agreement and Plan of Merger by and among the Registrant, AM Capital  I, Inc. and NOMOS Corporation, incorporated by reference to  Exhibit 2 to the Registrant’s Form 8-K filed March 5,  2004.                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18  |   | The First  Amendment dated as of April 28, 2004, to the Rights Agreement, dated as  of October 12, 1998 by and between the Registrant and U.S. Stock  Transfer Corporation, incorporated by reference to Exhibit 10 to the  Registrant’s Form 8-K filed April 30, 2004. |
| 10.19  |   | Agency Agreement  dated as of March 17, 2004, by and between the Registrant and NOMOS  Corporation, incorporated by reference to Exhibit 10 to the Registrant’s  Form 8-K filed March 22, 2004.                                                                              |
| 10.20  |   | Lease Agreement  dated August 22, 2002, by and between NOMOS Corporation and Cranberry  200 Venture, L.P., incorporated by reference to Exhibit 10.20 to the  Registrant’s Form 10-K filed March 11, 2005.                                                                   |
| 10.21  |   | Amendment to  Lease Agreement dated August 22, 2002, by and between NOMOS Corporation  and Cranberry 200 Venture, L.P., incorporated by reference to  Exhibit 10.21 to the Registrant’s Form 10-K filed  March 11, 2005.                                                     |
| 10.22  |   | Secured Loan  Agreement dated as of October 15, 2003 by and between the Registrant and  Prostate Centers of America, incorporated by reference to Exhibit 10.22  to the Registrant’s Form 10-K filed March 11, 2005.                                                         |
| 10.23  |   | Settlement  Agreement dated as of August 4, 2004, by and among the Registrant, NOMOS  Corporation and Parker/Hunter, Incorporated, incorporated by reference to  Exhibit 10.23 to the Registrant’s Form 10-K filed  March 11, 2005.                                          |
| 10.24  |   | Loan Agreement  and Security Agreement, dated October 5, 2005, between NASI, the  Subsidiaries and Silicon Valley Bank., incorporated  by reference to Exhibit 10.1 to the Registrant’s Form 8-K  filed October 11, 2005.                                                    |
| 10.25* |   | Amendment to Loan Agreement and Security Agreement, dated  January 12, 2006, between NASI, the Subsidiaries and Silicon Valley  Bank.                                                                                                                                                            |
| 14     |   | Code of Ethics  incorporated by reference to Exhibit 14 to the Registrant’s Form 10-K  filed January 23, 2004.                                                                                                                                                                    |
| 21.1*  |   | Subsidiaries of  the Registrant.                                                                                                                                                                                                                                                                      |
| 23.1*  |   | Consent of Singer  Lewak Greenbaum & Goldstein LLP.                                                                                                                                                                                                                                          |
| 23.2*  |   | Consent of  PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                               |
| 31.1*  |   | Certification of  Chief Executive Officer.                                                                                                                                                                                                                                                            |
| 31.2*  |   | Certification of  Chief Financial Officer.                                                                                                                                                                                                                                                            |
| 32.1*  |   | Certification  pursuant to Rule 13a-14b under the Exchange Act and 18 U.S.C -1350.                                                                                                                                                                                                               |

----

+                Compensation planor agreement

*                    Filed herewith

63

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of DirectorsNorth American Scientific, Inc.Chatsworth, California

We have audited the consolidated balance sheet ofNorth American Scientific, Inc. and subsidiaries (collectively, the “Company”)as of October 31, 2005, and the related consolidated statement ofoperations, stockholders’ equity and cash flows for the year then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provided a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of North American Scientific, Inc. and subsidiaries as of October 31,2005, and the results of their operations and their cash flows for the yearthen ended, in conformity with U.S. generally accepted accounting principles.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of North American Scientific, Inc.’sand subsidiaries internal control over financial reporting as of October 31,2005, based on “*criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO*)”and our report dated January 10, 2006 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of North American Scientific, Inc.’sinternal control over financial reporting and an unqualified opinion on theeffectiveness of North American Scientific, Inc.’s internal control overfinancial reporting.

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

January 10, 2006

64

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Tothe Board of DirectorsNorth American Scientific, Inc.Chatsworth, California

Wehave audited management’s assessment, included in the accompanying “Management’sReport on Internal Control over Financial Reporting”, included in Item 9A, thatNorth American Scientific, Inc. maintained effective internal control overfinancial reporting as of October 31, 2005, based on “*criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO*).” NorthAmerican Scientific, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Inour opinion, management’s assessment that North American Scientific, Inc.maintained effective internal control over financial reporting as of October 31,2005, is fairly stated, in all material respects, based on  “*criteria established inInternal Control—Integrated Framework issued by the Committee of  Sponsoring Organizations of the TreadwayCommission (COSO*).” Also, in our opinion, North American Scientific, Inc.maintained, in all material respect, effective internal control over financialreporting as of October 31, 2005, based on “*criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO*).”

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements of North American Scientific, Inc. andour report dated January 10, 2006 expressed an unqualified opinion.

/s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles,California

January 10,2006

65

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders ofNorth American Scientific, Inc.

In our opinion, the consolidated balance sheet as of October 31,2004 and the related consolidated statements of operations, changes instockholders’ equity and cash flows for each of the two years in the periodended October 31, 2004 present fairly, in all material respects, thefinancial position of North American Scientific, Inc. and its subsidiaries(the “Company”) at October 31, 2004, and the results of their operationsand their cash flows for each of the two years in the period ended October 31,2004 in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in our opinion, the financial statementschedule listed in the index appearing under Item 15(a)(2) presentsfairly, in all material respects, the information set forth therein as of October 31,2004 and for each of the two years in the period ended October 31, 2004when read in conjunction with the related consolidated financial statements.These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

As discussed in Note 5 tothe consolidated financial statements, the Company changed the manner in whichit accounts for variable interest entities during the year ended October 31,2003. As discussed in Note 6 to the consolidated financial statements, theCompany changed the manner in which it accounts for asset retirement costs asof  November 1, 2002.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

February 25, 2005

66

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**NORTHAMERICAN SCIENTIFIC, INC.Consolidated Balance Sheets**

| ** **                                                                                                                                                                          | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                                          |       |
| Current assets                                                                                                                                                                      |       |                 |       |   |   |
| Cash and cash equivalents                                                                                                                                                           |       | $                    | 2,630,000  |   | $ | 2,334,000 |   |
| Marketable securities, held to maturity                                                                                                                                             |       | 993,000              |       | 10,046,000 |   |
| Accounts receivable, net of reserves                                                                                                                                                |       | 5,521,000            |       | 7,132,000 |   |
| Inventories, net of reserves                                                                                                                                                        |       | 3,731,000            |       | 4,871,000 |   |
| Prepaid expenses and other current assets                                                                                                                                           |       | 794,000              |       | 1,061,000 |   |
| Total current assets                                                                                                                                                                |       | 13,669,000           |       | 25,444,000 |   |
| Non-current  marketable securities                                                                                                                                                  |       | —               |       | 2,600,000 |   |
| Equipment and  leasehold improvements                                                                                                                                               |       | 2,836,000            |       | 4,127,000 |   |
| Goodwill                                                                                                                                                                            |       | 2,564,000            |       | 18,732,000 |   |
| Intangible  assets, net                                                                                                                                                             |       | 3,158,000            |       | 29,504,000 |   |
| Other assets                                                                                                                                                                        |       | 106,000              |       | 132,000 |   |
| Total assets                                                                                                                                                                        |       | $                    | 22,333,000 |   | $ | 80,539,000 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                       |       |
| Current liabilities                                                                                                                                                                 |       |                 |       |   |   |
| Accounts payable                                                                                                                                                                    |       | $                    | 2,164,000  |   | $ | 2,061,000 |   |
| Accrued expenses                                                                                                                                                                    |       | 4,706,000            |       | 6,808,000 |   |
| Deferred revenue                                                                                                                                                                    |       | 4,662,000            |       | 6,293,000 |   |
| Total liabilities                                                                                                                                                                   |       | 11,532,000           |       | 15,162,000 |   |
| Commitments and  contingencies (Note 16)                                                                                                                                            |       |                 |       |   |   |
| 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; 17,056,669 (2005) and 16,308,487 (2004) shares issued; and  16,948,643 (2005) and 16,200,461 (2004) shares outstanding |       | 173,000              |       | 163,000 |   |
| Additional paid-in capital                                                                                                                                                          |       | 121,147,000          |       | 120,220,000 |   |
| Treasury stock, at cost—108,026 common shares                                                                                                                                  |       | (129,000             | )          | (129,000 | ) |
| Accumulated deficit                                                                                                                                                                 |       | (110,390,000         | )          | (54,877,000 | ) |
| Total stockholders’ equity                                                                                                                                                     |       | 10,801,000           |       | 65,377,000 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                    |       | $                    | 22,333,000 |   | $ | 80,539,000 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

67

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**NORTHAMERICAN SCIENTIFIC, INC.**

**ConsolidatedStatements of Operations**

| ** **                                                                                       | ** ** | **For the Years Ended October 31,** | ** **  |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                                                       | ** ** | **2005**                                                     | ** **  | **2004** | ** ** | **2003** | ** ** |
| Revenue                                                                                          |       |                                                         |        |   |   |   |   |
| Product                                                                                          |       | $                                                            | 20,780,000  |   | $ | 19,486,000 |   | $ | 14,683,000 |   |
| Service                                                                                          |       | 11,444,000                                                   |        | 5,251,000 |   | — |   |
| Total revenue                                                                                    |       | 32,224,000                                                   |        | 24,737,000 |   | 14,683,000 |   |
| Cost of revenues                                                                                 |       |                                                         |        |   |   |   |   |
| Product                                                                                          |       | 15,597,000                                                   |        | 13,482,000 |   | 6,944,000 |   |
| Service                                                                                          |       | 4,459,000                                                    |        | 2,336,000 |   | — |   |
| Total cost of revenue                                                                            |       | 20,056,000                                                   |        | 15,818,000 |   | 6,944,000 |   |
| Gross profit                                                                                     |       | 12,168,000                                                   |        | 8,919,000 |   | 7,739,000 |   |
| Selling expenses                                                                                 |       | 8,874,000                                                    |        | 6,709,000 |   | 3,411,000 |   |
| General and  administrative expenses                                                             |       | 10,442,000                                                   |        | 12,179,000 |   | 6,163,000 |   |
| Research and  development                                                                        |       | 6,334,000                                                    |        | 3,209,000 |   | 499,000 |   |
| Amortization of  intangible assets                                                               |       | 2,300,000                                                    |        | 1,172,000 |   | 13,000 |   |
| Writedown of  goodwill and intangible assets                                                     |       | 40,214,000                                                   |        | — |   | — |   |
| In-process  research and development                                                             |       | —                                                       |        | 9,200,000 |   | — |   |
| Merger and  integration costs                                                                    |       | —                                                       |        | 1,056,000 |   | — |   |
| Total operating expenses                                                                         |       | 68,164,000                                                   |        | 33,525,000 |   | 10,086,000 |   |
| Loss from operations                                                                             |       | (55,996,000                                                  | )           | (24,606,000 | ) | (2,347,000 | ) |
| Interest and  other income, net                                                                  |       | 121,000                                                      |        | 579,000 |   | 1,749,000 |   |
| Income (loss) before provision (benefit) for income  taxes                                       |       | (55,875,000                                                  | )           | (24,027,000 | ) | (598,000 | ) |
| Provision  (benefit) for income taxes                                                            |       | —                                                       |        | (257,000 | ) | — |   |
| Loss from continuing operations                                                                  |       | (55,875,000                                                  | )           | (23,770,000 | ) | (598,000 | ) |
| Income (loss)  from discontinued operation (including a loss on disposal of $5,231,000 in  2004) |       | 362,000                                                      |        | (12,537,000 | ) | (8,536,000 | ) |
| Loss before cumulative effect of change in  accounting principle                                 |       | (55,513,000                                                  | )           | (36,307,000 | ) | (9,134,000 | ) |
| Cumulative effect  of change in accounting principle                                             |       | —                                                       |        | — |   | (306,000 | ) |
| Net loss                                                                                         |       | $                                                            | (55,513,000 | ) | $ | (36,307,000 | ) | $ | (9,440,000 | ) |
| Basic and diluted  loss per share:                                                               |       |                                                         |        |   |   |   |   |
| Continuing operations                                                                            |       | $                                                            | (3.38       | ) | $ | (1.81 | ) | $ | (0.06 | ) |
| Discontinued operations                                                                          |       | 0.02                                                         |        | (0.95 | ) | (0.83 | ) |
| Cumulative effect of change in accounting principle                                              |       | —                                                       |        | — |   | (0.03 | ) |
| Net loss                                                                                         |       | $                                                            | (3.36       | ) | $ | (2.76 | ) | $ | (0.92 | ) |
| Weighted average  number of common shares outstanding                                            |       |                                                         |        |   |   |   |   |
| Basic and diluted                                                                                |       | 16,502,071                                                   |        | 13,138,721 |   | 10,257,688 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

