**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-K

**x  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended October 31, 2004**

**CommissionFile Number 0-26670**

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NORTH AMERICANSCIENTIFIC, INC.

(Exact name of Registrantas specified in its charter)
| **Delaware**                                                     | ** ** | **51-0366422**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

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

(Address of 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:

**CommonStock, par value $0.01 per share**

(Title of class)

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Indicate by check mark whetherthe 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 No

The aggregate market valueof voting stock held by non-affiliates of the Registrant was approximately$83.2 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 February 28, 2005,approximately 16,195,692 shares of the Registrant’s Common Stock, $.01 parvalue per share, were outstanding.

 

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**NORTH AMERICANSCIENTIFIC, INC.**

**Table of Contents**

**Form 10-K**
|                   | ** ** | ** **                                                                                                          | ** ** | ** ** | **Page** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| **PART I**   |       |                                                                                                                |       |       |
| Item 1.           |       | Business                                                                                                            |       | 3          |
| Item 2.           |       | Properties                                                                                                          |       | 39         |
| Item  3.          |       | Legal  Proceedings                                                                                                  |       | 39         |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                 |       | 40         |
| **PART II**  |       |                                                                                                                |       |       |
| Item  5.          |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 41         |
| Item  6.          |       | Selected  Consolidated Financial Data                                                                               |       | 42         |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 43         |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk.                                                        |       | 54         |
| Item 8.           |       | Consolidated Financial Statements and Supplementary Data                                                            |       | 54         |
| Item  9.          |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 54         |
| Item 9A.          |       | Controls and Procedures                                                                                             |       | 54         |
| Item  9B.         |       | Other  Information                                                                                                  |       | 56         |
| **PART III** |       |                                                                                                                |       |       |
| Item 10.          |       | Directors and Executive  Officers of the Company                                                                    |       | 57         |
| Item 11.          |       | Executive Compensation                                                                                              |       | 61         |
| Item 12.          |       | Security Ownership of  Certain Beneficial Owners and Management                                                     |       | 65         |
| Item 13.          |       | Certain Relationships and  Related Transactions                                                                     |       | 67         |
| Item 14.          |       | Principal Accounting Fees  and Services                                                                             |       | 68         |
| **PART IV**  |       |                                                                                                                |       |       |
| Item 15.          |       | Exhibits, Financial Statement Schedules                                                                             |       | 69         |
|              |       | Signatures                                                                                                          |       | 101        |

 

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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 innovative products for radiation therapytreatment, including brachytherapy seeds, and planning and delivery technologyfor intensity modulated radiation therapy (“IMRT”) and image guided radiationtherapy (“IGRT”). In addition, since 1990, we have applied our expertise inradioisotopes to develop and market products for other medical, 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 disease 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 forcommercial use in 1998, and introduced our Palladium-103 seed thefollowing year, thus becoming the first company to manufacture both iodine andpalladium brachytherapy seeds. These products were initially marketed under anexclusive third party distribution agreement, which terminated in January 2003.We transitioned to direct sales and marketing of our brachytherapy productsduring fiscal year 2003, and currently market and sell our Iodine-125seeds under the trade name Prospera® I-125, and our Palladium-103seeds under the 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 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 of cancersat hospitals and free-standing radiation oncology centers. As a result of theacquisition, we are now able to offer a broader complement of products andservices to address the needs of the radiation oncologist. (See Note 4 of Notesto Consolidated Financial Statements)

In October 2000, weacquired Theseus Imaging Corporation (“Theseus”), a company engaged in theresearch and development of a proprietary radiopharmaceutical agent (referredto as “Hynic-Annexin V”). Over the following four years, we made substantialinvestments in Theseus for 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 

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regulatoryapprovals of Hynic-Annexin V would not occur earlier than 2007 and that theadditional costs would be substantial. With limited capital resources and theadditional need to fund product development of our recently acquired IMRT andIGRT products, we explored alternative options for Theseus. Discussions withpotential financial and strategic partners ceased in August 2004. As adirect result we shut-down the operation in September 2004 (See Note 3 of Notesto Consolidated Financial Statements).

**IMRT AND 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 nearby healthytissue. As a result, IMRT provides the potential for improved outcomes by moreeffectively treating tumors, and a better quality of life for patients byavoiding 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 believe thatour inverse planning approach results in better treatment plans and reduces theamount of time required for doctors to create these plans when 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 itoffers a number of advantages over competing multileaf collimators, includingthe ability to deliver radiation from a significantly greater number of angles.MIMiC is primarily sold as a component of our integrated PEACOCK system, but isalso 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 product, BAT, isused in conjunction with external beam radiation to locate targets, includingtumors and surrounding organs that may move inside the patient’s body from onetreatment session to the next. Customers use PEREGRINE, our radiation dosecalculation and simulation software product that uses advanced statisticaltechniques to simulate the path of radiation particles as they are absorbed bythe patient’s body. BAT and PEREGRINE are designed to be used in connectionwith both IMRT and conventional radiation 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 that was 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 the patient.A typical multileaf collimator has an average radiation leakage of between 1%and 3%. The actual leakage for MIMiC is typically less than 1%. Although MIMiCcan be 

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used on many linearaccelerators that come already equipped with a multi-leaf collimator, theprimary market for MIMiC is for the older linear accelerators that do not havea 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. Treatments that requiredaily localization of this kind include those for cancers of the prostate,female pelvis, pancreas, breast and liver. The conventional approach to thisproblem is to include in the treatment plan a margin of error, which inevitablyleads to exposing healthy tissue to radiation. BAT reduces this margin of errorfrom the currently accepted standard practice of within 2 centimeters to within2 millimeters. BAT determines the location of the target by means of either ajointed, mechanical arm, at the end of which is an ultrasound probe, or by acamera mounted in the treatment room which tracks passive markers placed on theultrasound probe. Using a touch-screen monitor and ultrasound images, the practitionermaneuvers the probe to the exact location of the tumor. BAT then calculates theposition of the target relative to the delivery point of the radiation beam.BAT can be used in conjunction with IMRT as well as conventional radiationtreatment. Currently, BAT is predominantly used by hospitals and clinics intreating prostate cancer.

*PEREGRINE.*   Ourradiation dosage calculation software product, PEREGRINE, is used to estimatethe amount and distribution of the radiation dose in three dimensions that wouldbe absorbed by a patient from a prescribed plan. The prevailing method of dosecalculation is to estimate the absorption of radiation by the patient’s bodybased on the absorption of radiation by water. This method can be reasonablyaccurate for areas of homogeneous tissue. However, most tumors are surroundedby heterogeneous tissue structures, such as bones, air sacs or other variantsin density, each of which absorbs radiation at a different rate. PEREGRINE isdesigned to improve the accuracy of both IMRT and conventional radiationtreatment 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.

We have made initial sales of PEREGRINE to earlyadopters who are currently using it for laboratory testing and researchpurposes. These early adopters are assisting us in completing the final stagesof 

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development of thisproduct. Currently, PEREGRINE can only be used in conjunction with some linearaccelerators and treatment planning systems. We are developing additionalupgrades for PEREGRINE that we believe, when completed, will allow PEREGRINE tooperate with a broader range of linear accelerators, energy levels andradiation planning systems. These upgrades are designed primarily to improvethe installation and commissioning process, as opposed to the underlyingsoftware function, so as to make it easier for PEREGRINE customers to validatethe 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 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 thehead and neck. We license some of the technology underlying our NOMOS CRANEfamily of products from the University of Texas.

·       *Other SystemAccessories.  *We offer several other system accessories thatassist in the positioning and verification of patient alignment. Our TALON®product is a device used to position the head during radiation therapy andradiosurgery, which permits precise repositioning across multiple treatmentdays. Our radiotherapy table adapter and our computed tomography table adapterare adjustable, rigid structures that attach to a variety of treatment tablesand imaging couches to provide a stable and consistent reference base forpatient positioning. We also offer our Target Box, which is a device thatconnects to our radiotherapy table adapter and provides multiple means ofachieving precise patient alignment, including the use of laser positioning. Wealso offer a verification cassette that stores film and which can be used toverify the accuracy of patient treatment dosages. Although sales of theseaccessory products currently represent a small portion of our revenues, webelieve that they enhance our core product offerings and present additionalmarket opportunities for us.

**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 

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early-stage prostatecancer. The PSA test, which is recommended for men over the age of 50,determines the amount of prostate specific antigen contained in an examinee’sblood. Elevated levels of PSA can result from benign symptoms such asinflammation but can also be indicative of the presence of cancerous cells inthe prostate. The emergence of PSA blood testing has greatly improvedphysicians’ ability to diagnose and treat 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 severaltherapies available 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 primary therapies, which include RP and EBRT. Webelieve that the increasing use of this technique reflects the growingacceptance in the medical community and among patients.

*Our Brachytherapy Products*

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. 

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Because some physiciansmay prefer iodine seeds and others prefer palladium seeds, we believe that itis advantageous 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 ultra sound 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.

**Other Competing Prostate Cancer Treatment Modalities**

*Radical Prostatectomy*

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.

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 

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addressthese side effects, but these techniques require a high degree of surgicalskill. RP is typically more expensive than other common treatment modalities.

*External Beam Radiation 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 travels throughthe body, affecting both healthy and cancerous tissue alike, other side effectsare associated with EBRT. For instance, rectal wall damage caused by theradiation beam is a noted negative side effect. Data suggests that between 30%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 the eye. We directly market this product line toophthalmologists and medical physicists. The number of cases occurring annuallywill limit Prospera® ocular melanoma sales for this application, but we view itas a natural extension of our brachytherapy business and as a service to theoncology community.

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**OTHER PRODUCTS**

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

**Radiation Calibration and Reference Source Products**

Radioactivity is a natural physical property. Eachradioisotope emits energy characteristics to that specific 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 calibration programs.We supply many of the required types of calibration standards.

**Standards for 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 industrialuses, ranging from measuring the thickness of materials and gauging fluidlevels to electronics 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 customersinclude federal and state governmental agencies, leading medical equipmentmanufacturers, nuclear utilities and private organizations. Our radiationsources are also sold through a select group of representatives anddistributors in North America and Europe. We support our products through afull product catalog, advertising, telemarketing and trade shows, and engage indirect selling to end users as well as to equipment manufacturers for inclusionin 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 |
| 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                                                                                                                                                                                                                                                                                                                                                                                |       | January 21,  1997 until May 17, 2014       |

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|                                                                    |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                               |
|--------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|
| 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 lays 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         |
| 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 |

 

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*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    |
| 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 |

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| 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 a outer housing that contains a  substrate upon which a radioactive pattern is deposited. The radioactive  deposit may be placed on the surface of the substrate in the form of a  deposited solution and may be fixed to the surface of the substrate by, for  example, a binding agent and/or a sealing layer. The deposited solution may also  include a colorant to visually indicate the activity distribution of the  radioactive deposit. |   | September 7, 2004 until June 12, 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 January 7,2005, we had 6 additional United States pending patent applications. We havealso been issued 11 foreign patents and have 3 foreign patent applicationsstill pending.

**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, 

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renegotiated or madenon-exclusive if we fail to meet specified performance obligations includinggross revenues from the sale of our PEREGRINE product of at least$4 million per calendar year. In addition, the United States governmentretains a royalty-free license to the technology covered by this agreement. In June 2002,we negotiated an amendment to this license agreement that, among other things,eliminated the minimum annual royalty payments and the gross revenueperformance obligation until March 2005. We are currently in the processof renegotiating this license.

·       *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. In addition, the license will terminate upon 30 daysnotice from the Board of Regents if we fail to make any scheduled royaltypayments. Under this license agreement, we are required to pay a royalty of$6,000 for each NOMOS CRANE sold in conjunction with a PEACOCK, with aggregateminimum 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, whichallows us to develop beam characterization models for generic accelerators, isa key component 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 Eleckta A.B. (“Eleckta”) arethe other major manufacturers of linear accelerators, each of which offers itsown multileaf collimators that compete with our MIMiC and PEACOCK products.