68

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**NORTH AMERICAN SCIENTIFIC, INC.Consolidated Statementsof Changes in Stockholders’ Equity**

| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**          | ** ** | ** **      | ** ** | ** **             | ** ** | ** **  | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------------|------------|-----------------|------------|------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**             | ** ** | **Shares**      | ** ** | **Amount**             | ** ** | **Deficit** | ** ** | **Equity**  | ** ** |
| Balance at  October 31, 2002                             |       | 10,250,136            |       | $           | 103,000    |                    | $          | 73,929,000      |       | —                 |       | $           | —     |        | $          | (9,131,000 | ) | $ | 64,901,000 |   |
| Common stock  issued upon exercise of stock options           |       | 7,100                 |       | —      |       | 34,000                  |       | —          |       | —                 |       | —      |       | 34,000      |       |
| Common stock  issued under employee stock purchase plan  |       | 21,005                |       | —      |       | 147,000                 |       | —          |       | —                 |       | —      |       | 147,000     |       |
| Purchase of  treasury stock                                   |       | —                |       | —      |       | —                  |       | 19,000          |       | (129,000               | )          | —      |       | (129,000    | )          |
| Shares issued upon  acquisition                               |       | 20,000                |       | —      |       | 186,000                 |       | —          |       | —                 |       | —      |       | 186,000     |       |
| Compensatory stock  options, issued to non-employees          |       | —                |       | —      |       | 47,000                  |       | —          |       | —                 |       | —      |       | 47,000      |       |
| Net loss                                                      |       | —                |       | —      |       | —                  |       | —          |       | —                 |       | (9,440,000  | )          | (9,440,000  | )          |
| Balance at  October 31, 2003                             |       | 10,298,241            |       | 103,000     |       | 74,343,000              |       | 19,000          |       | (129,000               | )          | (18,571,000 | )          | 55,746,000  |       |
| Common stock  issued upon exercise of stock options           |       | 717,864               |       | 7,000       |       | 3,509,000               |       | —          |       | —                 |       | —      |       | 3,516,000   |       |
| Common stock  issued under employee stock purchase plan  |       | 24,285                |       | —      |       | 167,000                 |       | —          |       | —                 |       | —      |       | 167,000     |       |
| Modification of  stock options issued to an employee          |       | —                |       | —      |       | 351,000                 |       | —          |       | —                 |       | —      |       | 351,000     |       |
| Shares issued for  NOMOS acquisition                     |       | 5,268,097             |       | 53,000      |       | 37,257,000              |       | —          |       | —                 |       | —      |       | 37,310,000  |       |
| Shares returned  relating to NOMOS acquisition                |       | —                |       | —      |       | —                  |       | 89,026          |       | —                 |       | —      |       | —      |       |
| Options assumed  upon acquisition                             |       | —                |       | —      |       | 4,593,000               |       | —          |       |                   |       |        |       | 4,593,000   |       |
| Net loss                                                      |       | —                |       | —      |       | —                  |       | —          |       | —                 |       | (36,307,000 | )          | (36,307,000 | )          |
| Balance at  October 31, 2004                             |       | 16,308,487            |       | 163,000     |       | 120,220,000             |       | 108,026         |       | (129,000               | )          | (54,877,000 | )          | 65,377,000  |       |
| Common stock  issued upon exercise of stock options           |       | 687,013               |       | 9,000       |       | 755,000                 |       | —          |       | —                 |       | —      |       | 764,000     |       |
| Common stock  issued under employee stock purchase plan  |       | 59,742                |       | 1,000       |       | 172,000                 |       | —          |       | —                 |       | —      |       | 173,000     |       |
| Shares issued for  NOMOS acquisition                     |       | 1,427                 |       | —      |       | —                  |       | —          |       | —                 |       | —      |       | —      |       |
| Net loss                                                      |       | —                |       | —      |       | —                  |       | —          |       | —                 |       | (55,513,000 | )          | (55,513,000 | )          |
| Balance at  October 31, 2005                             |       | 17,056,669            |       | $           | 173,000    |                    | $          | 121,147,000     |       | 108,026                |       | $           | (129,000   | )           | $          | (110,390,000 | ) | $ | 10,801,000 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

69

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**NORTH AMERICAN SCIENTIFIC, INC.Consolidated Statementsof Cash Flows**
|                                                                                            | ** ** | **For the Years Ended October 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2005**                                                     | ** **  | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                      |       |                                                         |        |   |   |   |   |
| Net loss                                                                                   |       | $                                                            | (55,513,000 | ) | $ | (36,307,000 | ) | $ | (9,440,000 | ) |
| Loss (gain) from  discontinued operations                                                  |       | (362,000                                                     | )           | 12,537,000 |   | 8,536,000 |   |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                                         |        |   |   |   |   |
| Write-down of goodwill  and intangible assets                                              |       | 40,214,000                                                   |        | — |   | — |   |
| Write-off  in-process research and development                                             |       | —                                                       |        | 9,200,000 |   | — |   |
| Depreciation and  amortization                                                             |       | 3,371,000                                                    |        | 2,139,000 |   | 780,000 |   |
| Provision for doubtful  accounts                                                           |       | 709,000                                                      |        | 522,000 |   | 65,000 |   |
| Non-cash stock  compensation expense                                                       |       | —                                                       |        | 351,000 |   | 47,000 |   |
| Cumulative effect of  change in accounting principle                                       |       | —                                                       |        | — |   | 306,000 |   |
| Gain on sale of non-marketable  securities                                                 |       | —                                                       |        | — |   | (600,000 | ) |
| Other                                                                                      |       | —                                                       |        | — |   | 113,000 |   |
| Changes in assets and liabilities, net of  acquisitions and discontinued operations:       |       |                                                         |        |   |   |   |   |
| Accounts receivable                                                                        |       | 903,000                                                      |        | (2,579,000 | ) | 295,000 |   |
| Inventories                                                                                |       | 1,140,000                                                    |        | 414,000 |   | (24,000 | ) |
| Income taxes                                                                               |       | —                                                       |        | 496,000 |   | 510,000 |   |
| Prepaid expenses and  other assets                                                         |       | 110,000                                                      |        | 2,081,000 |   | (997,000 | ) |
| Accounts payable                                                                           |       | 148,000                                                      |        | (1,310,000 | ) | 361,000 |   |
| Accrued expenses                                                                           |       | (470,000                                                     | )           | (3,965,000 | ) | 2,415,000 |   |
| Deferred revenue                                                                           |       | (1,631,000                                                   | )           | 1,552,000 |   | — |   |
| Net cash provided by  (used in) continuing operations                                 |       | (11,381,000                                                  | )           | (14,869,000 | ) | 2,367,000 |   |
| Net cash used in  discontinued operations                                                  |       | (578,000                                                     | )           | (8,393,000 | ) | (8,630,000 | ) |
| Net cash provided by  (used in) operating activities                                       |       | (11,959,000                                                  | )           | (23,262,000 | ) | (6,263,000 | ) |
| Cash flows from investing activities:                                                      |       |                                                         |        |   |   |   |   |
| Proceeds from sale of  marketable securities                                               |       | 11,653,000                                                   |        | 52,108,000 |   | 39,649,000 |   |
| Purchases of marketable  securities                                                        |       | —                                                       |        | (17,400,000 | ) | (33,766,000 | ) |
| Proceeds from sales of  non-marketable securities                                          |       | —                                                       |        | — |   | 408,000 |   |
| Acquisitions, net of  cash acquired                                                        |       | —                                                       |        | (13,248,000 | ) | (662,000 | ) |
| Capital expenditures                                                                       |       | (335,000                                                     | )           | (1,308,000 | ) | (365,000 | ) |
| Net cash provided by  (used in) investing activities                                       |       | 11,318,000                                                   |        | 20,152,000 |   | 5,264,000 |   |
| Cash flows from financing activities:                                                      |       |                                                         |        |   |   |   |   |
| Net proceeds from stock  options and stock purchase plan                                   |       | 937,000                                                      |        | 3,683,000 |   | 181,000 |   |
| Purchase of common stock  as treasury stock                                                |       | —                                                       |        | — |   | (129,000 | ) |
| Net cash provided by  financing activities                                                 |       | 937,000                                                      |        | 3,683,000 |   | 52,000 |   |
| Net increase (decrease)  in cash and cash equivalents                                      |       | 296,000                                                      |        | 573,000 |   | (947,000 | ) |
| Cash and cash  equivalents at beginning of period                                          |       | 2,334,000                                                    |        | 1,761,000 |   | 2,708,000 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                                            | 2,630,000   |   | $ | 2,334,000 |   | $ | 1,761,000 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

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**NORTH AMERICAN SCIENTIFIC, INC.Notes to Consolidated Financial Statements**

**NOTE1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Business*

North American Scientific, Inc.(the “Company”), a Delaware corporation, designs, develops and manufactures andsells products for radiation therapy, including brachytherapy, and planning anddelivery technology for intensity modulated radiation therapy (“IMRT”) andimage guided radiation therapy (“IGRT”). In May 2004, the Company acquiredNOMOS Corporation (“NOMOS”), which develops and markets products used duringexternal beam radiation therapy for the treatment of cancer (See Note 4). TheRadiation Sources segment develops and markets radioisotopic products includingbrachytherapy seeds and accessories used in the treatment of cancer andnon-therapeutic products used in medical, environmental, research andindustrial applications. The Company’s Theseus operation had been developing aradiopharmaceutical imaging agent for various medical diagnostic and monitoringfunctions, including the management of chemotherapy treatment. In September 2004,the Company discontinued its operations of Theseus (See Note 3).

*Management’s Plans*

The accompanying financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand liquidation of liabilities in the normal course of business. We haveincurred net losses of $55.5 million, $36.3 million, and $9.4 million for theyears ended October 31, 2005, 2004 and 2003, respectively and have usedcash in operations of $12.0 million, $23.3 million and $6.3 million for theyears ended October 31, 2005 2004 and 2003, respectively. As of October 31,2005, we had cash, cash equivalents and marketable securities of $3.6 millionand an accumulated deficit of $110.4 million.

Based on the Company’scurrent operating plans, management believes existing cash resources and cashforecasted by management to be generated by operations will be sufficient tomeet working capital and capital requirements through at least the next twelvemonths. Also, management’s plans to attain profitability and generateadditional cash flows include increasing revenues from existing and newproducts and services and a focus on cost control. There is no assurance that managementwill be successful with these plans. However, if events and circumstances occursuch that the Company does not meet its current operating plan as expected, andthe Company is unable to raise additional debt or equity financing, the Companymay be required to further reduce expenses or take other steps which could havea material adverse effect on our future performance, including but not limitedto, the premature sale of some or all of our assets or product  lines on undesirable terms, merger with oracquisition by another company on unsatisfactory terms,  or the cessation of operations.

*Principles ofConsolidation*

The consolidated financial statements include theaccounts of the Company and its subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

As a result of the Company’sdisposal of its Theseus operation in September 2004, the Company’spreviously reported Consolidated Statements of Operations and Cash Flows forthe fiscal year 2003 have been restated to present the discontinued Theseusoperations separate from continuing operations (See Note 3). Certain otherreclassifications have been made to prior year balances in order to conform tothe current year presentation.

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*Use of Estimates*

In the normal course ofpreparing the financial statements in conformity with generally acceptedaccounting principles in the United States of America, management is requiredto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and reported amounts of revenue and expenses duringthe reporting period. Actual results could differ from those amounts.

*Cash and CashEquivalents*

The Company considers allhighly liquid investments purchased with an original or remaining maturity ofthree months or less to be cash equivalents.

*Inventories*

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

The Company’s RadiationSources products are subject to shelf-life expiration periods, which arecarefully monitored by the Company. Provision is made for inventory items whichmay not be sold because of expiring dates. The Company routinely reviews otherinventories for evidence of impairment of value and makes provision as suchimpairments are identified.

*Fair Value ofFinancial Instruments*

The carrying amounts ofcash and cash equivalents, receivables, accounts payable, and accrued expensesapproximate fair value because of their short maturities. The Companydetermines the fair value of its marketable securities based on quoted marketprices.

*MarketableSecurities*

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

Debt securities that the Company has the positiveintent and ability to hold to maturity are classified as “held-to-maturity” andreported at amortized cost. Debt securities not classified as held-to-maturityand marketable equity securities are classified as either “trading” or “available-for-sale,”and are recorded at fair value with unrealized gains and losses included inearnings or stockholders’ equity, respectively. All other equity securities areaccounted for using either the cost method or the equity method.

The Company continuallyreviews its investments to determine whether a decline in fair value below thecost basis is other than temporary. If the decline in fair value is judged tobe other than temporary, the cost basis of the security is written down to fairvalue and the amount of the write-down is included in the ConsolidatedStatements of Operations.

*Accounts Receivableand Allowance for Doubtful Accounts:*

Accounts receivable arerecorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is the Company’s best estimate of the amount of probablecredit losses in our existing accounts receivable. The Company determines theallowance based on historical write-off experience and customer economic data.We review our allowance for doubtful accounts monthly. Past due balances over60 days and over a specified amount are reviewed individually forcollectibility. Account balances are 

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chargedoff against the allowance when the Company believes that it is probable thereceivable will not be recovered. The Company does not have anyoff-balance-sheet credit exposure related to our customers.

*Equipment andLeasehold Improvements*

Equipmentand leasehold improvements are stated at cost. Maintenance and repair costs areexpensed as incurred, while improvements are capitalized. Gains or lossesresulting from the disposition of assets are included in income. Depreciationand amortization are computed using the straight-line method over the estimateduseful lives as follows:

| Furniture, fixtures and  equipment |   | 3–7 years                             |
|------------------------------------|--------|--------------------------------------------|
| Leasehold improvements             |   | Lesser of the useful life or term of lease |

 

*Goodwill*

Goodwill represents theexcess of cost over the value of net assets of businesses acquired pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 141, “BusinessCombinations” and is carried at cost unless write-downs for impairmentare required. The Company evaluates the carrying value of goodwill on an annualbasis and whenever events and changes in circumstances indicate that thecarrying amount may not be recoverable.

*Intangible Assets*

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

The Company reviews forimpairment whenever events and changes in circumstances indicate that suchassets might be impaired. If the estimated future cash flows (undiscounted andwithout interest charges) from the use of an asset are less than the carryingvalue, a write-down is recorded to reduce the related asset to its estimatedfair value.

*Revenue Recognition*

The Company sells productsfor radiation therapy treatment, including brachytherapy seeds used in thetreatment of cancer, IMRT and IGRT products and services. Product revenueconsists of brachytherapy, non-therapeutic sources, and certain IMRT hardwaredevices, including our MiMIC and Crane products. Software revenues consist ofIMRT treatment planning software Corvus, Peregrine and Peacock and our IGRTproduct. Service revenue consists of warranty revenue and maintenance serviceagreements.

*Product revenue*

TheCompany applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition” for the sale of non-software products. SAB No. 104,which supercedes SAB No. 101, “Revenue Recognition in Financial Statements”,provides guidance on the recognition, presentation and disclosure of revenue infinancial statements. SAB No. 104 outlines the basic criteria that must bemet to recognize revenue and provides guidance for the disclosure of revenuerecognition policies. In general, the Company recognizes revenue related toproduct sales when (i) persuasive evidence of an arrangement exists, (ii) deliveryhas occurred, (iii) the fee is fixed or determinable, and (iv) collectibilityis reasonably assured.

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*Software revenue*

The Company’s software revenue is generated from thesale of advanced medical equipment products. The software element of theCompany’s products is deemed an essential element of the functionality of theproduct. Maintenance and support are provided with the initial product sale fora twelve month period. The maintenance and support is renewable annually orlonger, at the customer’s discretion.

The Company recognizes revenue in accordance with theprovisions of Statement of Position (“SOP”) 97-2, “Software RevenueRecognition”, as amended by SOP 98-9, “Modification of SOP 97-2,Software Revenue Recognition, with respect to Certain Transactions”. Under theprovisions of SOP 97-2, the Company recognizes software revenue upondelivery and acceptance, provided all significant obligations have been met,persuasive evidence of an arrangement exists, fees are fixed or determinable,collection is probable, and the Company is not involved in providing servicesthat are essential to the functionality of the product.

The Company’s softwaresales are generally multiple element arrangements, which could include theproduct, first year annual maintenance and support, and training andinstallation. Revenues from the multiple element arrangements are allocated toeach element based on the relative fair value of the elements. If the fairvalue of the element exists, the determination is based on vendor specificobjective evidence. If such evidence of fair value for each element of thearrangement does not exist, all revenue from the arrangement is deferred untilsuch time that evidence of fair value of each element does exist or until allelements of the arrangement are delivered. If in a multiple elementarrangement, fair value does not exist for one or more of the undeliveredelements, the residual method of accounting is applied. Under the residualmethod, the fair value of the undelivered elements is deferred, and theremaining portion of the arrangement fee is recognized as revenue.

*Service revenue*

Services revenues arederived mainly from maintenance and support contracts and are recognized on astraight-line basis over the term of the contract. Payments for maintenancerevenues are normally received in advance and are nonrefundable.

*Research andDevelopment Costs*

Research and development (“R&D”)expenses are comprised primarily of the following types of costs incurred inperforming 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-processresearch and development projects and technologies which have no alternativefuture use. Research and development costs are expensed as incurred.

*Stock-basedCompensation*

The Company accounts for its stock option awards toemployees and directors using the intrinsic value method of accounting inaccordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. The Company hasprovided additional disclosures required by SFAS No. 123, “Accounting forStock-Based Compensation.”

On December 31, 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock BasedCompensation—Transition and Disclosure,” which amends SFAS No. 123. SFAS No. 148requires more prominent and frequent disclosures about the effects of stock-basedcompensation, which the Company has adopted as of November 1, 2002. TheCompany has elected to continue to account for its stock-basedcompensation using the intrinsic value method of accounting according to the provisionsof APB Opinion No. 25.

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Hadcompensation cost for the Company’s stock options been recognized based uponthe estimated fair value on the grant date under the fair value methodologyprescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’snet loss and loss per share would have been as follows:

| ** **                                | ** ** | **Year Ended October 31,** | ** **  |
|-------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                | ** ** | **2005**                                  | ** **  | **2004** | ** ** | **2003** | ** ** |
| Net loss, as  reported                    |       | $                                         | (55,513,000 | ) | $ | (36,307,000 | ) | $ | (9,440,000 | ) |
| Add: stock-based  compensation recognized |       | —                                    |        | 351,000 |   | — |   |
| Less: total stock-based  compensation(1)  |       | (1,318,000                                | )           | (2,561,000 | ) | (2,151,000 | ) |
| Net loss, as adjusted                     |       | $                                         | (56,831,000 | )) | $ | (38,517,000 | ) | $ | (11,591,000 | ) |
| Basic loss per share, as reported         |       | $                                         | (3.36       | ) | $ | (2.76 | ) | $ | (0.92 | ) |
| Diluted loss per  share, as reported      |       | $                                         | (3.36       | ) | $ | (2.76 | ) | $ | (0.92 | ) |
| Basic loss per  share, as adjusted        |       | $                                         | (3.44       | ) | $ | (2.93 | ) | $ | (1.13 | ) |
| Diluted loss per share,  as adjusted      |       | $                                         | (3.44       | ) | $ | (2.93 | ) | $ | (1.13 | ) |

----

(1)          As determined under thefair value method.

The Company uses the Black-Scholesoption-pricing model for estimating the fair value of options granted.The Black-Scholes option-pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions, including the expected stock pricevolatility. The Company uses projected volatility rates, which are based uponhistorical volatility rates, trended into future years. Because the Company'semployee stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management's opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of the Company's options. For purposes of pro forma disclosures, theestimated fair values of the options are amortized over the options' vestingperiods.

*Net Loss per Share*

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

Dilutedearnings (loss) per share is computed by dividing the net income (loss) by thesum of the weighted average number of common shares outstanding for the periodplus the assumed exercise of all dilutive securities by applying the treasurystock method. Stock options for which the exercise price exceeds the averagemarket price over the period have an anti-dilutive effect on earnings per shareand, accordingly, are excluded from the calculation. The following table setsforth the computation of basic and diluted loss per share:

| ** **                                       | ** ** | **Year Ended October 31,** | ** **  |
|--------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                       | ** ** | **2005**                                  | ** **  | **2004** | ** ** | **2003** | ** ** |
| Net loss, as  reported                           |       | $                                         | (55,513,000 | ) | $ | (36,307,000 | ) | $ | (9,440,000 | ) |
| Weighted average shares outstanding—Basic   |       | 16,502,071                                |        | 13,138,721 |   | 10,257,688 |   |
| Dilutive effect  of stock options and warrants   |       | —                                    |        | — |   | — |   |
| Weighted average shares outstanding—Diluted |       | 16,502,071                                |        | 13,138,721 |   | 10,257,688 |   |
| Basic loss per share                             |       | $                                         | (3.36       | ) | $ | (2.76 | ) | $ | (0.92 | ) |
| Diluted loss per share                           |       | $                                         | (3.36       | ) | $ | (2.76 | ) | $ | (0.92 | ) |

 

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Stock options and warrantsto purchase 2,862,849, 3,673,210 and 2,313,726 common shares for the yearsended October 31, 2005, 2004 and 2003, respectively, were not included inthe computation of diluted loss per share for those years because their effectwould have been anti-dilutive.