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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 hasdeveloped and obtained FDA 510(k) clearance for a product that incorporatesIMRT delivery and imaging into one unit, including the radiation source. Theyclaim that their product will be able to verify the precise position of thepatient’s tumor before each treatment, much like our fixation devices and ourBAT product. To our knowledge, initial sales have been made to a fewinstitutions and there is 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 traditional therapies, we maylose market share for our brachytherapy seeds or may find that our products arerendered non-competitive or obsolete by such market shifts and technologicaldevelopments.

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 manufacturedby a third party, and Theragenics Corporation, which manufacturers Palladium-103seeds and sells both Palladium-103 and Iodine-125 brachytherapyseeds. Several additional 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, government researchfacilities or private research laboratories could render our products obsolete.Therefore, additional companies with substantially greater financial resourcesthan we have, as well as more extensive experience in research and development,the regulatory approval process and manufacturing and marketing, may developtreatments and products that are similar to our products.

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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. Thedomestic sales staff currently consists of twenty full-time dedicated regionalsales representatives, business development managers, product specialists andzone managers.

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.

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.

**GOVERNMENTREGULATION**

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 States Regulatory 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 

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requirementscan result in civil penalties, recall, injunction or seizure of products,refusal of the government to approve or clear product approval applications,disqualification from sponsoring, or conducting clinical investigations,prevent us from entering into government supply contracts, withdrawal ofpreviously approved applications and criminal prosecution.

Approval of new medicaldevices is a lengthy procedure and can take a number of years and theexpenditure of significant resources. There is a shorter FDA review andclearance process, the premarket notification process, or the 510(k) process,whereby a company can market certain medical devices that can be shown to besubstantially equivalent to other legally marketed devices. We have been able toachieve market clearance for some of our medical device products using the510(k) process.

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

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

As a registered medicaldevice manufacturer with the FDA, we are subject to inspection to ensurecompliance with their current Good Manufacturing Practices, or cGMP. Theseregulations require that we and any of our contract manufacturers design,manufacture and service products and maintain documents in a prescribed mannerwith respect to manufacturing, testing, distribution, storage, design controland service activities. Modifications or enhancements that could significantlyaffect the safety or effectiveness of a device or that constitute a majorchange to the intended use of the device require a new 510(k) notice for anyproduct modification. We may be prohibited from marketing the modified productuntil the 510(k) notice is cleared by the FDA.

The Medical DeviceReporting regulation requires that we provide information to the FDA on deathsor serious injuries alleged to be associated with the use of our devices, aswell as product malfunctions that are likely to cause or contribute to death orserious injury if the malfunction were to recur. Labeling and promotionalactivities are regulated by the FDA and, in some circumstances, by the FederalTrade Commission.

As a medical devicemanufacturer, we are also subject to laws and regulations administered bygovernmental entities at the federal, state and local levels. For example, ourfacilities are licensed as medical product 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.

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*Foreign Regulatory Process*

Our products are alsoregulated outside the United States as medical devices by foreign governmentalagencies, similar to the FDA, and are subject to regulatory requirements,similar to the FDA’s, in the foreign countries in which we plan to sell ourproducts.

We hold a QualityAssurance certificate to ISO/EN 13485, the European Union standard for medicalproduct manufacturers. This certificate is a prerequisite to applying the CEMark to our products. The CE Mark is required on all medical products sold andused in the European Union. It is also recognized by many countries outside theEuropean Union, such as Australia. The CE Mark indicates that a product wasdesigned, released, produced, sold and serviced using a system that complieswith the EU Council Directive 93/42/ECC for medical devices and EU Council90/385/ECC for active implantable medical devices. All of our radiation therapyproducts are currently eligible to bear the CE marking.

Canada has a similardevice classification system to the FDA, although its system contains fourclasses (Class I through Class IV). Health Canada has granted us Class IIlicenses to distribute our BAT, CORVUS and PEREGRINE products throughoutCanada. In 2003, our BAT product was re-classified in Canada as a Class IIIdevice. Our PROSPERA brachytherapy products have been granted a class IIIlicense. The Quality System for each facility is audited annually forcompliance to the Canadian Medical Device Regulations. This allows us to sellour 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.

**MANUFACTURING**

**IMRT/IGRT**

We purchase all majorcomponents for our IMRT and IGRT products from third-party suppliers. Weperform system design, final product assembly, testing and packaging at ourfacility in the Pittsburgh, Pennsylvania metropolitan area. We are required tomeet and adhere to applicable requirements of the United States and foreignregulatory agencies, including the Quality System Regulation of the FDA, theMedical Device Directive of the European Union, and the Medical DeviceRegulations of Canada.

We generally produce ourproducts based on firm orders and on anticipated additional orders that we arerelatively confident will be obtained. Lead times for materials and componentsrequired by us vary significantly and depend on factors such as the specificsupplier and the availability and demand for the applicable components.

Currently, we utilizesingle source suppliers for a number of significant components for each of ourmajor products. Of the ten suppliers representing our highest dollar volume in2004, six represent sole source suppliers. Other suppliers exist for each ofour components provided by single source suppliers. We have not in the pastexperienced any significant disruption in product availability because ofsingle source suppliers, and we have in the past successfully transitioned fromsingle source suppliers to new suppliers without significant disruptions inproduction. It is likely we will continue to change suppliers in the future asour products change and we look for ways to improve functionality and lowercosts.

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.

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**Radiation Sources**

We manufacture all of ourbrachytherapy seed products at two facilities in the Los Angeles, Californiametropolitan area. We manufacture certain of our brachytherapy accessoryproducts, including our steppers and stabilizers, in our Seattle facility, andwe manufacture our calibration and reference source products in one of our LosAngeles facilities. The equipment used to manufacture our products is purchasedfrom a variety of suppliers. Additionally, we have developed an in-housecapability to both build and repair certain equipment used in the manufacturingof our products. We consider our manufacturing equipment to be in goodcondition.

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 totaled $4.2 million, $0.5 million and $0.5 million during the yearsended October 31, 2004, 2003 and 2002, respectively. Costs associated withthe development of Hynic-Annexin V the principal product candidate of ourdiscontinued operation totaled $5.8 million, $6.9 million and $8.5 millionduring the years ended October 31, 2004, 2003 and 2002, respectively.Development costs of IMRT and IGRT were $3.5 million in 2004. Our R&Dspending reflects our belief that to maintain our competitive position in amarket characterized by rapid rates of technological advancement, we mustcontinue to invest significant resources in new product development, as well ascontinue to enhance existing products. We expect that most of the R&Dspending in the future will be focused on our IMRT and IGRT products.

**EMPLOYEES**

As of October 31,2004, we had a total of 192 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 withoutcharge copies of our Proxy Statement, Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,any amendments to those reports filed by us with the SEC and any other of ourreports filed with or furnished to the SEC on or through our website, *www.nasmedical.com*, as soon as reasonably practicable afterthey are filed. You may request a paper copy of materials we file with the SECby calling us at 1-818-734-8600.

You also may read and copymaterials we file with the SEC at the SEC’s Public Reference Room at 450Fifth Street, NW, Washington, DC 20549. You may obtain information on theoperation of the Public 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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**Risk Factors**

**All of our productlines are subject to intense competition. Many of 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 radiationtherapy, or IMRT, and image-guided radiation therapy, or IGRT, product lines,including CORVUS, PEACOCK and BAT, will generate a substantial part of ourrevenues for the foreseeable future. We will need to continue to developenhancements to these products and improvements on our core technologies inorder to compete effectively. Rapid change and technological innovationcharacterize the marketplace for medical products, and our competitors coulddevelop technologies that are superior to our products or that render suchproducts obsolete. We anticipate that expenditures for research and developmentwill continue to be significant. The domestic and foreign markets for radiationtherapy equipment are highly competitive. Many of our competitors and potentialcompetitors have substantial installed bases of products and significantlygreater financial, research and development, marketing and other resources thanwe do. Competition may increase as emerging and established companies enter thefield. In addition, the marketplace could conclude that the tasks our productswere designed to perform are no longer elements of a generally acceptedtreatment regimen. This could result in us having to reduce production volumesor discontinue production of one or more IMRT/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 ofstereotactic positioning accessories and planning software, allowing Varian todirectly compete against BAT.

We also compete with Siemens and Eleckta, each ofwhich manufactures one or more multileaf collimators that compete with MIMiCand, 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 of conventional radiation therapyproducts many of which are devoting substantial resources to promoting theirproducts.

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 wellas distribute Palladium-103 seeds manufactured by a third party; Mentor,which manufactures and sells Iodine-125 brachytherapy seeds and currentlydistributes third party manufactured Palladium-103 brachytherapy seeds;and Theragenics Corporation, which manufacturers Palladium-103 seeds andsells Palladium-103 and Iodine-125 brachytherapy seeds directly andits Palladium-103 brachytherapy seeds through marketing relationshipswith third parties. Several additional companies currently sell brachytherapyseeds as well.

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.

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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.Developments by any of these or other companies or advances by medicalresearchers at universities, government facilities or private laboratoriescould render our products obsolete. Moreover, companies with substantiallygreater financial resources, as well as more extensive experience in researchand development, the regulatory approval process, manufacturing and marketing,may be in a better position to seize market opportunities created bytechnological advances in our industry.

**We are highlydependent on our direct sales organization, which is small compared to many ofour competitors and which has relatively limited marketing and sales experiencein brachytherapy and IMRT/IGRT products. Any failure to build and manage ourdirect sales organization could negatively affect our revenues.**

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.

Until its termination in January 2003, we reliedalmost exclusively on our marketing and distribution agreement with a thirdparty for the marketing and sales of our brachytherapy products, includingIodine-125 and Palladium-103 seeds. In connection with thetermination of this agreement, we developed an internal sales and marketingforce to directly market and sell these products. Additionally, we added ninefull-time sales representatives to the field in connection with the May 2004acquisition of NOMOS Corporation, who have never previously sold brachytherapyproducts. In relation to our competitors in the brachytherapy market, we havelimited experience marketing and selling our brachytherapy products, which infiscal 2004 accounted for approximately 52% of our revenue.

Similarly, while we have been able to maintain our keyexecutives in our sales and marketing management team, we have experienced someturnover in our domestic direct sales force following our acquisition of NOMOSCorporation, which has resulted in a relative lack of experience in sellingIMRT/IGRT products.

As a result of ourrelatively small sales force and our comparative lack of marketing and salesexperience in our domestic direct sales force, there can be no assurance thatour direct sales and marketing efforts will be successful. If we are notsuccessful in our direct sales and marketing, our sales revenue and results ofoperations are likely to be materially adversely affected.

**If we are unable tocomplete current developments or to develop new enhancements and newgenerations 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.

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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 could reduceor prevent us from increasing our operating margins.

In addition, although wehave received FDA 510(k) clearance for our PEREGRINE dose calculation softwareproduct, we are still in the process of finalizing the development of PEREGRINEin order to allow it to be used clinically to treat patients and to enable itto be used with a broader range of linear accelerators, energy levels withthose linear accelerators, and treatment planning systems without the need forextensive commissioning and testing. These final developments are designedprimarily to enhance the installation process, as opposed to the underlyingsoftware function. We have reviewed these changes and do not believe thesechanges will require any new 510(k) clearances from the FDA. However, the FDAcould disagree and require the submission of a 510(k) application. We mayencounter problems with the performance or implementation of thesedevelopments. An inability to complete these developments on a timely basiscould adversely affect our relationship with the early purchasers of PEREGRINE,and could 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.

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

Our IMRT/IGRT productsface competition from companies that sell conventional radiation therapyproducts as well as from companies that are developing, marketing andmanufacturing alternative therapies to radiation for the treatment of tumorouscancers. It is possible that advances in the pharmaceutical, bio-medical orgene-therapy fields could render some or all radiation therapies, whetherconventional or based on IMRT/IGRT and brachytherapy obsolete. Even incrementaladvances in competing technologies could result in the rejection of ourproducts as a part of a generally accepted diagnostic or treatment regimen. Ifalternative therapies are proven or perceived to offer treatment options thatare superior or more cost effective than the treatments our products provide,physician adoption of our products could be negatively affected and ourrevenues from our products could decline.

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**Doctors andhospitals may not adopt our products and technologies at levels sufficient tosustain 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, potential customers who decide toutilize IMRT/IGRT may choose to purchase competitors’ products. Importantfactors that will affect our ability to attain broad market acceptance of ourIMRT/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.

**Currently, ourproducts 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 the relativebenefits of IMRT treatments other than for limited types of cancer such asprostate cancer, where mortality is closely linked to recurrence of the localtumor. They point out that in many types of cancer, such as breast cancer,mortality is usually a result of metastasis, meaning the expansion of thecancer 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.

**One of our primarymarkets in our IMRT product line is the market for upgrading linearaccelerators that do not have IMRT capabilities to provide them with IMRTcapabilities. This market will shrink over time, thereby limiting our potentialrevenues 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 

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capabilitiesto enable them to deliver IMRT treatments. Most of these linear acceleratorsare older models. Selling CORVUS to customers with newer multileafcollimator-equipped linear accelerators can be difficult because these linearaccelerators may be offered with IMRT planning software at little or noadditional cost. Accordingly, to make a sale, we often must convince thesepotential customers that CORVUS is sufficiently superior to the IMRT orconventional radiation treatment planning software products offered by themanufacturer to justify the additional costs of purchase. Selling PEACOCK andMIMiC to potential customers with newer multileaf collimator-equipped linearaccelerators is even more difficult because, in addition to the incrementalcosts of purchase, these potential customers may be reluctant to incur theadditional effort required to retrofit the factory installed multileafcollimator with MIMiC. Over time, if more institutions purchase new linearaccelerators that are IMRT-equipped or upgrade their older accelerators withtechnology 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 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.**

Our IMRT products are designed to be used in conjunctionwith most linear accelerators currently in use. Our products are not currentlycompatible with all linear accelerators. However, when manufacturers modify thedesign or functionality of their machines, we are often required to modify ourproducts to ensure compatibility. Future changes cannot be predicted and, inthe case of 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. We could be required to obtainadditional regulatory clearances for any modifications of our products. It isalso possible that, despite our best efforts, we might be unable to make ourproducts compatible with new or modified versions of linear accelerators ormight only be able to do so at a prohibitive expense.

Our PEREGRINE product isnot currently fully compatible with the majority of the linear accelerators inthe United States and worldwide markets. We cannot assure you that we will besuccessful in making PEREGRINE compatible with these linear accelerators, andany future changes in the design of any linear accelerators could require us toredesign the functionality of PEREGRINE. We may not be successful at any sucheffort.

**Our future growthdepends, in part, on our ability to penetrate foreign markets, particularly inAsia and Europe.  However, we mayencounter difficulties in gaining market acceptance of our products in foreignmarkets, where we have limited experience marketing, servicing and distributingour products, and where we will be subject to additional regulatory burdens andother 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 2004, less than 10% of ourproduct revenues and less than 10% of our total revenues were derived fromsales to 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;

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

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·       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.

**If governmental andprivate third-party payors do not reimburse healthcare providers at favorablerates for use of our products, the revenues attributed to our products coulddecline.**

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. For example, we havepreviouisly 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.

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 such legislationor regulation would have on our business, financial condition or results ofoperations.

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 andbrachytherapy services. Changes in Medicare reimbursement policies or amountsaffecting hospitals and freestanding clinics could negatively affect marketdemand for our products.

With respect to brachytherapy in particular, medicarereimbursement amounts for seeding are currently significantly less than forradical prostatectomy, or RP. Although seeding generally requires less 

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physician time than RP,lower reimbursement amounts, when combined with physician familiarity with RP,may create disincentives for urologists to perform 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 our productsto 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.

**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 significantly declined. If the decline continues, it couldaffect our ability to fund future operations.**

We have incurred substantial net losses in each of thelast three fiscal years. As reflected in our financial statements, we haveexperienced net losses of $36.3 million, $9.4 million, and $5.2 million in ourfiscal years ended October 31, 2004, 2003 and 2002, 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 $15.0 million at October 31, 2004. The decrease was primarilyattributed to net cash payments of $13.2 million related to our acquisition ofNOMOS, $14.9 million used in continuing operating activities, $8.4  million used in the discontinued Theseusoperations, and $1.3 million used for capital expenditures, partially offset by$3.7 million in cash received from the exercise of stock options and ouremployee stock purchase plan.

The negative cash flow we have sustained has reducedour working capital, which in turn, could impact our ability to fund futureoperations. Management has and continues to take actions to improve our results.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 financing favorable to our stockholders or us, economiccycles, market acceptance of our products, competitors’ responses to ourproducts, the intensity of competition in our markets and the level of demandfor our products.

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

·       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;

·       Ourability to sell and market our products;

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·       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 willprobably need to raise additional capital, reduce operations or take othersteps to achieve positive cash flow. Although we cannot assure you that we willbe successful in these efforts or that any or some of these factors will notnegatively impact us, we believe that we have sufficient cash flow to sustainus at least through the fiscal year ended October 31, 2005.

**As part of ourbusiness strategy, we intend to pursue transactions that may cause us toexperience significant charges to earnings that may adversely affect our stockprice 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, we may choose to enter into such transactions. Wemay not be able to successfully integrate newly acquired organizations,products or technologies into our business and the process could be expensiveand time consuming and may strain our resources. Depending upon the nature ofany transaction, we may experience a charge to earnings which could bematerial.

**We may requireadditional capital in the future and we may be unable to obtain capital onfavorable terms or at all.**

Although, we expect ourexisting capital resources and future operating cash flows to be sufficient forthe foreseeable future, continued operating losses could significantly reduceour remaining cash, cash equivalents and investments in marketable securities. Furthermore,we may require further capital for the purchase of complementary businesses,technologies or products. Our capital requirements will depend on numerousfactors, including the time and cost involved in expanding production capacityand the cost involved in protecting our proprietary rights and the time andexpense involved in completing product development programs.

**Operating resultsfor 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 

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reduction in the number ofprocedures performed during summer months, which could affect our third fiscalquarter results;

·       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; and

·       Acquisitions that result inin-process research and development expenses may be charged fully in anindividual quarter.

**Risk ofNon-Compliance with Section 404 of the Sarbanes-Oxley Act of 2002.**

Beginning in fiscal 2005, Section 404 of theSarbanes-Oxley Act of 2002 (the “Act”) will require that we include an internalcontrol report of management in our Annual Report on Form 10-K.  The internal control report must contain (i) astatement of management’s responsibility for establishing and maintainingadequate internal control over financial reporting, (ii) a statementidentifying the framework used by management to conduct the required evaluationof the effectiveness of our internal control over financial reporting, (iii)management’s assessment of the effectiveness of our internal control overfinancial reporting as of the end of our most recent fiscal year, including astatement as to whether or not internal control over financial reporting iseffective, and (iv) a statement that our independent registered publicaccounting firm has an attestation report on management’s assessment ofinternal control over financial reporting.

Management acknowledges its responsibility forinternal controls over financial reporting and seeks to continually improvethose controls. In addition, in order to achieve compliance with Section 404 ofthe Act within the prescribed period, beginning in early fiscal 2005, theCompany will engage in a process to document and evaluate its internal controlsover financial reporting. In this regard, management will dedicate internalresources, engage outside consultants and adopt a detailed work plan to (i)assess and document the adequacy of internal controls over financial reporting,(ii) take steps to improve control processes where appropriate, (iii) validatethrough testing that controls are functioning as documented and (iv) implementa continuous reporting and improvement process for internal controls overfinancial reporting. The Company believes the process commencing in earlyfiscal 2005 for documenting, evaluating and monitoring its internal controlsover financial reporting will be consistent with the objectives of Section 404of the Act.

As noted in Item 9A of this report on Form 10-K,management has concluded that there existed two material weaknesses in ourinternal control over financial reporting as of October 31, 2004. There are noassurances that we will not discover additional deficiencies in our internalcontrols as we implement new documentation and test procedures to comply withthe new Section 404 reporting requirement. If we discover deficiencies or are unable to complete the work necessaryto properly evaluate our internal controls over financial reporting, there is arisk that management and or our independent registered public accounting firmmay not be able to conclude at October 31, 2005, that our internal controlsover financial reporting are effective.

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**Wemay be unable to successfully integrate NOMOS’ operations with our operations.**

Theacquisition of NOMOS in May 2004 has required the integration of NOMOSwith our Company. As the integration continues, it remains a complex, costlyand time-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.

**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 finalproduct assembly of our IMRT/IGRT products, we purchase all major componentsfor those products from third-party suppliers. We currently rely on a singlesource of supply for several key materials and components, the most importantof which are the tungsten leaves used in our MIMiC multi-leaf collimator andall major components used in our BAT targeting system. We also obtain variousother components for our IMRT/IGRT products from a limited number of sources.We cannot produce IMRT/IGRT products without these components. In the event ofany extended or recurring interruption in supply, or if any of the significantcomponents to our IMRT/IGRT products become obsolete or are no longermanufactured, we could be required to redesign our products or seek alternativesupply sources, which could significantly impair our ability to sell theseproducts. In some cases, we expect that it would take several months, orlonger, for a new supplier to begin providing components to specification. Inaddition, we could be required to make a new or supplemental filing with theFDA and other applicable regulatory authorities and might have to obtainclearance or other regulatory approvals prior to marketing a product containingnew components. We may be unable to obtain the necessary regulatory clearancesor approvals on a timely basis, if at all, which could cause our revenues todecline and our business to suffer.

We also depend upon a limited number of outsideunaffiliated suppliers for our radioisotopes. Our principal suppliers areNordion International, Inc. and a company in Russia. We also utilize othercommercial isotope manufacturers located in the United States and overseas. Todate, we have been able to obtain the required radioisotopes for our productswithout any significant delays or interruptions. Currently, we rely exclusivelyupon Nordion International for our supply of the Palladium-103 isotope;if Nordion International ceases to supply isotopes in sufficient quantity tomeet our needs, there may not be adequate alternative sources of supply. If welose any of these suppliers (including any single-source 

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supplier),we would be required to find and enter into supply arrangements with one ormore replacement suppliers. Obtaining alternative sources of supply could involvesignificant delays and other costs and these supply sources may not beavailable to us on reasonable terms or at all. Any disruption of supplies coulddelay delivery of our products that use radioisotopes, which could adverselyaffect our business and financial results and could result in lost or deferredsales.

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

Our success is materiallydependent on our key employees, and, in particular, the continued services ofL. Michael Cutrer, our president and chief executive officer, James W.Klingler, our chief financial officer and John W. Manzetti, who serves asthe president of the NOMOS Radiation Oncology Division. We carry key employeeinsurance for Mr. Cutrer in the amount of $2.5 million. Our futurebusiness and financial results could be adversely affected if the services ofMessrs Cutrer, Klingler and Manzetti or other key employees cease to beavailable. To date, we have not had any significant problems in retaining orattracting key personnel. To our knowledge, none of our key employees have anyplans to retire or leave in the near future.

Our future success andability to grow our business will depend in part on the continued service ofour skilled personnel and our ability to identify, hire and retain additionalqualified personnel. Although some employees are bound by a limitednon-competition agreement that they sign upon employment, few of our employeesare bound by employment contracts, and it is difficult to find qualifiedpersonnel, particularly medical physicists and customer service personnel, whoare willing to travel extensively. We compete for qualified personnel withmedical equipment manufacturers, universities and research institutions.Because the competition for these personnel is intense, costs related tocompensation 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.

**Wedepend partially on our relationships with distributors and other industryparticipants to market our IMRT/IGRT and radiation source products, and ifthese relationships are discontinued or if we are unable to develop newrelationships, our revenues could decline.**

We currently rely, andwill continue to rely, upon collaborative relationships with agents anddistributors and other industry participants to maintain IMRT/IGRT marketaccess to potential customers, particularly in Asia and Europe, and ourbusiness strategy includes entering into more of these relationships in thefuture. Some of the entities with whom we have relationships to help market anddistribute our products also produce or distribute products that directlycompete with our IMRT/IGRT products.