*Income Taxes*

The Company accounts forincome taxes under the liability method. Under this method, deferred incometaxes are recognized by applying enacted statutory tax rates applicable tofuture years to differences between the tax bases and financial reportingamounts of existing assets and liabilities. A valuation allowance is providedwhen it is more likely than not that all or some portion of deferred tax assetswill not be realized.

*Diversification ofCredit Risk*

The Company’s financialinstruments that are subject to concentrations of credit risk consist primarilyof cash equivalents, marketable securities, and accounts receivable, which arenot collateralized. The Company’s policy is to invest its cash with highlyrated financial institutions in order to limit the amount of credit exposure.

*TheCompany extends differing levels of credit to customers, does not requirecollateral, and maintains reserves for potential credit losses based upon the collectibilityof accounts receivable. The Company monitors the credit worthiness of itscustomers and makes provision whenever there are indications of potentialcredit losses.*

*SignificantConcentrations*

As of October 31, 2005, there were no customersthat made up more than 10% of the accounts receivable or generated more than10% of sales for the year ended October 31, 2005. The Company had anexclusive agreement with Mentor Corporation (“Mentor”) for the distribution ofits brachytherapy products which terminated in January 2003. This customerrepresented 27% and 78% of total revenues for the years ended October 31,2003 and 2002, respectively. In addition, two other customers each represented11% 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 tradereceivables.

The Company relies oncertain companies as the sole source of various materials in its manufacturingprocess. Any extended interruption in the supply of these materials couldresult in the failure to meet customer demand and materially impact futureoperating results.

*Recent AccountingPronouncements*

In December 2004, the FASB issued SFAS No. 123(Revised 2004), “Share-Based Payment,” that addresses the accounting forshare-based payment transactions in which a Company receives employee servicesin exchange for (a) equity instruments of the Company or (b) liabilitiesthat are based on the fair value of the Company’s equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS No. 123Raddresses all forms of share-based payment awards, including shares issuedunder employee stock purchase plans, stock options, restricted stock and stockappreciation rights. SFAS No. 123R eliminates the ability to account forshare-based compensation transactions using APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, that was provided in Statement 123 asoriginally issued. Under SFAS No. 123R companies are required to recordcompensation expense for all share based payment award transactions measured atfair value. This statement is effective for quarters ending after June 15,2005. The Company will implement SFAS 123R in our fiscal year beginning November 1,2005. We are currently evaluating the impact of this new standard, but weestimate the impact of applying the 

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various provisions of SFASNo. 123R will result in an expense of approximately $1.3 million during eachof the next four years if all current unvested stock options vest on thescheduled dates and the assumptions in the Black-Scholes model remain the same(See Notes 1 and 13 to the consolidated financial statements).

In November 2004, the FASB issued SFAS No. 151“Inventory Costs”. This Statement amends  the guidance in ARB No. 43,Chapter 4, “Inventory Pricing”, to clarify the accounting  for abnormal amountsof idle  facility  expense, freight,  handling costs,  and wasted  material (spoilage). In addition, this  Statement  requires that  allocation  of fixed production  overhead to thecosts of conversion be based  on  the normal capacity of the productionfacilities. The provisions of this Statement will be effective for fiscal yearsbeginning after June 15, 2005. The Company will implement SFAS No. 151in our fiscal year beginning November 1, 2005. We are currently evaluatingthe impact this new Standard, but believe that it will not have a materialimpact on our financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153“Exchanges  of  Non-monetary Assets—an amendment of APBOpinion  No. 29”. This Statementamended APB Opinion No. 29 to eliminate the exception for non-monetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of non-monetary assets that do not have commercial substance. Anon-monetary  exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The provisions of this Statement areeffective for fiscal periods beginning after June 15, 2005. TheCompany  implemented SFAS No. 153 inour fiscal period beginning August 1, 2005. The implementation of SFAS No. 153did not have a material impact upon our financial position, results ofoperations or cash flows.

In March 2005, the FASB issued FASBInterpretation (“FIN”) No. 47, “Accounting for Conditional AssetRetirement Obligations.” FIN No. 47 clarifies that the term conditionalasset retirement asset obligation as used in FASB Statement No. 143, “Accountingfor Asset Retirement Obligations,” refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and/ or method ofsettlement. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN No. 47 iseffective no later than the end of fiscal years ending after December 15,2005 (December 31, 2005 for calendar-year companies). Retrospectiveapplication of interim financial information is permitted but is not required.The Company will implement FIN No. 47 in its fiscal year beginning November 1,2005. Management does not expect adoption of FIN No.47  to have a material impact on the Company’sfinancial statements.

In May 2005, the FASBissued Statement of Accounting Standards (SFAS) No. 154, “AccountingChanges and Error Corrections”, an amendment to Accounting Principles Bulletin(APB) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”. Though SFAS No. 154carries forward the guidance in APB No.20 and SFAS No.3 with respect toaccounting for changes in estimates, changes in reporting entity, and thecorrection of errors, SFAS No. 154 establishes new standards on accountingfor changes in accounting principles, whereby all such changes must beaccounted for by retrospective application to the financial statements of priorperiods unless it is impracticable to do so. SFAS No. 154 is effective foraccounting changes and error corrections made in fiscal years beginning after December 15,2005, with early adoption permitted for changes and corrections made in yearsbeginning after May 2005. The Company will implement SFAS No. 154 inits fiscal year beginning November 1, 2006. We are currently evaluatingthe impact  of this new standard, butbelieve that it will not have a material impact upon the Company’s financialposition, results of operations or cash flows.

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**NOTE 2—SEGMENT INFORMATION**

The Company’s operations are divided into segmentsbased upon a combination of factors including: product produced, manufacturingprocess and management oversight. The Company’s two segments are: IMRT/IGRT andRadiation Sources. IMRT/IGRT develops and markets products used during externalbeam radiation therapy for the treatment of cancer. Radiation Sources developsand markets radioisotopic products including brachytherapy seeds andaccessories used in the treatment of cancer and non-therapeutic products usedin medical, environmental, research and industrial applications. Theseus hadbeen developing a radiopharmaceutical imaging agent for various medicaldiagnostic and monitoring functions, including the management of chemotherapytreatment. However, in September 2004, the Company discontinued itsoperations of Theseus (See Note 3).

The Company evaluates performance and allocatesresources based on operating results and development milestones. The accountingpolices of the reportable segments are the same as those described in Note 1 inthe summary of significant accounting policies. There are no inter-companysales or profits.

TheCompany’s segments are business units that either offer different products or aremanaged separately because they operate with distinct manufacturing anddevelopment processes.

| ** **                        | ** ** | **Year Ended October 31,** | ** **  |
|-----------------------------------|------------|-------------------------------------------|-------------|
| ** **                        | ** ** | **2005**                                  | ** **  | **2004** | ** ** | **2003** | ** ** |
| **Net sales**                     | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| IMRT/IGRT                         |       | $                                         | 20,192,000  |   | $ | 11,759,000 |   | $ | — |   |
| Radiation Sources                 |       | 12,032,000                                |        | 12,978,000 |   | 14,683,000 |   |
|                              |       | $                                         | 32,224,000  |   | $ | 24,737,000 |   | $ | 14,683,000 |   |
| **Income (loss) from operations** | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| IMRT/IGRT                         |       | $                                         | (51,271,000 | ) | $ | (17,766,000 | ) | $ | — |   |
| Radiation Sources                 |       | (4,725,000                                | )           | (6,840,000 | ) | (2,347,000 | ) |
|                              |       | $                                         | (55,996,000 | ) | $ | (24,606,000 | ) | $ | (2,347,000 | ) |

 

| ** **              | ** ** | **October 31,** | ** ** |
|-------------------------|------------|----------------------|------------|
| ** **              | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Goodwill**            | ** ** | ** **           | ** ** | ** ** | ** ** |
| IMRT/IGRT               |       | $                    | 2,564,000  |   | $ | 18,525,000 |   |
| Radiation Sources       |       | —               |       | 207,000 |   |
| Discontinued  operation |       | —               |       | — |   |
| Total goodwill          |       | $                    | 2,564,000  |   | $ | 18,732,000 |   |
| **Total  assets**       | ** ** | ** **           | ** ** | ** ** | ** ** |
| IMRT/IGRT               |       | $                    | 14,899,000 |   | $ | 61,719,000 |   |
| Radiation Sources       |       | 7,418,000            |       | 18,608,000 |   |
| Discontinued  operation |       | 16,000               |       | 212,000 |   |
| Total assets            |       | $                    | 22,333,000 |   | $ | 80,539,000 |   |

 

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**NOTE 3—DISCONTINUED OPERATION**

In September 2004, the Company discontinued itsTheseus Operation which had been engaged in the research and development of aproprietary radiopharmaceutical agent (referred to as “Hynic-Annexin V”) sinceits acquisition in October 2000. The Company believed that successfulcompletion of development and receipt of regulatory approvals allowing themarketing of Hynic-Annexin V would not occur earlier than 2007 and theadditional costs would be substantial. During the third quarter of fiscal 2004,the Company determined that it needed to review the carrying value of Theseusassets for possible impairment due to ongoing discussions with various thirdparties concerning strategic alternatives for the Hynic-Annexin V productdevelopment program. The Company determined that the carrying value of theTheseus assets at July 31, 2004 exceeded their fair value, as determinedby estimated future cash flows, and therefore, recorded a $4.7 millioncharge for the impairment of goodwill and long-lived assets. Discussions withthe various potential financial and strategic partners ceased in August 2004,which resulted in the Company’s decision to shut-down the Theseus operation in September 2004.The Company recorded additional costs of $0.7 million for severance,license termination fees and facility shut down costs, offset by $0.2 inproceeds from the sale of long-lived assets and research materials during thequarter ended October 31, 2004. As of October 31, 2005, the Companyrevised downward its estimate of the costs of the shut-down of its Theseusoperation, resulting in a gain of $0.4 million related to thatdiscontinued operation in the year ended October 31, 2005.

As a result of the shut-down in September 2004,the Company has presented the Theseus operation as a discontinued operation inthe accompanying financial statements. The results of operations for the yearsended October 31, 2003 have been restated accordingly.

Revenuesand loss from the discontinued operation were as follows:

| ** **                                         | ** ** | **For the Years Ended October 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                          |       | $                                                            | —     |   | $ | — |   | $ | — |   |
| Gain (loss) from discontinued operation            |       | $                                                            | —     |   | $ | (7,306,000 | ) | $ | (8,536,000 | ) |
| Gain (loss) on  disposal of discontinued operation |       | 362,000                                                      |       | (5,231,000 | ) | — |   |
| Gain (loss) from  discontinued operation           |       | $                                                            | 362,000    |   | $ | (12,537,000 | ) | $ | (8,536,000 | ) |

 

Assetsand liabilities of the discontinued operations were as follows:

| ** **                                          | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Prepaid and other  current assets                   |       | $                    | —     |   | $ | 186,000 |   |
| Equipment and  leasehold improvements               |       | —               |       | — |   |
| Goodwill                                            |       | —               |       | — |   |
| Intangible assets                                   |       | —               |       | — |   |
| Other assets                                        |       | 16,000               |       | 16,000 |   |
| Accounts payable                                    |       | (3,000               | )          | (45,000 | ) |   |
| Accrued expenses                                    |       | (350,000             | )          | (1,516,000 | ) |
| Net assets (liabilities)  of discontinued operation |       | $                    | (337,000   | ) | $ | (1,359,000 | ) |

 

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**NOTE 4—ACQUISITIONS**

*Radiation TherapyProducts*

In August 2003, theCompany acquired substantially all of the assets of Radiation Therapy Products(“RTP”), a manufacturer and distributor of equipment, including steppers andstabilizers, used in prostate brachytherapy procedures, for total considerationconsisting of $0.5 million in cash and $0.2 million in common stock(20,000 shares). The cost of the acquisition, including approximately$68,000 in direct transaction costs, was allocated to the assets acquired andliabilities assumed based on estimates of their respective fair values at thedate of acquisition. The Company recorded the fair value of assets andliabilities acquired, which consisted primarily of net tangible assets ($0.2 million),purchased technology ($0.2 million), other intangible assets ($0.1 million),and goodwill ($0.2 million). RTP’s historical operations were notconsidered material to the Company’s financial position or results ofoperations. The intangible assets are being amortized over periods ranging fromthree to ten years. The Company accounts for the operations of the RTP in itsRadiation Sources business segment.