We cannot assure you thatwe will be able to maintain or develop these relationships with agents anddistributors and other industry participants or that these relationships willcontinue to be successful. If any of these relationships is terminated, notrenewed or otherwise unsuccessful, or if we are unable to develop additionalrelationships, our product sales could decline, and our ability to grow ourIMRT/IGRT business could be adversely affected. This is particularly the casewith respect to foreign sales of our IMRT/IGRT products, where we currentlyrely, and we will continue to rely, on our distributors’ expertise regardingforeign regulatory matters and their access to actual and potential customers.

We do not have a directsales force for our radiation source products, and rely entirely on the effortsof agents and distributors for sales of products in our radiation sourcedivision (non-brachytherapy). We cannot assure you that we will be able tomaintain our existing relationships with our agents and distributors for thesale of our radiation source products.

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

The Sarbanes-Oxley Act of2002, as well as new rules subsequently implemented by the SEC and newlisting requirements subsequently adopted by NASDAQ in response toSarbanes-Oxley, have required changes in corporate governance practices,internal control policies and audit committee practices of public companies.These new rules, regulations, and requirements may significantly increase ourlegal, financial, compliance and administrative costs, and have made certainother activities more time consuming and costly. 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.

**Weare subject to extensive government regulation applicable to the manufactureand distribution of our products. Complying with the Food And DrugAdministration and other domestic and foreign regulatory bodies is an expensiveand time-consuming process, whose outcome can be difficult to predict. If wefail or 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 oursuppliers and distributors are subject to extensive and rigorous governmentregulation of the manufacture and distribution of our products, both in theUnited States and in foreign countries. Compliance with these laws andregulations is expensive and time-consuming, and changes to or failure tocomply with these laws and regulations, or adoption of new laws andregulations, could adversely affect our business.

In the United States, as amanufacturer and seller of medical devices and devices utilizing radioactiveby-product material, we and some of our suppliers and distributors are subjectto extensive regulation by federal governmental authorities, such as the UnitedStates Food and Drug Administration, or FDA, and state and local regulatoryagencies, such as the State of California, State of Pennsylvania and the Stateof Washington****to ensure such devices are safeand effective. Such regulations, which include the U.S. Food, Drug and CosmeticAct, or the FDC Act, and regulations promulgated by the FDA, govern the design,development, testing, manufacturing, packaging, labeling, distribution,import/export, possession, marketing, disposal, clinical investigationsinvolving humans, sale and marketing of medical devices, post-marketsurveillance, repairs, replacements, recalls and other matters relating tomedical devices, radiation producing devices and devices utilizing radioactiveby-product material. State regulations are extensive and vary from state tostate. Our brachytherapy seeds and IMRT/IGRT products constitute medicaldevices subject to these regulations. Future products in any of our businesssegments may constitute medical devices and be subject to regulation as such.These laws require that manufacturers adhere to certain standards designed toensure that the medical devices are safe and effective. Under the FDC Act, eachmedical device manufacturer must comply with requirements applicable tomanufacturing practices.

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

A 510(k) premarketnotification clearance will typically be granted for a device that issubstantially equivalent to a legally marketed Class I or Class IImedical device or a Class III medical device for which the FDA has not yetrequired submission of a premarket approval. A 510(k) premarket notificationmust contain information supporting the claim of substantial equivalence, whichmay include laboratory results 

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or theresults 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 thatwe are currently marketing have received clearances from the FDA through the510(k) premarket notification process. For any devices already cleared throughthe 510(k) process, modifications or enhancements that could significantlyaffect safety or effectiveness, or constitute a major change in intended userequire a new 510(k) submission and a separate FDA determination of substantialequivalence. We have made minor modifications to our products and, using theguidelines established by the FDA, have determined that these modifications donot require us to file new 510(k) submissions. If the FDA disagrees with ourdeterminations, we may not be able to sell one or more of our products untilthe FDA has cleared new 510(k) submissions for these modifications, and thereis no assurance that the FDA will ultimately grant a clearance. In addition,the FDA may determine that future products require the more costly, lengthy anduncertain premarket approval process under Section 515 of the FDC. Theapproval process under Section 515 generally takes from one to threeyears, but in many cases can take even longer, and there can be no assurancethat any approval will be granted on a timely basis, if at all. Under thepremarket approval process, an applicant must generally conduct at least oneclinical 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)for modifications to our existing products, or if the FDA requires us to gothrough the lengthier, more rigorous Section 515 premarket approvalprocess, our product introductions or modifications could be delayed orcancelled, which could cause our revenues to be below expectations.

In addition toFDA-required market clearances and approvals, our manufacturing operations arerequired to comply with the FDA’s Quality System Regulation, or QSR, whichaddresses the quality program requirements, such as a company’s managementresponsibility for the company’s quality systems, and good manufacturingpractices, product design, controls, methods, facilities and quality assurancecontrols used in manufacturing, assembly, packing, storing and installingmedical devices. Compliance with the QSR is necessary to receive FDA clearanceor approval to market new products and is necessary for us to be able tocontinue to market cleared or approved product offerings. There can be noassurance that we will not incur significant costs to comply with theseregulations in the future or that the regulations will not have a materialadverse effect on our business, financial condition and results of operations.Our compliance and the compliance by some of our suppliers with applicableregulatory requirements is and will continue to be monitored through periodicinspections by the FDA. The FDA makes announced and unannounced inspections todetermine compliance with the QSR’s and may issue us 483 reports listinginstances where we have failed to comply with applicable regulations and/orprocedures or Warning Letters which, if not adequately responded to, could leadto enforcement actions against us, including fines, the total shutdown of ourproduction facilities and criminal prosecution.

If weor any of our suppliers fail to comply with FDA requirements, the FDA caninstitute a wide variety of enforcement actions, ranging from a public warningletter to more severe sanctions such as:

·       fines,injunctions and civil penalties;

·       therecall or seizure of our products;

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·       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 foreigncountries could be longer than that required for FDA clearance and therequirements for licensing a product in another country may differsignificantly from the FDA requirements. We rely, in part, on our foreigndistributors to assist us in complying with foreign regulatory requirements. Wemay not be able to obtain these approvals without incurring significantexpenses or at all, and the failure to obtain these approvals would prevent usfrom selling our products in the applicable countries. This could limit oursales and growth.

**If we fail toprotect our intellectual property rights or if our intellectual property rightsdo not adequately cover the technologies we employ, or if such rights aredeclared to be invalid, other companies may take advantage of our technologyideas and more effectively compete directly against us, or we might be forcedto 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.

Even if we are able toeffectively enforce our existing proprietary rights to the fullest extentpermitted by law, this would not protect us from competition. We do not haveany patents on IMRT delivery or planning generally, and we have competitorsthat currently market and sell IMRT planning and delivery products includinginverse planning systems similar to our CORVUS product. In addition, ourcompetitors could design around our patents or develop products that providecomparable or superior outcomes 

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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.

**The medical deviceindustry is characterized by competing intellectual property, and we could besued 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 applicationsnow pending of which we are unaware, which could later result in issued patentsthat our products infringe. There could also be existing patents that one ormore of our products could inadvertently be infringing of which we are unaware.While we do not believe that any of our products, services or technologiesinfringe any valid intellectual property rights of third parties, we may beunaware of third-party intellectual property rights that relate to ourproducts, services or technologies. As the number of competitors in theradiation oncology market grows, and as the number of patents issued in thisarea grows, the possibility of a patent infringement claim against us going forwardincreases. We could incur substantial costs and diversion of managementresources if we have to assert our patent rights against others. An unfavorableoutcome to any litigation could harm us. In addition, we may not be able todetect infringement or may lose competitive position in the market before we doso.

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.

**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.

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**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.**

Although we estimate that our IMRT products have beenused to treat thousands of patients worldwide, this is still a statisticallysmall number, and these treatments have primarily involved tumors of theprostate, head, neck and spinal cord. Much of the data produced in currentstudies using IMRT and our products have involved small patient sample sizes,and any positive results of these studies may not be representative of theresults that will be achieved in studies involving larger patient sample sizes.If we are unable to obtain additional and more comprehensive clinical studies,or if long-term clinical studies fail to confirm the effectiveness of IMRT orour products, our sales could fail to increase or could decrease.

Some theoretical and non-clinical studies, meaningstudies that are not based on significant empirical evidence, have suggestedthat the use of IMRT and potentially our products may cause serious negativeside effects, such as a risk of induced cancer, as a result of the increasedradiation delivered to the patient. At present, not enough time has passed todetermine conclusively the long-term side effects. If future clinical studiesconfirm that these negative side effects occur as a result of IMRT treatments,our sales could fail to grow or could decline. In addition, if it is shown thatour products cause harmful side effects, the U.S. Food and Drug Administration,or FDA, could require us to change our product labeling to describe thesepotential side effects or could even rescind the clearances for our products andpotentially require a recall of our products.

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. Thesedifficulties and departures from customary practices may impede marketacceptance of IMRT in general and our products in particular, which couldadversely affect our ability to increase sales of our products and achieve ourdesired growth rate.

**IMRT treatmentsexpose patients to increased radiation leakage, which could potentially causelong-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.

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**Our IMRT/IGRTproducts are used in connection with the delivery of intense radiation. Defectsin, or misuse of, our products, or any detrimental side effects that resultfrom the use of our products, could result in serious injury or death and couldrequire costly recalls or subject us to costly and time-consuming productliability claims. This could harm future sales and require us to paysubstantial 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. It is an inherent risk of this industry that we might be sued in asituation where one of our products results in, or is alleged to result in, apersonal injury. Although we believe that we currently have adequate insuranceto address anticipated potential liabilities associated with product liability,any unforeseen product liability, exposure in excess of, or outside the scopeof, such insurance coverage could adversely affect our operating results. Anysuch claim brought against us, with or without merit, could result insignificant damage 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.

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 willcontinue to be available on terms acceptable to us or in sufficient amounts ifat all, or that it will provide adequate coverage in the event that any productliability is actually incurred.

**Our publicly-filedSEC reports are reviewed by the SEC from time to time and any significantchanges required as a result of any such review may result in materialliability to us and have a material adverse impact on the trading price of ourcommon 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 

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previouslyfiled SEC reports comply, and we intend that all future reports will comply inall material respects with the published rules and regulations of the SEC,we could be required to modify or reformulate information contained in priorfilings as a result of an SEC review. Any modification or reformulation ofinformation contained in such reports could be significant and result inmaterial liability to us and have a material adverse impact on the tradingprice of our common stock.

**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 2005,with multiple renewal options. We also have leased manufacturing andadministration offices in the Pittsburgh, Pennsylvania metropolitan area ofapproximately 35,000 square feet. The lease expires in February 2013 withan extension option and the option to obtain additional space within thebuilding. In addition, we have a small manufacturing facility in Seattle,Washington and small sales offices in Germany, the Netherlands and China. Webelieve that our facilities are adequate, suitable and of sufficientcapacity  to support our currentoperations.

**Item 3.   LEGAL PROCEEDINGS**

In March 2004 (prior to our acquisition of NOMOS),Parker/Hunter Incorporated (“Parker/Hunter”) filed a complaint against NOMOS inthe Court of Common Pleas of Allegheny County, Pennsylvania, alleging breach byNOMOS of an investment banking fee arrangement. NOMOS filed an answer denyingall substantive allegations of liability. In May 2004, NOMOS became awholly-owned subsidiary of the Company. In August 2004, the Company paidParker/Hunter $1.1 million in exchange for settlement and a release of allclaims related to its complaint filed against NOMOS. The Company has beenreimbursed the $1.1 million in the form of Company stock and cash from aspecial escrow established in connection with the Company’s acquisition ofNOMOS.

In 1998 (prior to our acquisition of NOMOS), NOMOSbecame involved in an infringement lawsuit against BrainLAB, USA, which NOMOSinitiated in the United States District Court for the District of Delaware,involving a NOMOS patent relating to the ultrasound localization techniquesthat are 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. No further appeals areplanned. The defendants filed a post-trial motion in the district court seekingreimbursement of their attorneys’ fees, which they allege are in excess of $0.4million. The district court originally denied the motion, without prejudice,because an appeal was still pending. Because our petition for rehearing wasdenied, the Court will reconsider this motion at some point in the future.

In October, 2002 (prior to our acquisition of NOMOS),two individual plaintiffs, Daniel Klimkowski and Nancy Klimkowski, filed apetition in Oklahoma County District Court against Mercy Health Center, Inc.,Varian Medial Systems, Inc., NOMOS, Siemens, Radiation Oncology Associates, Inc.,Morris J. Weizenberg, M.D., and Gary L. Larson, M.D., alleging thedefendants caused Mr. Klimkowski to receive excess radiation in thetreatment of his brain tumor. The plaintiffs sought compensatory and punitivedamages in excess of $10,000. The plaintiffs asserted a manufacturer’s productliability claim alleging that our PEACOCK system was defective, causing Mr. Klimkowskito receive an excessive amount of radiation to areas surrounding Mr. Klimkowski’stumor. The plaintiffs were unable to provide evidence that our PEACOCK systemmalfunctioned or was otherwise deficient. As a result, our counsel filed amotion for summary judgment, which the district court granted, dismissing theaction against us. Although we do not anticipate an appeal by the plaintiffs,the plaintiffs maintain a right to appeal until 30 days after 

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the conclusion of theentire case (which is still ongoing). If appealed, we will continue to pursuethe defense of this case aggressively.

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. Mr. Weeks is alleging non-economic and economic damages not toexceed approximately $3.2 million. We have yet to answer the complaint, anddiscovery has not yet commenced in the matter. We deny liability and intend tovigorously 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.   SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

None.

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**PART II**

**Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF 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.
| **Fiscal 2003** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter        |       | $          | 9.77       |     | $          | 7.26    |       |
| Second Quarter       |       | 8.05       |       | 6.25     |       |
| Third Quarter        |       | 9.00       |       | 6.62     |       |
| Fourth Quarter       |       | 11.24      |       | 6.80     |       |
|                      |            |            |            |          |            |         |            |  |  |

 
| **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 February 28, 2005, we hadapproximately 239 holders 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,**                                      | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**(1)                                                                    | ** ** | **2003**(2) | ** ** | **2002** | ** ** | **2001**(3) | ** ** | **2000** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except for per share amounts)** | ** ** |
| **Statement  of Operations:**                              |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net sales                                                  |       | $                                                                              | 24,737     |   | $ | 14,683 |   | $ | 20,780 |   | $ | 19,343 |   | $ | 17,490 |   |
| Cost of goods sold                                         |       | 15,818                                                                         |       | 6,944 |   | 7,581 |   | 6,862 |   | 5,834 |   |
| Gross profit                                               |       | 8,919                                                                          |       | 7,739 |   | 13,199 |   | 12,481 |   | 11,656 |   |
| Operating expenses                                         |       | 33,525                                                                         |       | 10,086 |   | 6,382 |   | 9,453 |   | 4,084 |   |
| Income (loss) from  operations                             |       | (24,606                                                                        | )          | (2,347 | ) | 6,817 |   | 3,028 |   | 7,572 |   |
| Interest and other  income, net                            |       | 579                                                                            |       | 1,749 |   | 1,834 |   | 2,078 |   | 1,122 |   |
| Income (loss) before  provision (benefit) for income taxes |       | (24,027                                                                        | )          | (598 | ) | 8,651 |   | 5,106 |   | 8,694 |   |
| Provision  (benefit) for income taxes                      |       | (257                                                                           | )          | — |   | 2,087 |   | (1,090 | ) | 3,221 |   |
| Income (loss) from  continuing operations                  |       | (23,770                                                                        | )          | (598 | ) | 6,564 |   | 6,196 |   | 5,473 |   |
| Loss from  discontinued operations(4)                      |       | (12,537                                                                        | )          | (8,536 | ) | (11,808 | ) | (8,181 | ) | (11,501 | ) |
| Cumulative effect  of change in accounting principle       |       | —                                                                         |       | (306 | ) | — |   | — |   | — |   |
| Net loss                                                   |       | $                                                                              | (36,307    | ) | $ | (9,440 | ) | $ | (5,244 | ) | $ | (1,985 | ) | $ | (6,028 | ) |
| Basic earnings  (loss) per share:                          |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                  |       | $                                                                              | (1.81      | ) | $ | (0.06 | ) | $ | 0.65 |   | $ | 0.64 |   | $ | 0.80 |   |
| Loss from discontinued  operations(4)                      |       | (0.95                                                                          | )          | (0.83 | ) | (1.16 | ) | (0.84 | ) | (1.67 | ) |
| Cumulative effect of  change in accounting principle       |       | —                                                                         |       | (0.03 | ) | — |   | — |   | — |   |
| Net loss                                                   |       | $                                                                              | (2.76      | ) | $ | (0.92 | ) | $ | (0.51 | ) | $ | (0.20 | ) | $ | (0.87 | ) |
| Diluted earnings  (loss) per share:                        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                  |       | $                                                                              | (1.81      | ) | $ | (0.06 | ) | $ | 0.57 |   | $ | 0.57 |   | $ | 0.72 |   |
| Loss from  discontinued operations(4)                      |       | (0.95                                                                          | )          | (0.83 | ) | (1.02 | ) | (0.75 | ) | (1.51 | ) |
| Cumulative effect  of change in accounting principle       |       | —                                                                         |       | (0.03 | ) | — |   | — |   | — |   |
| Net Loss                                                   |       | $                                                                              | (2.76      | ) | $ | (0.92 | ) | $ | (0.45 | ) | $ | (0.18 | ) | $ | (0.79 | ) |
| Shares used in per  share calculation                      |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                      |       | 13,139                                                                         |       | 10,258 |   | 10,210 |   | 9,783 |   | 6,907 |   |
| Diluted                                                    |       | 13,139                                                                         |       | 10,258 |   | 11,596 |   | 10,961 |   | 7,643 |   |

 
| ** **                                        | ** ** | **As of October 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2004**(1)                          | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                        | ** ** | **(In thousands)**              | ** ** |
| **Balance  Sheet Data:**                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and marketable securities |       | $                                    | 14,980     |   | $ | 49,115 |   | $ | 55,945 |   | $ | 54,342 |   | $ | 12,172 |   |
| Total assets                                      |       | 80,539                               |       | 62,532 |   | 69,135 |   | 72,681 |   | 31,714 |   |
| Total debt                                        |       | —                               |       | — |   | — |   | — |   | 2,500 |   |
| Total stockholders’  equity                  |       | 65,377                               |       | 55,746 |   | 64,901 |   | 69,873 |   | 25,721 |   |
|                                                   |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

(2)          The 2003 results include a $0.3 million charge forthe cumulative effect of a change in accounting principle to recognize futuredecommissioning costs of leased manufacturing facilities. This item had a($0.03) impact on basic and diluted loss per share. See Note 6 to theConsolidated Financial Statements.

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(3)          The 2001 results include the write-off of costsincurred related to two linear particle accelerators of $3.7 million. Thisitem had a ($0.38) impact on basic and diluted loss per share.

(4)          In September 2004, the Company’sTheseus operation was shut down. The Statement of Operations data includeTheseus as a discontinued operation. The 2004 results include a loss on disposalof $5.2 million and loss from operations of $7.3 million. Losses fromoperations for 2004 through 2000 consisted primarily of research anddevelopment expenses.

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

The following discussionand analysis provides information which we believe is relevant to an assessmentand understanding of our financial condition and results of operations. Thediscussion should be read in conjunction with the Consolidated FinancialStatements contained herein and the notes thereto. Certain statements containedin this Annual Report on Form 10-K, including, without limitation,statements containing the words “believes,” “anticipates,” “estimates,” “expects,”“intends,” “projects,” and words of similar import, are forward looking as thatterm is defined by the Private Securities Litigation Reform Act of 1995, or1995 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 Item 1 of this Form 10-K,or detailed in our 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.

**Overview**

We manufacture, market and sell products for theradiation oncology community, including brachytherapy seeds and ancillarydevices used primarily in the treatment of prostate cancer, as well asintensity modulated and image guidance radiation therapy products and servicesfor localization and treatment of cancer. Our business is organized into two operatingsegments: IMRT/IGRT and Radiation Sources. Theseus, which was discontinued on September 15,2004, had been developing radiopharmaceutical agents for various medicaldiagnostic and monitoring functions, including the management of chemotherapytreatment.

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 markets radioisotopicproducts including brachytherapy seeds, accessories and calibration sourcesused in the treatment of cancer and in medical, environmental, research andindustrial 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.

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 $11.5million in cash, the issuance of 5.2 million shares of the Company’s commonstock with a fair value of approximately $37.3 million, the assumption of 1.4million of stock options and warrants with a fair value of $4.6 million, directtransaction 

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costs of $3.0 million andthe assumption of acquisition related liabilities of $1.6 million in exchangefor all of the outstanding capital stock of NOMOS. We manage this business asour IMRT/IGRT operating segment. Our fiscal 2004 financial results include 6months of IMRT/IGRT operating results versus none in fiscal 2003. We expectthat our net sales, gross profit, selling expenses, general and administrativeexpenses and research and development expenses will increase in 2005 as we willhave 12 months of IMRT/IGRT operating results versus 6 months in 2004.

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, wehave spent 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 would be substantial. Withlimited capital resources and the additional need to fund product developmentof our recently acquired IMRT and IGRT products, we decided to explorealternative options for Theseus. Discussions with potential financial andstrategic partners ceased in August 2004. As a direct result we shut-downthe operation in September 2004.

**Critical AccountingPolicies**

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 consolidated financialstatements. Estimates are used for, but not limited to, the accounting forrevenue recognition, allowance for doubtful accounts, goodwill and long-livedasset impairments, loss contingencies, and taxes. Estimates and assumptionsabout future events and their effects cannot be determined with certainty. Webase our estimates on historical experience and on various other assumptionsbelieved to be applicable and reasonable under the circumstances. Theseestimates may change as new events occur, as additional information is obtainedand as our operating environment changes. These changes have historically beenminor and have been included in the consolidated financial statements as soonas they became known. The following critical accounting policies are impactedsignificantly by judgments, assumptions and estimates used in the preparationof the consolidated financial statements and actual results could differmaterially from the amounts reported based on these policies.

*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 product. 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 

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related to product saleswhen (i) persuasive evidence of an arrangement exists, (ii) deliveryhas occurred, (iii) the fee is fixed or determinable, and (iv) collectibilityis 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.

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

Our software 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 for Doubtful 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.

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*Goodwill and Other Intangible Assets*

Effective January 1, 2002, we adopted Statementof Financial Accounting Standard (SFAS) No. 142, “Goodwill and OtherIntangible Assets,” which requires, among other things, the use of anonamortization approach for purchased goodwill and certain intangibles. Undera nonamortization approach, goodwill and intangibles having an indefinite lifeare not amortized, but instead will be reviewed for impairment at leastannually or if an event occurs or circumstances indicate the carrying amountmay be impaired. Events or circumstances which could indicate an impairmentinclude a significant change in the business climate, economic and industrytrends, legal factors, negative operating performance indicators, significantcompetition, changes in our strategy or disposition of a reporting unit or aportion thereof. Goodwill impairment testing is performed at the reporting unitlevel.

SFAS 142 requires that goodwill be tested forimpairment using a two-step process. The first step of the goodwill impairmenttest, used to identify potential impairment, compares the fair value of areporting unit with its carrying amount, including goodwill. If the fair valueof a reporting unit exceeds its carrying amount, goodwill of the reporting unitis not considered to be impaired and the second step of the impairment test isunnecessary. If the carrying amount of a reporting unit exceeds its fair value,the second step of the goodwill impairment test must be performed to measurethe amount of impairment loss, if any. The second step of the goodwillimpairment test compares the implied fair value of reporting unit goodwill withthe carrying amount of that goodwill. The implied fair value of goodwill isdetermined in the same manner as the amount of goodwill recognized in abusiness combination. If the carrying amount of the reporting unit goodwillexceeds the implied fair value of that goodwill, an impairment loss isrecognized in an amount equal to that excess.