*NOMOS*

On May 4, 2004, the Company acquired NOMOS. Theresults of NOMOS have been included in the consolidated financial statementsfrom the date of acquisition as the Company’s IMRT/IGRT business segment. NOMOSdevelops, markets and sells medical devices used in external beam radiation. Asa result of the acquisition, the Company has expanded its product line, whichshould allow it to compete more effectively in the radiation oncology market.

The purchase price of approximately $58 millionconsisted of $11.5 million in cash, the issuance of 5.2 millionshares of the Company’s common stock with a fair value of approximately $37.3 million,the assumption of 1.4 million of stock options and warrants with a fairvalue of $4.6 million, direct transaction costs of $3.0 million andthe assumption of acquisition related liabilities of $1.6 million. Thefair value of the common stock used in determining the purchase price was $7.21per share based on the average of the closing price of the common stock for theperiod two days before and after the October 27, 2003 merger agreementannouncement date. The stock options and warrants, which fully vested at theacquisition date, were valued using a Black-Scholes valuation model with thefollowing assumptions: risk-free interest rate of 4.5%, volatility factor of60%, expected term of 1.5 years for stock options, contractual term of0.5 years for warrants and no dividend yield. The acquisition wasaccomplished through a reverse triangular merger into a wholly owned subsidiaryof the Company, and is reflected in the Company’s financial statements,including the footnotes thereto, as the IMRT/IGRT operating segment.

Pursuant to the purchase agreement, approximately15.8% of the shares of common stock and cash otherwise payable to the NOMOSshareholders were deposited into two separate escrow funds. With respect to thefirst escrow fund, 526,810 shares of the Company’s common stock and $1.2 millionof cash will be held for a period of two years following the acquisition date,as a source of reimbursement for losses arising from any breach by NOMOS of itsrepresentations or obligations under the purchase agreement. With respect tothe second escrow fund, 307,617 shares of the Company’s common stock and$0.7 million of cash were held in escrow as a source of reimbursement forany losses incurred in connection with the demand made against NOMOS byParker/Hunter Incorporated (“Parker/Hunter”). The escrowed funds were deemedcontingently returnable for accounting purposes until the Parker/Hunter matterwas settled in August 2004 for $1.1 million.

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Thepurchase price has been allocated based on the estimated fair values of theassets acquired and liabilities assumed as of the date of acquisition asfollows:

| Cash                                     |   | $          | 1,771,000  |   |
|------------------------------------------|--------|------------|------------|--------|
| Accounts  receivable                     |   | 2,908,000  |       |
| Inventories                              |   | 4,593,000  |       |
| Equipment and  leasehold improvements    |   | 1,423,000  |       |
| In-process  research and development     |   | 9,200,000  |       |
| Acquired  identifiable intangible assets |   | 30,300,000 |       |
| Goodwill                                 |   | 18,525,000 |       |
| Other current and  long term assets      |   | 508,000    |       |
| Accounts payable                         |   | (2,097,000 | )          |
| Accrued expenses                         |   | (3,271,000 | )          |
| Deferred revenue                         |   | (5,879,000 | )          |
|                                     |   | $          | 57,981,000 |   |

 

The amount allocated to in-process research anddevelopment (“IPR&D”) represents an estimate of the fair value of purchasedin-process technology for research projects that as of the acquisition date,will not have reached technological feasibility and have no alternative futureuse. Only those research projects that had advanced to a stage of developmentwhere management believed reasonable net future cash flow forecasts could beprepared and a reasonable likelihood of technical success existed were includedin the estimated fair value. The estimated fair value of the IPR&D to beacquired in the merger was determined based on applying a 20% discount rate tothe forecast of the estimated net future cash flows for each project, adjustedfor the estimated probability of technical success for each research project.IPR&D was expensed during the year ended October 31, 2004. Ongoingin-process research and development projects are generally focused ondeveloping enhancements and adding features and functionality that allowexisting products to more effectively and efficiently treat cancers found indisease sites, such as liver and breast, for which the Company’s products, dueto certain design limitations, have traditionally not been used. Strategically,this should enable the Company to expand the market for its products ratherthan to simply maintain the existing revenue base. Significant investment inresearch and development has been, and will continue to be, necessary to enhanceexisting products, develop new products and to allow the combined company togenerate new product sales to further penetrate and expand geographic marketsfor its products.

The value assigned to IPR&D was comprised of thefollowing projects: BAT® with optical tracking, which was released in the yearended October 31, 2004 ($7.8 million), development of a significantlyenhanced treatment planning system which is expected to be released in fiscal2005 ($1.1 million), and a treatment planning product, which is expectedto incorporate enhanced technology with Monte Carlo based simulationcapabilities which is expected to be released in fiscal 2006 ($0.3 million).Each product development has a risk of failure or delay in introduction thatcould result in diminished overall cash flows should the product not beintroduced to the market as currently anticipated. Continued product innovationand timely release of IPR&D projects, once integrated and redefined asnecessary, are believed to be fundamental to the success of the combinedcompany.

The amounts allocated to IPR&D, and otherintangible assets for financial reporting purposes did not result in futureincome tax deductions since the acquisition was a nontaxable transaction. Thedeferred tax liabilities related to such temporary differences were offset bydeferred tax assets (primarily net operating loss carryforwards subject tochange in ownership provisions of Internal Revenue Service Code Section 382)in the purchase price allocation. The Company provided a full valuationallowance against the remaining net deferred tax assets since realizationcannot be sufficiently assured. The Company has filed 

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consolidated and combinedfederal and state income tax returns with NOMOS. Goodwill is not deductible forincome tax purposes. Accordingly, no provision or benefit for income taxes wasrecognized in the accompanying pro forma results of operations.

Theacquired identifiable intangible assets have been amortized over their usefullives as follows:

| ** **                       | ** ** | **Amount** | ** ** | **Useful Lives (in years)** | ** **                             |
|----------------------------------|------------|------------|------------|--------------------------------------------|----------------------------------------|
| Purchased  technology            |       | $          | 24,000,000 |                                       | 14 – no  residual value |   |
| Existing customer  relationships |       | 1,900,000  |       | 10 – no  residual value     |                                   |
| Trademark                        |       | 4,400,000  |       | 14 – no  residual value     |                                   |
| Total                            |       | $          | 30,300,000 |                                       |                                   |   |

 

The Company incurred $1.1 million in merger andintegration costs consisting primarily of severance costs and informationtechnology consulting costs.

Thefollowing table presents unaudited pro forma revenue, net loss and loss pershare giving the effect of NOMOS acquisition as if it had been completed at thebeginning of each period presented:

| ** **                                              | ** ** | **Year Ended October 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| Revenue                                                 |       | $                                         | 38,976,000 |   | $ | 45,046,000 |   |
| Loss before  cumulative effect of accounting change (1) |       | (31,988,000                               | )          | (14,313,000 | ) |
| Net loss (1)                                            |       | (31,988,000                               | )          | (14,624,000 | ) |
| Net loss per share,  basic and diluted                  |       | (2.02                                     | )          | (0.95 | ) |
|                                                         |            |                                           |            |  |  |  |  |

----

(1)          Excludes a $9.2 millioncharge for IPR&D and $1.1 million in merger and integration costsassociated with the acquisition of NOMOS.

The unaudited pro forma financial information abovereflects the Company’s changes in revenue recognition policy. Prior to theacquisition by the Company on May 4, 2004, NOMOS had recognized revenue ofthe BAT product under SAB No. 101 as a product in which software wasdeemed incidental. The Company has determined that revenue recognition of theBAT product should be accounted for under SOP 97-2. The Company alsodetermined that revenue recognition of the BAT product should be deferred fromthe time of shipment, as NOMOS had historically recognized revenue, to the timeof acceptance or installation. As a result of these changes in revenuerecognition, the Company has presented the pro forma information above to beconsistent with results presented for the year ended October 31, 2004.

The impact of the changesin revenue recognition of the BAT product for the periods presented was anincrease of $1.8 million, and $1.3 million, for the years endedOctober 31, 2004 and 2003, respectively. The impact of the changes inrevenue recognition of the BAT product for the periods presented on net losswas a decrease in net loss of $1.0 million and  $1.0 million for the yearsended October 31, 2004 and 2003, respectively.

**NOTE 5—VARIABLE INTEREST ENTITY**

In October 2003, the Company entered into aSecured Loan Agreement with Prostate Centers of America (“PCA”). Under theagreement, the Company was obligated to make periodic advances subject to PCAachieving certain milestones.

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As of October 31, 2005, the Company’s advances toPCA under the secured note totaled $950,000, and they have been fully reserved.The secured note bears interest at 6% per annum and is repayable in fourinstallments commencing on December 1, 2004, with all unpaid principal andinterest due on September 1, 2005. As of October 31, 2005, the firstpayment had not been received. The Company has no equity interest in PCA. Thefunds are to be used for general working capital to provide variousbrachytherapy services to ambulatory surgical centers. TC2B, LLC, a distributorwho has agreed to procure all of its brachytherapy seeds exclusively from theCompany though October 2008, has a majority interest in PCA. On October 31,2005, total trade receivables due from TC2B were $1.0 million and sales to TC2Bduring the year ended October 31, 2005 were $0.8 million. The tradereceivable balance is fully reserved in the allowance for doubtful accounts,and we recognized $0.4 million of the revenue from sales to TC2B in the fiscalyear ended October 31, 2005. Based on the terms of the lending and supplyagreements with the above entities, the Company determined that PCA was avariable interest entity (“VIE”) and the Company was the primary beneficiaryunder FIN No. 46 since PCA does not have sufficient equity at risk for theentity to finance its activities.

FIN No. 46 requires that an enterpriseconsolidate a VIE if that enterprise has a variable interest that will absorb amajority of the entity’s expected losses if they occur. Accordingly, theCompany adopted FIN No. 46 in October 2003 and consolidated PCA as aVIE, regardless of the Company not having an equity interest in PCA and itscreditors having no recourse against the Company. The Company consolidated PCAin its Radiation Sources segment in the fiscal years ended October 31, 2003 and2004. In the fiscal year ended October 31, 2005, the Company determinedthat PCA is no longer a VIE, because: (i) during the year endedOctober 31, 2005, other outside parties provided additional funding to PCAwhich resulted in the Company no longer being the holder of the variableinterest that would hold the majority of the entity’s losses, (ii) PCA’sother creditors have no recourse against the Company, (iii) the Companyhas no equity interest in PCA, and (iv) PCA has informed the Company thatit likely will cease operations in 2006. As a result, the Company did notconsolidate PCA as a VIE in its financial statements for the fiscal year endedOctober 31, 2005.

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

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

 

Consolidationof PCA’s results of operations included the following:

| ** **           | ** ** | **Year Ended October 31,** | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales            |       | $                                         | —     |   | $ | 180,000 |   |   | $ | — |   |   |
| Loss from operations |       | $                                         | (18,000    | ) | $ | (932,000 | ) |   | $ | — |   |   |

 

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**NOTE 6—ASSET RETIREMENT OBLIGATIONS**

During 2003, the Company adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations” for recording future decommissioning costsrelated to its leased manufacturing and research facilities. Under SFAS No. 143,a future retirement obligation is recorded at present value by discounting theCompany’s estimated future asset retirement obligation using the Company’sestimated credit-adjusted borrowing rate. The resulting capitalized costsare recorded as part of equipment and leasehold improvements and are amortizedratably over the term of the leased facilities. The asset retirement obligationhas been recorded in accrued expenses and will be adjusted to fair value overthe lease term as an accretion expense. During 2003, the Company recorded aliability for asset retirement obligations of $0.4 million, increased netequipment and leasehold improvements by $0.1 million and recognized a charge of$0.3 million which is reported in the caption “Cumulative effect of change inaccounting principle.”

Hadthe asset retirement obligations been recognized in previous periods aspresented by SFAS No. 143, the Company’s net loss and loss per share wouldhave been as follows:

| ** **                                           | ** ** | **Year Ended October 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2003**                                  | ** ** | **2002** | ** ** |
| Net loss, as  reported                               |       | $                                         | (9,440,000 | ) | $ | (5,244,000 | ) |
| Cumulative effect  of change in accounting principle |       | 311,000                                   |       | — |   |
|                                                 |       | (9,129,000                                | )          | (5,244,000 | ) |
| Amortization and  accretion expense                  |       | —                                    |       | (33,000 | ) |
| Net loss, as  adjusted                               |       | $                                         | (9,129,000 | ) | $ | (5,277,000 | ) |
| Basic loss per  share, as reported                   |       | $                                         | (0.92      | ) | $ | (0.51 | ) |
| Diluted loss per  share, as reported                 |       | $                                         | (0.92      | ) | $ | (0.51 | ) |
| Basic loss per  share, as adjusted                   |       | $                                         | (0.89      | ) | $ | (0.46 | ) |
| Diluted loss per share,  as adjusted                 |       | $                                         | (0.89      | ) | $ | (0.46 | ) |

 

The current liability forretirement obligation was $0.4 million at October 31, 2005.  During the year ended October 31, 2005,accretion was immaterial and there were not any liabilities incurred or settled

**NOTE 7—MARKETABLE SECURITIES**

Marketablesecurities consist of the following:

| ** **                      | ** ** | **October 31,** | ** ** |
|---------------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Securities held  to maturity:   |       |                 |       |   |   |
| Corporate and  government bonds |       | $                    | 993,000    |   | $ | 10,272,000 |   |
| Annuity contract                |       | —               |       | 560,000 |   |
| Commercial paper                |       | —               |       | 1,814,000 |   |
|                            |       | 993,000              |       | 12,646,000 |   |
| Securities  available for sale  |       | —               |       | — |   |
|                            |       | 993,000              |       | 12,646,000 |   |
| Less: current  portion          |       | (993,000             | )          | (10,046,000 | ) |
| Non-current  portion            |       | $                    | —     |   | $ | 2,600,000 |   |

 

The amortized cost of allheld to maturity securities approximates fair value. At October 31, 2005,the entire balance of investments in debt securities matures within one year.

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**NOTE 8—ACCOUNTSRECEIVABLE**

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

Accountsreceivable consist of the following:

| ** **                             | ** ** | **October 31,** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Accounts  receivable—trade        |       | $                    | 6,854,000  |   | $ | 7,757,000 |   |
| Less: allowance  for doubtful accounts |       | (1,333,000           | )          | (625,000 | ) |
|                                   |       | $                    | 5,521,000  |   | $ | 7,132,000 |   |

 

The provision for doubtfulaccounts was $0.7 million, $0.5 million, and $0.1 million for the fiscal yearsended October 31, 2005, 2004 and 2003, respectively.

**NOTE 9—INVENTORIES**

Inventoriesconsist of the following:

| ** **      | ** ** | **October 31,** | ** ** |
|-----------------|------------|----------------------|------------|
| ** **      | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Raw materials   |       | $                    | 1,468,000  |   | $ | 4,249,000 |   |
| Work in process |       | 45,000               |       | 47,000 |   |
| Finished goods  |       | 2,218,000            |       | 575,000 |   |
|            |       | $                    | 3,731,000  |   | $ | 4,871,000 |   |

 

In fiscal year endedOctober 31, 2005, the Company recorded a charge in the IMRT/IGRT segmentfor excess inventory of $0.4 million and a charge for excess warrantyreplacement parts of $0.2 million. In fiscal year ended October 31, 2004,the Company recorded a charge in the IMRT/IGRT segment for excess inventory of$0.7 million and a charge for excess warranty replacement parts of $0.5million.

**NOTE10—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**

Equipmentand leasehold improvements consist of the following:

| ** **                                       | ** ** | **October 31,** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Furniture,  fixtures and equipment               |       | $                    | 6,185,000  |   | $ | 6,192,000 |   |
| Leasehold  improvements                          |       | 2,173,000            |       | 2,386,000 |   |
|                                             |       | 8,358,000            |       | 8,578,000 |   |
| Less: accumulated  depreciation and amortization |       | (5,522,000           | )          | (4,451,000 | ) |
|                                             |       | $                    | 2,836,000  |   | $ | 4,127,000 |   |

 

Depreciation andamortization expense was $1.1 million, $1.0 million, and $0.8 million for thefiscal years ended October 31, 2005, 2004 and 2003, respectively.

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**NOTE11—GOODWILL AND INTANGIBLE ASSETS**

The Company performed an analysis, with the assistanceof an appraisal firm, of the goodwill and intangible assets acquired from NOMOSCorporation on May 4, 2004 under SFAS 142 and SFAS 144 as of the Company’sannual test date of September 30, 2005 to determine the fair value thereofunder the applicable standards. According to SFAS 142 and SFAS 144 animpairment test consists of a comparison of the fair value of the goodwill andintangible assets with its carrying amount. Impairment exists when the carryingamount of goodwill and intangible assets exceeds its implied fair value.Testing for impairment is a two-step process. The first step is to determinethe fair value of the reporting unit. The fair value of our reporting unit wasless than its carrying amount (i.e. net assets) which required progress to steptwo. The second step is a process whereby the Company assumed the reportingunit is being acquired as of the goodwill testing date in a purchase businesscombination, in this case an asset sale excluding transferring the associatedliabilities at the reporting unit. This process also assumes the reporting unit’sfair value is a surrogate for the reporting unit’s purchase price. Goodwillthat emerges from this process is the implied fair value of goodwill. As theimplied fair value of goodwill was less than the carrying value of goodwill, animpairment loss of NOMOS and RTP goodwill in the amount of $16,168,000 wasrecognized as a write-down of goodwill and intangible assets in theConsolidated Statements of Operations.

The allocation of the fair value of the intangibleassets was determined by estimating the sum of the undiscounted cash flowsassociated with each intangible asset over its useful life. The estimated fairvalue of each asset then was compared to the carrying value of that asset. Asthe carrying value of each asset exceeded the fair value of each asset , animpairment loss of NOMOS and RTP intangible assets in the amount of $24,045,000was recognized as a write-down of goodwill and intangible assets in theConsolidated Statements of Operations.

In addition, the Company performed an internalanalysis under SFAS 142 and SFAS 144 as of the Company’s annual test date of September 30,2005 of the goodwill and intangible assets acquired from Radiation TherapyProducts (RTP) in August, 2003. The Company concluded that the goodwill andintangible assets acquired from RTP were impaired due to negative operatingperformance indicators, including the RTP products lower sales and netoperating losses. As a result, the Company wrote down the RTP goodwill by$207,000 and the RTP intangible assets by $122,000 to their estimated fairvalue in the quarter ended October 31, 2005.

Thechanges to carrying value of goodwill consist of the following:

| ** **                                             | ** ** | ** **    | ** ** | **Radiation** | ** ** | ** **                                                                          | ** ** | ** **                                                                        | ** ** |
|--------------------------------------------------------|------------|---------------|------------|---------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **IMRT/IGRT** | ** ** | **Sources**   | ** ** | **      Theseus      ** | ** ** | **      Total      ** | ** ** |
| Balance at  October 31, 2002                      |       | $             | —     |          | $          | —                                                                              |       | $                                                                                 | 3,659,000  |   | $ | 3,659,000 |   |
| Addition due to  acquisition of RTP                    |       | —        |       | 207,000       |       | —                                                                              |       | 207,000                                                                           |       |
| Balance at October 31, 2003                       |       | —        |       | 207,000       |       | 3,659,000                                                                           |       | 3,866,000                                                                         |       |
| Addition due to  acquisition of NOMOS (See Note 4)     |       | 18,525,000    |       | —        |       |                                                                                |       | 18,525,000                                                                        |       |
| Impairment due to  discontinued operation (See Note 3) |       | —        |       | —        |       | (3,659,000)                                                                         |       | (3,659,000)                                                                       |       |
| Balance at October 31, 2004                       |       | 18,525,000    |       | 207,000       |       | —                                                                              |       | 18,732,000                                                                        |       |
| Impairment charge                                      |       | (15,961,000)  |       | (207,000)     |       |                                                                                |       | (16,168,000)                                                                      |       |
| Balance at  October 31, 2005                      |       | $             | 2,564,000  |          | $          | —                                                                              |       | $                                                                                 | —     |   | $ | 2,564,000 |   |

 

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**NOTE 12—INTANGIBLEASSETS**

| ** **                             | ** ** | **October 31, 2005** | ** **  |
|----------------------------------------|------------|--------------------------------|-------------|
| Amortizable intangible assets          |       |                           |        |   |   |
| Purchased technology                   |       |                           | $           | 24,232,000 |   |   |
| Existing customer relationships        |       |                           | 1,952,000   |   |   |
| Trademark                              |       |                           | 4,426,000   |   |   |
| Patents and licenses                   |       |                           | 98,000      |   |   |
|                                   |       |                           | 30,708,000  |   |   |
| Less: accumulated  amortization        |       |                           | (3,505,000  | ) |   |
| Less: write-down of  intangible assets |       |                           |        |   |   |
| Purchased technology                   |       |                           | (21,103,000 | ) |   |
| Existing customer relationships        |       |                           | (182,000    | ) |   |
| Trademark                              |       |                           | (2,760,000  | ) |   |
| Patents and licenses                   |       |                           | —      |   |   |
|                                   |       |                           | (24,045,000 | ) |   |
|                                   |       |                           | $           | 3,158,000 |   |   |

 

Amortization expense was $2,300,000, $1,172,000, and$13,000, for the fiscal years ended October 31, 2005, 2004 and 2003,respectively.

Theestimate of aggregate amortization expense for the subsequent years is asfollows:

| **For the Years Ended October 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                                         |       | $          | 632,000    |       |
| 2007                                                         |       | 632,000    |       |
| 2008                                                         |       | 632,000    |       |
| 2009                                                         |       | 632,000    |       |
| 2010                                                         |       | 630,000    |       |
|                                                         |       | $          | 3,158,000  |       |

 

**NOTE 13—STOCKHOLDERS’ EQUITY**

*Preferred Stock*

The Company has authorizedthe issuance of 2,000,000 shares of preferred stock; however, no shares havebeen issued. The designations, rights and preferences of any preferred stockthat may be issued will be established by the Board of Directors at or beforethe time of such issuance.