Application of the goodwill impairment test requiresjudgment, including the identification of reporting units, assignment of assetsand liabilities to such reporting units, assignment of goodwill to suchreporting units, and determination of the fair value of each reporting unit.The fair value of each reporting unit is estimated using a discounted cash flowmethodology. This requires significant judgments including estimation of futurecash flows, which is dependent on internal forecasts, estimation of thelong-term rate of growth for our business, the useful life over which cash flowswill occur, and determination of our weighted average cost of capital. Changesin these estimates and assumptions could materially affect the determination offair value and/or goodwill impairment for each reporting unit.

We have selected August 31 as the date on which wewill perform our annual goodwill impairment test. Based on our valuation ofgoodwill, no impairment charges related to the write-down of goodwill wererecognized for the years ended October 31, 2002 and 2003. During the yearended October 31, 2004, we wrote-off $3.6 million of goodwill recordedfrom an acquisition completed during 2000. The impairment was recognized duringour third quarter ended July 31, 2004 based on the results of an interimassessment necessitated by developments in the acquired business. (see Note 3of Notes to Consolidated Financial Statements).

Other intangible assetsthat have finite useful lives are amortized over their useful lives. Animpaired asset is written down to fair value. Intangible assets with finiteuseful lives consist primarily of purchased technology, trademarks, andcustomer relationships and are amortized over the expected period of benefitwhich range from three to fourteen years using the straight-line andaccelerated methods. Customer relationships are amortized under an acceleratedmethod which reflects the related customer attrition rates.

*Impairment of Long-lived Assets*

We assess the impairmentof long-lived assets, which include equipment and leasehold improvements andidentifiable intangible assets, whenever events and circumstances indicate thatsuch assets might be impaired. In the event the expected undiscounted futurecash flow attributable to the asset is less than the 

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carryingamount of the asset, an impairment loss equal to the excess of the asset’scarrying value over its fair value is recorded.

*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, the effect isrecorded promptly in the consolidated financial statements. Although theoutcome of these claims cannot be predicted with certainty, we do not believethat any of the existing legal matters will have a material adverse effect onour 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 the differencesare expected to reverse. Valuation allowances are established when necessary toreduce deferred tax assets to the amounts expected to be realized. In addition,we are subject to examination of our income tax returns by the Internal RevenueService and other tax authorities. We regularly assess the likelihood ofadverse outcomes resulting from these examinations.

**Results ofOperations**

**Fiscal 2004 vs. Fiscal 2003**

**Netsales.****  **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 from product($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 $1.7million decrease of net sales in our Radiation Sources business. The decreasein our Radiation Sources business reflects a decline in unit volume that weattribute to the transition in the second quarter 2003 from selling ourbrachytherapy products through a distributor to selling them directly to endcustomers. During this period our average selling price of our RadiationSources’ Products remained constant.

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 our IMRT/IGRTbusiness in May 2004.

**Grossprofit.****  **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 our 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,from our Radiation Sources business. The gross profit as a percent of sales ofour IMRT/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$0.5 million.

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.

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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 returns associated with the BAT trade-in programunfavourably impacted sales and gross profit by $0.2 million. The decrease ingross profit as a percentage of sales is also due to a reduction in unit volumeas we transitioned in the second quarter of 2003, to a direct sales force forour brachytherapy business and the addition of certain low margin brachytherapyaccessories that are contracted out. We expect margins of both businesses toimprove over time with the anticipated increase in sales volumes as our salesteam becomes more fully integrated and new products are introduced.

**Sellingexpenses.****  **Sellingexpenses comprised primarily of salaries, commissions, and marketing costs,increased $3.3 million or 97%, to $6.7 million for the fiscal year ended October 31,2004, from $3.4 million for the fiscal year ended October 31, 2003. Theincrease in selling expenses is attributed to the acquisition of our IMRT/IGRTbusiness in May 2004. We expect selling expenses to continue to increaseas we expand our business internationally.

**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 increase inG&A is primarily attributed to (i) the acquisition of our IMRT/IGRTbusiness ($2.3 million), (ii) severance costs associated with theresignation of our former chief financial officer ($0.9 million), (iii)increased accounting 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.

**Researchand development (“R&D”).****  **R&D increased $2.7 million, or 543%, to $3.2million for the fiscal year ended October 31, 2004, from $0.5 million forthe fiscal year ended October 31, 2003. The increase in R&D spendingis primarily due to the acquisition of our IMRT/IGRT business in May 2004.Our R&D spending reflects our belief that to maintain our competitiveposition in a market characterized by rapid rates of technological advancement,we must continue to invest significant resources in new product development, aswell as continue to enhance existing products. We expect that in the future ourR&D will increase and be focused on our IMRT/IGRT products.

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

**In-processresearch and development (“IPR&D”).****  **During the fiscal year ended October 31, 2004,we purchased NOMOS, and as a result incurred a charge of $9.2 million forIPR&D. See Note 4 to the consolidated financial statements for a discussionof 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.

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**Lossfrom discontinued operation.****  **Loss from our discontinued Theseus operation increased$4.0 million, or 47% to $12.5 million for the fiscal year ended October 31,2004 from $8.5 million for the fiscal year ended October 31, 2003. Theincrease in loss is attributed to the cost of shutting down the Theseusoperation consisting primarily of impairment of goodwill ($3.6 million), losson disposal of fixed assets ($0.5 million), abandonment of licenses andseverance ($1.1 million) offset by a reduction of clinical trial and otherresearch costs ($1.2 million). Loss from our discontinued Theseus operation included$5.8 million and $6.9 million of R&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.”

**Fiscal 2003 vs. Fiscal 2002**

**Netsales.****  **Netsales decreased $6.1 million, or 29%, to $14.7 million for the year ended October 31,2003 from $20.8 million for the year ended October 31, 2002. The decreasein net sales was due to the following: (i) an approximately 45% decline inunit sales of seeds associated with the transition to the direct marketing andsale of our brachytherapy products upon the conclusion in January 2003 ofour previous distribution agreement with Mentor Corporation (“Mentor”), and (ii) althoughour average selling prices of seeds increased by approximately 17% as a resultof eliminating our primary distributor, the industry witnessed a significantreduction in average selling prices to end users of brachytherapy seeds as aresult of a highly competitive pricing environment and price containmentpressure arising from Medicare reimbursement limits. Thus, although we capturedthe distributor margin, overall average selling prices to end users of ourbrachytherapy products decreased approximately 30%.

**Grossprofit.****  **Grossprofit decreased $5.5 million, or 41%, to $7.7 million for the fiscal yearended October 31, 2003 from $13.2 million for the fiscal year ended October 31,2002. Gross profit as a percent of sales decreased from 64% to 53% during thisperiod. The decrease in gross profit as a percentage of sales was primarily dueto a reduction in unit volume as we transitioned to a direct sales initiativein January 2003 and the addition of certain low margin brachytherapyaccessories that are outsourced.

**Sellingexpenses.****  **Sellingexpenses increased $2.9 million or 555%, to $3.4 million for the fiscal yearended October 31, 2003, from $0.5 million for the fiscal year ended October 31,2002. The increase in selling expenses is primarily attributed to thedevelopment of a direct sales and marketing force for our Radiation Sourcesbusiness.

**Generaland administrative expenses.****  **G&A increased $0.8 million or 15%, to $6.2 millionfor the fiscal year ended October 31, 2003, from $5.4 million for thefiscal year ended October 31, 2002. The increase in G&A is primarilyattributed to legal expenses associated with the Mentor litigation (SeeNote 16 of notes to consolidated financial statements).

**Researchand development.****  **R&Dremained unchanged at $0.5 million for the fiscal years ended October 31,2003 and 2002. All of our research and development costs are expensed asincurred.

**Amortization of intangible assets.  **Amortizationof intangible assets increased to $13,000 for the fiscal year ended October 31,2003 from $1,000 for the fiscal year ended October 31, 2002, primarily due toan increase in the amount of intangible assets.

**Interestand other income, net.****  **Interest and other income, net decreased $0.1 million,or 5%, to $1.7 million for the fiscal year ended October 31, 2003 from$1.8 million for the fiscal year ended October 31, 2002. This decreasereflects lower interest income as a result of a lower portfolio balance and ageneral 

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decline in the effectiveyield of our portfolio of marketable securities consistent with the general declinein interest rates in the period which was partially offset by a gain ofapproximately $0.6 million resulting from the sale of our remaining shares ofRadioMed Corporation, a privately held company.

**Provision(benefit) for income taxes.**   Results ofoperations for the year ended October 31, 2002 included a provision forincome taxes of $2.1 million to record a valuation allowance due to theuncertainty of our ability to realize the future benefit of our deferred taxassets. We did not recognize a benefit for the loss during the year ended October 31,2003 or 2002.

**Lossfrom discontinued operation.****  **Loss from our discontinued Theseus operation decreased$3.3 million, or 28%, to $8.5 million for the fiscal year ended October 31,2003 from $11.8 million for the fiscal year ended October 31, 2002. Thedecrease in loss is attributed to the shift of clinical trials from the UnitedStates to Europe and to the timing of clinical trial work.

**Cumulative effect ofchange in accounting principle.****  **During 2003, we adopted Statement of Financial AccountingStandards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,”for recording future decommissioning costs related to our leased manufacturingand research facilities. Under SFAS No. 143, a future retirementobligation is recorded at present value by discounting the Company’s estimatedfuture asset retirement obligation. In adopting this pronouncement, werecognized a charge of $0.3 million which is reported in the caption “Cumulativeeffect of change in accounting principle.”

**Liquidity andCapital Resources**

To date, our short-term liquidity needs have generallyconsisted of operating capital to finance growth in inventories, trade accountsreceivable, new product research and development, capital expenditures,acquisitions and strategic investments in related businesses. We have satisfiedthese needs primarily through a combination of cash generated by operations,public offerings and from private placements of our common stock. We do notcurrently have a line of credit or similar arrangement with a bank.We expect that we will beable to satisfy 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 $36.3 million, $9.4 million, and $5.2 million for theyears ended October 31, 2004, 2003 and 2002, respectively and have usedcash in operations of $23.3 million and $6.3 million for the years ended October 31,2004 and 2003, respectively offset by $1.7 million of cash provided byoperations in 2002. As of October 31, 2004, we have cash, cash equivalentsand marketable securities of $15.0 million, no long-term debt, and anaccumulated deficit of $54.9 million.

Based on our current operating plans, we believe thatthe existing cash resources and cash forecasted by our plans to be generated byoperations will be sufficient to meet working capital and capital requirementsthrough 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, realizing the benefits of theintegration of the historic company and NOMOS operations and a focus on costcontrol. There is no assurance that we will be successful with these plans. However,if events and circumstances occur such that we do not meet our currentoperating plan as expected, and we are unable to raise additional financing, wemay be required to further reduce certain discretionary spending, which couldhave a material adverse effect on our ability to achieve our intended businessobjectives.

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

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**Balance Sheet and Cash Flows**

*Cash,cash equivalents, and investments in marketable securities.*   AtOctober 31, 2004, we had cash and cash equivalents, and investments inmarketable securities aggregating approximately $15.0 million, a decrease ofapproximately $34.1 million from $49.1 million at October 31, 2003. Thedecrease was primarily attributed to net cash payments of $13.2 million for theacquisition of NOMOS, $14.9 million used in continuing operating activities,$8.4 million used in discontinued Theseus operations, and $1.3 millionused for capital expenditures, partially offset by $3.7 million in cashreceived from the exercise of stock options and the employee stock purchaseplan.

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, 2004, wereceived $3.7 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”) increased approximately $1.1 million to$4.1 million at October 31, 2004, from $3.0 million at October 31,2003. The increase in Fixed Assets reflects capital expenditures of $1.3million and the acquisition of NOMOS fixed assets of $1.4 million offset by$1.0 million in depreciation expense and a $0.6 million write-off of fixedassts held in discontinued operations. Included in the $1.3 million of capitalexpenditures are $0.6 million in equipment and leasehold improvements of PCA(See Note 5 of Notes to Consolidated Financial Statements).