*Stock Options*

The Company’s 1996 Stock Option Plan (“1996 Plan”), asamended through April 6, 2001, provides for the issuance of incentivestock options to employees of the Company and non-qualified options toemployees, directors and consultants of the Company with exercise prices equalto the fair market value of the Company’s stock on the date of grant. Certainoptions are immediately exercisable while other options vest over periods up tofour years. The options expire ten years from the date of grant. The 1996 Planprovides for the automatic increase on January 1 of each year, beginningwith calendar year 2002 and continuing through calendar year 2004, by a numberof shares equal to 3.5% of the total number of shares of the Company’s CommonStock outstanding on the last trading day in the immediately preceding calendaryear. The 1996 Plan terminates on April 1, 2006.

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In March 2003, the Company’s shareholdersapproved the 2003 Non-Employee Directors’ Equity Compensation Plan (“Directors’Plan”). The Directors’ Plan supersedes prior provisions for grants of stockoptions to non-employee directors contained in the 1996 Plan. Under theDirectors’ Plan, the Company may issue up to 500,000 shares to non-employeedirectors of the Company through non-qualified options or restricted stock. Theexercise price of options is equal to the fair market value of the Company’sstock on the date of grant. Options and restricted stock vest equally over athree-year period. The options expire ten years from the date of grant.

In May 2004, the Company’s shareholders approvedproposals to amend the 1996 Plan to make an additional 600,000 shares availablefor issuance under the plan and to permit the issuance of 1,362,589 replacementoptions in connection with the acquisition of NOMOS.

At October 31, 2005, a total of 4,146,550 sharesof the Company’s common stock were reserved for issuance.

Thefollowing table summarizes stock option activity for both plans:

| ** **                        | ** ** | ** **                             | ** ** | **Options Outstanding** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Options  Available  for Grant** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Exercise price** | ** ** |
| Balance at  October 31, 2002 |       | 87,205                                 |       |                         | 2,289,138  |   |   |   | $ | 9.80 |   |   |
| Granted                           |       | (566,300                               | )          |                         | 566,300    |   |   |   | 7.34 |   |   |
| Canceled or  expired              |       | 169,384                                |       |                         | (169,384   | ) |   |   | 12.29 |   |   |
| Exercised                         |       | —                                 |       |                         | (7,100     | ) |   |   | 4.83 |   |   |
| Additional shares  reserved       |       | 858,899                                |       |                         | —     |   |   |   |   |   |   |
| Balance at October 31, 2003  |       | 549,188                                |       |                         | 2,678,954  |   |   |   | 9.13 |   |   |
| Granted                           |       | (306,000                               | )          |                         | 306,000    |   |   |   | 8.77 |   |   |
| Replacement  options              |       | (1,362,589                             | )          |                         | 1,362,589  |   |   |   | 2.05 |   |   |
| Canceled or  expired              |       | 375,858                                |       |                         | (375,858   | ) |   |   | 10.05 |   |   |
| Exercised                         |       | —                                 |       |                         | (717,864   | ) |   |   | 4.92 |   |   |
| Additional shares  reserved       |       | 2,323,285                              |       |                         | —     |   |   |   |   |   |   |
| Balance at October 31, 2004  |       | 1,579,742                              |       |                         | 3,253,821  |   |   |   | 6.96 |   |   |
| Granted                           | ** ** | (275,000                               | **)**      |                         | 275,000    |   |   |   | 3.65 |   |   |
| Canceled or  expired              |       | 427,699                                | ** ** | ** **                   | (427,699   | ) |   |   | 7.63 |   |   |
| Exercised                         |       | —                                 | ** ** | ** **                   | (687,013   | ) |   |   | 1.12 |   |   |
| Balance at  October 31, 2005 |       | 1,732,441                              |       |                         | 2,414,109  |   |   |   | $ | 8.13 |   |   |

 

There were 1,873,220, 1,591,598 and 1,530,468 optionsexercisable with weighted average exercise prices of $8.79, $9.31 and $9.56 atOctober 31, 2005, 2004, and 2003, respectively.

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Thefollowing table summarizes options outstanding at October 31, 2005 and therelated weighted average exercise price and remaining contractual lifeinformation:

| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                   | ** ** | **Shares**                   | ** ** | **Weighted Avg.  Remaining  Contractual  Life  (Years)** | ** ** | **Weighted Avg.  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Avg.  Exercise  Price** | ** ** |
| $0.03 – $3.18                      |       | 521,634                      |       |                         | 6.24       |   |   |   | $ | 1.92 |   |   | 271,489 |   |   | $ | 0.86 |   |   |
| $3.94 – $7.29                      |       | 520,016                      |       |                         | 6.15       |   |   |   | 6.51 |   |   | 428,269 |   |   | 6.37 |   |   |
| $7.31 – $8.80                      |       | 634,299                      |       |                         | 6.84       |   |   |   | 7.98 |   |   | 459,302 |   |   | 7.80 |   |   |
| $8.94 – $12.89                     |       | 507,150                      |       |                         | 5.96       |   |   |   | 10.94 |   |   | 483,150 |   |   | 10.98 |   |   |
| $16.75 – $24.54                    |       | 231,010                      |       |                         | 3.80       |   |   |   | 19.96 |   |   | 231,010 |   |   | 19.96 |   |   |
|                                    |       | 2,414,109                    |       |                         | 6.09       |   |   |   | $ | 8.13 |   |   | 1,873,220 |   |   | $ | 8.79 |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The average fair value foraccounting purposes of options granted was $2.47, $5.19 and $4.45 per share forthe years ended October 31, 2005, 2004 and 2003, respectively.

*Modification ofStock Options*

In January 2004, theCompany’s Senior Vice President and Chief Financial Officer, resigned from theCompany to pursue other opportunities. Pursuant to a mutual agreement, theCompany agreed to immediately vest 171,834 stock options held by the formerofficer which resulted in a one-time non-cash stock-based compensation chargeof approximately $351,000.

*Fair ValueDisclosures*

TheCompany calculated the fair value of each option grant on the respective dateof grant using the Black-Scholes option-pricing model as prescribedby SFAS 123 using the following assumptions:

| ** **               | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield           |       | 0                                         | %          | 0 | % | 0 | % |
| Expected  volatility     |       | 82                                        | %          | 74 | % | 76 | % |
| Risk-free  interest rate |       | 3.9                                       | %          | 3.3 | % | 3.6 | % |
| Expected life            |       | 5 years                                   |       | 5 years |   | 5 years |   |

 

*Stockholders’Rights Plan*

In October 1998, theBoard of Directors of the Company implemented a rights agreement to protectstockholders’ rights in the event of a proposed takeover of the Company. In thecase of a triggering event, each right entitles the Company’s stockholders tobuy, 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, orcommences 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’soption for $0.001 per right. The Company also has the ability to amend therights, subject to certain limitations.

*Employee StockPurchase Plan*

The Company has anEmployee Stock Purchase Plan (“the ESPP”) under which 300,000 shares of theCompany’s common stock are reserved for issuance. Eligible employees mayauthorize payroll deductions of up to 15% of their salary to purchase shares ofthe Company’s common stock at a discount of up to 15% of the market value atcertain plan-defined dates. In fiscal 2005, 2004 and 2003, the shares issuedunder the 

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ESPPwere 59,742, 24,285 and 21,005 shares, respectively. At October 31, 2005,170,328 shares were available for issuance under the ESPP.

*Common StockWarrants and Stock Options Issued to Third Parties*

The Company may grant stockoptions to consultants for services performed. In fiscal 2003, the Companygranted 20,000 options with an exercise price of $8.94 per share to a thirdparty. Fifty percent of such options vested immediately and the remaining fiftypercent vest upon the achievement of certain objectives. The Company recognized$47,000 in compensation expense in fiscal 2003 related to the vested options.

*Common StockRepurchase Program*

In October 2001, theBoard 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 willdepend on subsequent developments and corporate needs, and the repurchase ofshares may be interrupted or discontinued at any time. As of October 31,2005, 19,000 shares had been repurchased by the Company at a cost of $129,000.

*Common Stock*

The Company issued1,427 shares of the Company’s common stock in exchange for shares of NOMOSCorporation that were not tendered previously.

**NOTE 14—INCOME TAXES**

Theprovision (benefit) for income taxes is comprised as follows:

| ** ** | ** ** | **Year Ended October 31,** | ** **                                       |
|------------|------------|-------------------------------------------|--------------------------------------------------|
| ** ** | ** ** | **2005**                                  | ** **                                       | **2004** | ** ** | **2003** | ** ** |
| Current:   |       |                                      |                                             |   |   |   |   |
| Federal    |       |                                      |                                             | $ | (257,000 | ) |   |   |
| State      |       | —                                    |                                             | — |   | — |   |
|       |       | —                                    |                                             | $ | (257,000 | ) | — |   |
| Deferred:  |       | —                                    |                                             | — |   | — |   |
| Federal    |       | —                                    |                                             | — |   | — |   |
| State      |       | —                                    |                                             | — |   | — |   |
|       |       | $                                         |        — |   | $ | (257,000 | ) | $ |        — |   |
|            |            |                                           |                                                  |  |  |  |  |  |  |  |

 

During the year ended October 31, 2002, avaluation allowance of $2.1 million was recorded due to the uncertainty of ourability to realize the future benefit of our deferred tax assets. The Companydid not recognize a benefit for the loss during the year ended October 31,2005, 2004, or 2003. During the year ended October 31, 2004, the Companyrecorded a benefit of $0.3 million for a refund received.

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Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of theCompany’s net deferred tax assets are as follows:

| ** **                                                             | ** ** | **October 31,**                                                                              | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                                                          | ** ** | **2004** | ** ** |
| Deferred tax  assets :                                                 |       |                                                                                              |       |   |   |
| Accrued liabilities                                                    |       | $                                                                                                 | 552,000    |   | $ | 506,000 |   |
| Accrued decommissioning                                                |       | 158,000                                                                                           |       | 138,000 |   |
| Allowance for doubtful accounts and write-offs from  NOMOS acquisition |       | 828,000                                                                                           |       | 742,000 |   |
| Inventory reserve and capitalized inventory                            |       | 2,015,000                                                                                         |       | 1,902,000 |   |
| Other                                                                  |       | 426,000                                                                                           |       | 5,000 |   |
| Depreciation and amortization                                          |       | 1,607,000                                                                                         |       | 155,000 |   |
| Tax credits                                                            |       | 4,814,000                                                                                         |       | 5,050,000 |   |
| Theseus impairment                                                     |       | 2,160,000                                                                                         |       | 2,005,000 |   |
| Net operating loss carryforwards                                       |       | 43,616,000                                                                                        |       | 40,510,000 |   |
|                                                                   |       | 56,176,000                                                                                        |       | 51,013,000 |   |
| Deferred tax  liabilities:                                             |       |                                                                                              |       |   |   |
| Purchased intangible assets                                            |       | (2,248,000                                                                                        | )          | (12,497,000 | ) |
| Other                                                                  |       | (234,000                                                                                          | )          | (313,000 | ) |
|                                                                   |       | (2,482,000                                                                                        | )          | (12,810,000 | ) |
| Net deferred tax assets                                                |       | 53,694,000                                                                                        |       | 38,203,000 |   |
| Less: valuation allowance                                              |       | (53,694,000                                                                                       | )          | (38,203,000 | ) |
|                                                                   |       | $               — |       | $                — |   |
|                                                                        |            |                                                                                                   |            |  |  |  |  |

 

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

At October 31, 2005, the Company had federal netoperating loss carryforwards of approximately $107 million which begin toexpire in 2013, of which $63 million was acquired in the NOMOS acquisition. TheCompany has federal research and experimentation credits of $5 million, whichbegin to expire in 2008, of which $3 million was acquired in the NOMOSacquisition. The Company also has state NOL carryforwards of approximately$80 million which begin to expire in 2008, of which $51 million wasacquired in the NOMOS acquisition. The use of net operating loss carryforwardsis subject to statutory limitations.

Areconciliation of tax expense computed at the U.S. federal statutory rate is asfollows:

| ** **                                      | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal tax  provision at U.S. statutory rate   |       |                                      | (34        | )% |   |   | (34 | )% |   |   | (34 | )% |   |
| State income  taxes, net of federal tax benefit |       |                                      | —     |   |   |   | — |   |   |   | (4 | ) |   |
| Impairment of  Goodwill                         |       |                                      | 10         |   |   |   | — |   |   |   | — |   |   |
| Other                                           |       |                                      | 3          |   |   |   | (1 | ) |   |   | — |   |   |
| Other  non-deductible expenses                  |       |                                      | —     |   |   |   | 9 |   |   |   | — |   |   |
| Tax credits                                     |       |                                      | —     |   |   |   | — |   |   |   | (5 | ) |   |
| Valuation  allowance                            |       |                                      | 21         |   |   |   | 25 |   |   |   | 43 |   |   |
|                                            |       |                                      | —     | % |   |   | (1 | )% |   |   | — | % |   |

 

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**NOTE 15—RETIREMENT PLAN**

The Company has a 401(k) retirementplan that allows eligible employees to contribute up to the statutory annuallimits. Under this plan, the Company makes certain contributions based upon thecompensation of eligible employees and makes additional matching contributionsfor those employees who elect to contribute to the plan. The Company’s expensefor its plan totaled $0.2 million, $0.2 million and $0.2 million, for the yearsended October 31, 2005, 2004, and 2003, respectively.

**NOTE16—COMMITMENTS AND CONTINGENCIES**

*ContractCommitments*

The Company has enteredinto purchase commitments of $0.2 million to suppliers under blanket purchaseorders.

*Lease Commitments*

The Company leases facilities and equipment undernon-cancelable operating lease agreements. Future minimum lease payments aresubject to annual adjustment for increases in the Consumer Price Index. Totalrent expense for the years ended October 31, 2005, 2004 and 2003 was$872,000, $1,034,000 and $705,000, respectively.

Future minimum annual lease payments under alloperating leases are as follows:

| **For the Years Ended October 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                                         |       | $          | 748,000    |       |
| 2007                                                         |       | 510,000    |       |
| 2008                                                         |       | 492,000    |       |
| 2009                                                         |       | 492,000    |       |
| 2010                                                         |       | 492,000    |       |
| Thereafter                                                   |       | 1,271,000  |       |
|                                                         |       | $          | 4,005,000  |       |

 

*EmploymentAgreements*

The Company maintainsemployment agreements with certain key management. The agreements provide forminimum base salaries, eligibility for stock options and performance bonusesand severance payments.

*Litigation*

In December, 2004, an individual plaintiff, StevenWeeks, filed a complaint in the Coos County Circuit Court of the State ofOregon against Bay Area Health District, North American Scientific, Inc.,NOMOS Corporation and Carl Jenson, M.D., alleging the defendants caused Mr. Weeksto receive excessive radiation during the course of his IMRT treatment, as aresult of a manufacturing and/or design defect(s) in the Company’s CORVUSand BAT products. In September, 2005, prior to the case going to trial, theCompany was party to a settlement agreement and the lawsuit is no longer anongoing matter. Under the arrangement, the parties mutually agreed to dismissall claims and counterclaims against each other without admitting anywrongdoing.

In November, 2005, the Company was served with acomplaint filed in U.S. District Court in Hartford, Connecticut by World WideMedical Technologies (WWMT). WWMT’s six count complaint alleges breach of aconfidentiality agreement, fraud, patent infringement, wrongful interferencewith contractual relations, violation of the Connecticut Uniform Trade SecretsAct, and violation of the Connecticut Unfair 

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Practices Act. WWMTalleges that the Company fraudulently obtained WWMT’s confidential informationduring negotiations to purchase WWMT in 2004 and that once the Company acquiredthat information, it purportedly learned that Richard Terwilliger, (our currentVice President of New Product Development) owned certain patent rights and thatwe began trying to inappropriately gain property rights by hiring him away fromWWMT. The Company was served with this matter at approximately the same time Mr. Terwilligerwas served with a state court claim seeking a preliminary injunction preventingTerwilliger from effectively serving as VP of New Product Development at NASI. TheCompany has agreed to defend Mr. Terwilliger. We have removed the statecourt claim against Mr. Terwilliger to federal court and have had thecases joined. We have also answered both complaints and discovery has commencedin each matter, while the parties await a date from the U.S. District Court fora hearing upon an injunction sought by WWMT. The Company denies liability andintends to vigorously defend this case as it progresses.

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

**NOTE17—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)**

The following tablepresents summarized quarterly financial data (in thousands, except per sharedata):

| ** **              | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **Fiscal 2005**         |       |               |       |                |       |               |       |                |       |
| Net sales               |       | $                  | 8,164      |                | $          | 9,141              |       | $                   | 8,060      |   | $ | 6,859 |   |
| Gross profit            |       | 2,930              |       | 3,658               |       | 3,383              |       | 2,197               |       |
| Net loss                |       | (3,649             | )          | (3,928              | )          | (3,302             | )          | (44,635             | )          |
| Diluted loss per share  |       | $                  | (0.22      | )                   | $          | (0.24              | )          | $                   | (0.20      | ) | $ | (2.70 | ) |
| **Fiscal 2004**         |       |               |       |                |       |               |       |                |       |
| Net sales               |       | $                  | 3,363      |                | $          | 3,482              |       | $                   | 8,137      |   | $ | 9,755 |   |
| Gross profit            |       | 1,458              |       | 1,549               |       | 3,336              |       | 2,576               |       |
| Net loss                |       | (3,930             | )          | (3,910              | )          | (20,993            | )          | (7,474              | )          |
| Diluted loss per  share |       | $                  | (0.37      | )                   | $          | (0.38              | )          | $                   | (1.36      | ) | $ | (0.48 | ) |

 

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of DirectorsNorth American Scientific, Inc.Chatsworth, California

Our audit of the consolidated financial statements andinternal control over financial reporting referred to in our reports dated January 10,2006 (included elsewhere in this Annual Report on Form 10-K) alsoincluded the financial statement schedule of North American Scientific, Inc.listed in Item 15(a) of this Form 10-K. This schedule is theresponsibility of North American Scientific, Inc.’s management. Ourresponsibility is to express an opinion based on our audit of the consolidatedfinancial statements.

In our opinion, thefinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, present fairly in allmaterial respects the information set forth therein.

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, CaliforniaJanuary 10, 2006

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**SCHEDULEIINORTH AMERICAN SCIENTIFIC, INC.VALUATION AND QUALIFYING ACCOUNTS**

| ** **                                   | ** ** | ** ** | ** ** | **Additions**                                  | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
|----------------------------------------------|------------|------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|
| **Description**                              | ** ** | ** ** | ** ** | **Balance at  beginning  of period** | ** ** | **Charged  to cost and  expenses** | ** ** | **Charged  to other  accounts** | ** ** | **Deductions** | ** ** | **Balance at  end of  Period** | ** ** |
| **Fiscal 2005**                         |       |       |       |                                           |       |                                         |       |                                 |       |   |   |   |   |
| Allowance for  doubtful accounts             |       | $          | 625,000    |                                           | $          | 709,000                                      |       | $                                    | —     |   |   | $ | — |   |   | $ | 1,334.000 |   |
| Deferred tax  asset valuation allowance      |       | $          | 38,203,000 |                                           | $          |                                         |       | $                                    | 14,902,000 |   |   | $ |   |   |   | $ | 53,105,000 |   |
| **Fiscal  2004**                             |       |       |       |                                           |       |                                         |       |                                 |       |   |   |   |   |
| Allowance for  doubtful accounts             |       | $          | 103,000    |                                           | $          | 522,000                                      |       | $                                    | —     |   |   | $ | — |   |   | $ | 625,000 |   |
| Deferred tax  asset valuation allowance      |       | $          | 9,587,000  |                                           | $          | —                                       |       | $                                    | 28,616,000 |   |   | $ | — |   |   | $ | 38,203,000 |   |
| **Fiscal  2003**                             |       |       |       |                                           |       |                                         |       |                                 |       |   |   |   |   |
| Allowance for  doubtful accounts and returns |       | $          | 450,000    |                                           | $          | 65,000                                       |       | $                                    | 11,000     |   |   | $ | 423,000 |   |   | $ | 103,000 |   |
| Deferred tax asset  valuation allowance      |       | $          | 5,098,000  |                                           | $          | —                                       |       | $                                    | 4,489,000  |   |   | $ | — |   |   | $ | 9,587,000 |   |
|                                              |            |            |            |                                                |            |                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                       |   | NORTH AMERICAN SCIENTIFIC, INC. |
|-----------------------|--------|--------------------------------------|
|                  |   |                                 |   | /s/ L. MICHAEL CUTRER |
| January 17, 2006 |   | By:                                  |   | L. Michael Cutrer *President and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedby the following persons on behalf of the Registrant in the capacities and onthe dates indicated.

|                               | **Signature** | ** **                                                                        | ** ** |                       | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------------|---------------|-----------------------------------------------------------------------------------|------------|-----------------------|-----------|------------|------------|--|----------|------------|
| /s/ IRWIN J. GRUVERMAN        |          |                                                                              |       |                  |
| Irwin J. Gruverman            |          | Chairman of the Board of  Directors                                               |       | January 17, 2006 |
| /s/ L. MICHAEL CUTRER         |          |                                                                              |       |                  |
| L. Michael Cutrer             |          | President, Chief  Executive Officer and Director  (Principal Executive Officer)   |       | January 17, 2006 |
| /s/ JAMES W. KLINGLER         |          |                                                                              |       |                  |
| James W. Klingler             |          | Senior Vice President  and Chief Financial Officer  (Principal Financial Officer) |       | January 17, 2006 |
| /s/ DONALD E. HORACEK         |          |                                                                              |       |                  |
| Donald E. Horacek             |          | Corporate Controller  (Principal Accounting Officer)                              |       | January 17, 2006 |
| /s/ JOHN A. FRIEDE            |          |                                                                              |       |                  |
| John A. Friede                |          | Director                                                                          |       | January 17, 2006 |
| /s/ JONATHAN P. GERTLER       |          |                                                                              |       |                  |
| Dr. Jonathan P.  Gertler |          | Director                                                                          |       | January 17, 2006 |
| /s/ JOHN M. SABIN             |          |                                                                              |       |                  |
| John M. Sabin                 |          | Director                                                                          |       | January 17, 2006 |
| /s/ RICHARD A. SANDBERG       |          |                                                                              |       |                  |
| Richard A. Sandberg           |          | Director                                                                          |       | January 17, 2006 |
| /s/ GARY N. WILNER            |          |                                                                              |       |                  |
| Dr. Gary N. Wilner       |          | Director                                                                          |       | January 17, 2006 |
| /s/ NANCY W. WYSENSKI         |          |                                                                              |       |                  |
| Nancy W. Wysenski             |          | Director                                                                          |       | January 17, 2006 |

 

 

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