*Otherassets.*   At October 31, 2004, other assetswere approximately $0.1 million, a decrease of approximately $1.2 million from$1.3 million at October 31, 2003. The decrease in other assets was due tothe reclassification of capitalized transaction costs of the NOMOS acquisitionas part of the purchase price allocation (See Note 4 of Notes to ConsolidatedFinancial Statements).

*Accountspayable and accrued expenses.*   Accounts payableand accrued expenses increased approximately $2.3 million to $9.1 million as ofOctober 31, 2004, from $6.8 million at October 31, 2003. The increasewas a result of an assumption of liabilities as part of the purchase priceallocation associated with the NOMOS acquisition (See Note 4 of Notes toConsolidated Financial Statements).

*Deferred revenue.*   Deferredrevenue increased approximately $6.3 million during the year ended October 31,2004. The increase was attributable to our IMRT/IGRT business acquired in May 2004($4.8 million) and by an increase in the sale of service contracts ($1.5 million).Deferred revenue consists of unearned service revenue and from the deferral ofsoftware product revenue where customer acceptance has not been received or fornew products where acceptance by our customers has not been clearlyestablished.

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**Liquidity and Capital 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 and anobligation to further fund PCA, contingent upon PCA achieving certainmilestones.
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Operating leases                 |       | $                                         | 4,575,000  |   | $ | 938,000 |   | $ | 1,013,000 |   | $ | 984,000 |   | $ | 1,640,000 |   |
| Purchase  commitments            |       | 937,000                                   |       | 937,000 |   | — |   | — |   | — |   |
| PCA funding  commitment          |       | 250,000                                   |       | 250,000 |   | — |   | — |   | — |   |
|                             |       | $                                         | 5,762,000  |   | $ | 2,125,000 |   | $ | 1,013,000 |   | $ | 984,000 |   | $ | 1,640,000 |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Although we continue to believe that the cashgenerated by operations and investments will be sufficient to support ouroperations and planned expansion for at least the next twelve months we areinvestigating other forms of financing, including a line of credit with a bank.

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 terms favorable toour stockholders or us. Insufficient funds may require us to scale back ouroperations or related expenses or delay, scale back or eliminate some or all ofour research and development programs. If additional funds are raised byissuing equity securities, dilution to existing stockholders would result.

**Recent AccountingPronouncements**

In December 2003, the SEC issued SAB No. 104.SAB No. 104 revises or rescinds portions of the interpretive guidanceincluded in Topic 13 of the codification of staff accounting bulletins in orderto make this interpretive guidance consistent with current authoritativeaccounting and auditing guidance and SEC rules and regulations. It alsorescinds the Revenue Recognition in Financial Statements Frequently AskedQuestions and Answers document issued in conjunction with Topic 13. Selectedportions of that document have been incorporated into Topic 13. The adoption ofSAB No. 104 did not have a material impact on our financial position,results of operations or cash flows.

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In July 2004,the Emerging Issues Task Force (“EITF”) published its consensus on Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and its Application to CertainInvestments.” EITF Issue No. 03-1 addresses the meaning of otherthan temporary impairment and its application to debt and equity securitieswithin the scope of SFAS No. 115, certain debt and equity securitieswithin the scope of SFAS No. 124, and equity securities that are notsubject to the scope of SFAS No. 115 and accounted for under the equitymethod. In September 2004, the FASB issued FASB Staff Position (“FSP”)EITF Issue No. 03-1-1, which delays the effect date for therecognition and measurement guidance in EITF Issue No. 03-1. Inaddition, the FASB has issued a proposed FSP to consider whether furtherapplication guidance is necessary for securities analyzed for impairment underEITF issue No. 03-1. We continue to assess the potential impact thatthe adoption of the proposed FSP could have on our financial statements.

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. We have not yet determined the impact of applying the various provisionsof SFAS No. 123R.

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 facilityexpense, 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 the Companybeginning with its fiscal year ending 2005. We are currently evaluating theimpact of 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, theFASB issued SFAS 153 “Exchanges of Non-monetary Assets—an amendment of APBOpinion No. 29”. This Statement amended APB Opinion 29 to eliminate theexception for non-monetary exchanges of similar productive assets and replacesit with a general exception for exchanges of non-monetary assets that do nothave commercial substance. A non-monetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. We are currently evaluating the impact of applying thevarious provisions of this new standard, but believe that it will not have amaterial impact upon our financial position, results of operations or cashflows.

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**Related PartyTransactions**

In October 2003,we entered into a Secured Loan Agreement with Prostate Centers of America (“PCA”).Based on the terms of the agreement, we determined that PCA is a variableinterest entity (“VIE”) as defined in Financial Accounting Standards BoardInterpretation (“FIN”) No. 46, “Consolidation of Variable InterestEntities—an interpretation of ARB No. 51., and, therefore we were requiredto include the operations of PCA in our consolidated financial statements eventhough we did not have an equity interest in PCA (See Note 5 of Notes toConsolidated Financial Statements).

In October 2003,we also entered into a sales agreement with TC2B, LLC, the majority shareholderof PCA to provide brachytherapy seeds. On October 31, 2004, total tradereceivables from TC2B were $0.3 million and sales to TC2B during the year endedOctober 31, 2004 were $0.3 million.

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

Our financial instruments include cash and marketablesecurities. At October 31, 2004, 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.**   CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

**Item 9A.   CONTROLSAND PROCEDURES**

**(a)   Evaluationof Disclosure Controls and Procedures**

We maintain disclosure controls and proceduresdesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Commission’srules and forms, and that such information is accumulated and communicatedto our management, including our Chief Executive Officer (“CEO”) and our ChiefFinancial Officer (“CFO”), as appropriate to allow timely decisions regardingrequired disclosure. In designing and evaluating our controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management necessarily is required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

As previously disclosed  in our filing on Form 10-Q/A for the quarter endedJuly 31, 2004, on January 31, 2005 our independent registered publicaccounting firm communicated to the Company and to the Chairman of our AuditCommittee that we may have material weaknesses involving internal controls thatrelated to the Company’s historical accounting for the Company’s businessacquisition of NOMOS Corporation (“NOMOS”). After an internal evaluation, our CEO and CFO 

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concluded that there existed material weaknesses inour internal control over financial reporting, with which the Audit Committeeconcurs.  The Company concluded therewere errors in the NOMOS purchase price allocation which required a restatementto our financial statements to (a) correct for an error made in thevaluation used to allocate the NOMOS purchase price and (b) properlyaccount for certain contingently returnable shares of the Company’s commonstock and contingently returnable cash issued into escrow for the NOMOS sellingshareholders.  The material weaknessesidentified related to the (a) procedures employed by management in thepreparation of the purchase price valuation used to assign asset values tocertain acquired intangible assets, including review of the valuationspecialist’s work and related assumptions, and (b) lack of sufficientresources to identify and properly address technical accounting and reportingissues related to purchase accounting matters.

In connection with our acquisition of NOMOS on May 4,2004 (included in our filing on Form 10-Q/A for the quarter ended July 31,2004), we engaged a valuation specialist firm to assist the Company in determiningthe fair value of certain identified intangible assets acquired fromNOMOS.  We utilized the valuation reportto assign the intangible asset values to the assets acquired as reported in theForm 8-K dated July 19, 2004, the Form 10-Q dated September 20, 2004 andthe Forms 10-Q/A dated September 21, 2004 and January 27, 2005.  However, during the finalization of ourannual financial statements for the year ended October 31, 2004, it was notedthat there was an inconsistency in the royalty rate used to value the trademarkand the royalty rate used for the trademark contributory asset charge whichresulted in improperly valuing the fair values of NOMOS’ in-process R&D,purchased technology and customer relationship intangible assets.   We concluded that the error materiallymisstated the values assigned to the acquired intangible assets in the openingpurchase price allocation.  Wesubsequently engaged a second valuation firm to properly calculate theintangible asset values which report was used by the Company in its restatementof the financial statements for the quarter ended July 31, 2004 as described inNote 2 of Condensed Notes to the Financial Statements in Amendment No. 3to the Form 10-Q/A filed on March 11, 2005.

Pursuant to the NOMOS purchase agreement, 307,617shares of the Company’s common stock and $701,000 of cash due to the sellingNOMOS shareholders were placed in escrow to serve as a source of reimbursementfor losses incurred in connection with the demand made against NOMOS byParker/Hunter Incorporated.  The Companypreviously reported the escrowed shares as issued and outstanding for legal andaccounting purposes in the Form 10-Q filed on September 20, 2004 and Forms10-Q/A filed on September 21, 2004 and January 27, 2005.  However, because settlement of theParker/Hunter matter was not finalized until August 4, 2004, it was later determinedthat these shares were contingently returnable as of July 31, 2004, andtherefore should not be considered issued and outstanding for accountingpurposes.  The Company did not restatethe financial statements in the previous filings, because the adjustments weredetermined to be immaterial based on an analysis under SAB 99.  However, in connection with restating thefinancial statements to correct the error in valuation assumptions as describedin the immediately preceding paragraph, the Company has made such adjustmentsto properly account for contingently returnable consideration in therestatement of the financial statements for the quarter ended July 31, 2004 asdescribed in Note 2 of Condensed Notes to the Financial Statements in AmendmentNo. 3 to the Form 10-Q/A filed on March 11, 2005.

As required byRule 13a-15(b) under the Exchange Act, we have carried out anevaluation under the supervision and with the participation of our management,including our CEO and CFO, of the effectiveness, as of October 31, 2004 ofthe design and operation of our “controls and procedures” as defined inRule 13a-15(e) under the Exchange Act. Based upon the foregoing,our CEO and CFO concluded that as a result of the material weaknessesidentified above, our disclosure controls and procedures related to the mattersdescribed above were ineffective as of October 31, 2004. In response to thematters identified, we have taken steps to strengthen our internal controlsover financial reporting to prevent the recurrence of the circumstances thatresulted in the determination to restate 

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our financial statements.In order to remedy these weaknesses, in the event of a future acquisition,management intends to (a) engage a second appraisal firm to confirm theintangible asset valuation under SFAS 141 performed by the appraisal firmengaged to perform such intangible asset valuation, and (b) complete amore formal review process of relevant accounting literature related topurchase accounting. Our CEO and CFO did not note any other material weaknessesor significant deficiencies in our disclosure controls and procedures duringtheir evaluation. In addition, as part of the assessment of our internalcontrols that we will need to undergo during our 2005 fiscal year in connectionwith the process required by Section 404 of the Sarbanes-Oxley Act of2002, we intend to continue to review, evaluate and strengthen our controls andprocesses. Our Audit Committee is performing oversight of our implementation ofenhancements and improvements to our internal controls, and our management isreporting to our Audit Committee on a regular basis regarding these matters. Asa result of these activities, we intend to continue to refine and improve ourinternal controls on an ongoing basis. 

**(b)   Changes in internal controls**

Other than the mattersdiscussed above, there were no significant changes in our internal controlsover financial reporting during the quarter ended October 31, 2004, thathave materially affected or are reasonably likely to materially affect ourinternal control over financial reporting.

**Item9B**.   OTHER INFORMATION.

None

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**PART III**

**Item10.**                 DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT
| **Name**                   | ** ** | ** **                                                   | ** ** | **Position** | ** ** | **Age** |
|----------------------------|------------|--------------------------------------------------------------|------------|--------------|------------|---------|
| Irwin J. Gruverman         |       | Chairman of the Board of  Directors                          |       | 71           |
| L. Michael Cutrer          |       | President, Chief  Executive Officer and Director             |       | 49           |
| Donald N. Ecker            |       | Director                                                     |       | 58           |
| John A. Friede             |       | Director                                                     |       | 66           |
| Dr. Jonathan  Gertler |       | Director                                                     |       | 48           |
| James Klingler             |       | Senior  Vice-President & Chief Financial Officer    |       | 57           |
| John W. Manzetti           |       | President of NOMOS  Radiation Oncology Division and Director |       | 57           |
| Mitchell H. Saranow        |       | Director                                                     |       | 59           |
| Dr. Gary N. Wilner    |       | Director                                                     |       | 64           |
| Nancy J. Wysenski          |       | Director                                                     |       | 46           |

 

The terms of all directorswill expire at the next annual meeting of the stockholders, or when theirsuccessors are elected and qualified. Directors are elected each year, and alldirectors serve one-year terms. Officers serve at the pleasure of the Board ofDirectors. The Company is party to a voting agreement with Mr. Friede, aDirector of the Company and former Chairman of the Board of NOMOS Corporation (“NOMOS”)prior to the Company’s acquisition of NOMOS on May 4, 2004, whereby Mr. Friedehas agreed to vote the Company shares of which he is the beneficial owner infavor of the election of the individuals nominated by a majority of the Company’sBoard of Directors so long as the Board of Directors of the Company designates Mr. Friedeand Mr. Manzetti (or other persons of Mr. Friede’s selection ifeither Mr. Friede or Mr. Manzetti are no longer members of the Board)for re-election. The voting agreement between the Company and Mr. Friedeterminates on May 4, 2006. There are no other arrangements orunderstandings between us and any other person pursuant to which such personwas or is to be selected as a director, executive officer or nominee. We have,however, entered into employment agreements with three of our executiveofficers, which are described in Item 11 below under the heading “EmploymentAgreements.”

**Biographical Information**

**IrwinJ. Gruverman,******Chairmanof the Board of Directors. Mr. Gruverman has been a Director of theCompany since 1989. Mr. Gruverman founded and has been the Chairman andChief Executive Officer of MFIC Corporation, a company that manufacturesprocess devices for pharmaceutical and other manufacturing uses, since 1982.From 1990 to 2001, Mr. Gruverman was the General Partner in G&GDiagnostics Limited Partnership II, a venture capital limited partnership. Mr. Gruvermanserved as Executive Vice President of New England Nuclear, a radioactivematerials business, during the later years of his tenure from 1961 to 1981. Mr. Gruvermanalso serves as a director of InVitro International, Inc.

**L.Michael Cutrer**has been the President and ChiefExecutive Officer and a Director of the Company since 1989. Previously, Mr. Cutrerwas a Manager of Isotope Products Laboratory, Inc., a radioisotopemanufacturing company, where he was responsible for industrial productmanufacturing, research and development.

**DonaldN. Ecker**has been a Director of the Company since March 2003.He founded CEO Strategic Solutions LLC in January, 1999, a private investmentbank specializing in merger & acquisition transactions as well asfinancial advisory engagements. Before that, Mr. Ecker spent over 20 yearsat Ernst & Young LLP, where he had the following major milestones orassignments: founded and directed the Ernst & Young National Physician &Medical Group Practice working with groups through out the U.S.; co-director ofthe Center for Strategic Transactions for the U.S.; lead the entrepreneurialpractice for 

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Southern California, and;served as coordinating partner on global accounts as well as startups. He alsoserved as a managing partner in various units of the firm. Prior to joiningErnst & Young, Mr. Ecker founded his own accounting/tax practice.Mr. Ecker also directed family investment partnerships for over 20 yearsthat included large real estate holdings, farming and cattle operations.Mr. Ecker is a Certified Public Accountant in California, with a Bachelorof Science in Business Administration from California Polytechnic University-Pomonaand an Executive Management Program graduate from Northwestern University,Kellogg School of Management. He serves on the Sybron Dental (SYD-NYSE) boardand chairs the audit committee.

**JohnA. Friede******hasbeen a Director of the Company since May 2004. Mr. Friede co-foundedNOMOS with Dr. Mark Carol in 1979 and served as chairman of the board ofdirectors and a director from NOMOS’ inception until the merger with theCompany. From November 1999 to December 2000, Mr. Friede servedas NOMOS’ president, and from November 1999 to October 2001, he alsoserved as NOMOS’ chief executive officer. Prior to joining NOMOS, Mr. Friedemanaged, and continues to manage, his own private investment portfolio inmedical technology and other venture capital fields. Mr. Friede holds aB.A. in History from Dartmouth College and an M.B.A. from the HarvardUniversity Graduate School of Business Administration.

**Dr.****Jonathan P. Gertler**has been a Director ofthe Company since December 2002. Dr. Gertler is Managing Director andHead of Healthcare Investment Banking at Adams, Harkness & Hill, aninvestment banking firm. Prior to joining Adams, Harkness & Hill in2001, Dr. Gertler spent fourteen years as a vascular surgeon and threeyears in venture capital, investing in medical device and technology companies.He was an Attending Vascular Surgeon at Massachusetts General Hospital inBoston and Associate Professor of Surgery at Harvard University from 1992 to2001 as well as Associate Director of both the Vascular Diagnostic and ResearchLaboratories. In addition, Dr. Gertler founded Cardiovascular Technologies, Inc.in 1997, which developed an embolic entrapment device, that was acquired byEmbolic Protections, Inc. and subsequently acquired by Boston ScientificCorporation in 2001. He also served as a venture partner for Schroder VenturesLife Science Fund, a venture fund, and as a Director for Quick Study Radiology,a start up radiology services company in St Louis, from 1999 to 2002.

**JamesW. Klingler******joined theCompany in July 2004 as Senior Vice-President and Chief Financial Officer.Previously, he was Vice President—Finance and Chief Financial Officer of TroyGroup, Inc., a provider of secure check printing products and wirelessconnectivity solutions, from January 2002 to July 2004. From February 2001to November 2001, he served as Senior Vice President, Business Operationsand Chief 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, critical control and turbomachineryapplications and a subsidiary of Invensys plc, from February 1999 to February 2001,and Vice President and Chief Financial Officer of Wilshire Technologies, Inc.,a company that manufactures polyurethane products, from October 1994 to February 1999.Mr. Klingler holds a B.A. from The Ohio State University and an M.B.A.from the Columbia University Graduate School of Business.

**JohnW. Manzetti**has been a Director of the Company andPresident of the NOMOS Radiation Oncology Division of the Company since May 2004.Mr. Manzetti served as NOMOS’ chief executive officer from October 2001until the merger of NOMOS with the Company in May 2004, and as presidentfrom December 2000 until the merger. From December 2000 to October 2001,Mr. Manzetti also served as NOMOS’ chief operating officer. From the timehe joined NOMOS in May 1999 until December 2000, Mr. Manzetti servedas NOMOS executive vice president and chief financial officer. He was a memberof NOMOS’ board of directors from December 2000 until the merger. Prior tojoining NOMOS, from 1988 to 1999, Mr. Manzetti served as executive vicepresident and chief financial officer at Carnegie Group, Inc., a supplierof knowledge-based software systems, which was acquired by Logica PLC in November 1998.

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Mr. Manzetti also wasa director, secretary and treasurer of Carnegie Group from 1989 until 1998. Mr. Manzettiholds a B.S.B.A. from Geneva College and an M.B.A. from the University ofAkron.

**MitchellH. Saranow**has been a Director of the Company since June 2001.Mr. Saranow founded his own firm, The Saranow Group, LLC, a privateinvestment firm, in 1984, where he acquired and served as Chief ExecutiveOfficer of companies with operations in the United States and Europe. Mr. Saranowhas served as Chairman of Lenteq, LP, a manufacturer of color formulationequipment for the paint and personal care industries, since October, 2003. Heserved as Chairman of the Board and Co-Chief Executive Officer of NavigantConsulting, Inc., a nationwide consulting firm, from November 1999 toMay 2000. Prior thereto, Mr. Saranow was Chairman and ManagingGeneral Partner of Fluid Management, L.P., a color formulation business, formore than five years. Mr. Saranow was Vice President of Finance and ChiefFinancial Officer of CFS Continental, Inc., then the second largestfull-line food services company in the United States, from 1979 to 1983, andVice President of Finance and Law of the Sunmark Companies, a confections andsnack foods company, from 1975 to 1979. Mr. Saranow is also a Director ofLawson Products, Inc. In addition, he is a member of the Governing Boardof Northwestern University Library and recently served as President of theJuvenile Protective Association, a 100-year old child welfare agency. Mr. Saranowis a graduate of Northwestern University and holds M.B.A. and J.D. degrees fromHarvard University. He earned his CPA in 1981. He served as the “James M.Collins Senior Lecturer” at the Harvard Business School during the 2001-2002academic year.

**Dr.****Gary N. Wilner**has been a Director of theCompany since December 2002. Dr. Wilner retired from the practice ofmedicine in January, 2005. From 1974 until 2005, Dr. Wilner was Directorof Clinical Cardiology at Evanston Hospital in Evanston, Illinois. In addition,he concurrently served on the faculty of the Feinberg School of Medicine at NorthwesternUniversity. He is the past President of the Chicago Heart Association and along-standing member of the Adjunct Board of the Albert Einstein Peace PrizeFoundation. Since 1993, Dr. Wilner has served as an independent trustee ofThe Oakmark Funds, and became Chairman of the Board of Trustees for The OakmarkFunds in 2004. Dr. Wilner is currently an ex-officio member of the Boardof Trustees for the Museum of Contemporary Art in Chicago, Illinois.

**Nancy J. Wysenski******has been a Director of the Company since May 2004.Ms. Wysenski is the President and a founding member of EMD Pharmaceuticals, Inc.,a United States pharmaceutical company owned by Merck KGaA. Ms. Wysenskialso serves as a member of the Merck KGaA Ethical Pharmaceuticals ExecutiveCommittee and manages their ethical pharmaceutical product portfolio. Ms. Wysenskiis also responsible for Dey Laboratories, a specialty pharmaceutical companyowned by Merck KGaA focused on the development of drugs used in the treatmentof respiratory diseases and allergies. Prior to joining and founding EMDPharmaceuticals, Inc. in August 1999, Ms. Wysenski was theSenior Vice President of Operations at NetGenics, a bio-informatics serviceprovider, from 1998 to 1999. Prior thereto, Ms. Wysenski held a number ofpositions at Astra Merck, a pharmaceutical company, culminating at VicePresident of Field Sales. Prior to joining Astra Merck in 1992, Ms. Wysenskiheld a number of positions at Merck Human Health, a pharmaceutical company,from 1984 to 1998. Ms. Wysenski is a graduate of Kent State University andholds an M.B.A. from Baldwin Wallace College.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Securities Exchange Actof 1934 (the “Act”) requires our officers, directors and persons who own morethan 10% of any class of our securities registered under Section 12(g) ofthe Act to file reports of ownership and changes in ownership with the SEC.Officers, directors and greater than 10% stockholders are required by SECregulation to furnish us with copies of all Section 16(a) forms theyfile.

Based solely on a reviewof copies of such reports furnished to us and written representations that noother reports were required during the fiscal year ended October 31, 2004,we believe that all persons 

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subjectto the reporting requirements pursuant to Section 16(a) complied withall applicable reporting requirements, except that Ms. Wysenski filed onereport late on Form 3 and Form 4.

**Boardof Directors Meetings and Committees**

The Board of Directors of the Company held ninemeetings during the fiscal year ended October 31, 2004, and acted twice byunanimous written consent. All of the Directors who were on the Board duringfiscal year 2004 attended at least 75% of the total number of meetings of theBoard of Directors and committees on which they served. John A. Friede and JohnW. Manzetti were elected to the Board of Directors on June 3, 2004, andfrom that time forward attended all meetings of the Board of Directors. NancyS. Wysenski was elected to the Board of Directors on June 3, 2004, andfrom that time forward attended all meetings of the Board of Directors andcommittees on which she serves, with one exception.

The Board of Directors has three standing committees:the Audit Committee, the Compensation Committee, and the Nominating andCorporate Governance Committee.

*AuditCommittee.*   Duringthe fiscal year ended October 31, 2004, the members of the Audit Committeewere Mr. Ecker (Chairman), Dr. Gertler, Mr. Saranow and Dr. Wilner,each of whom is “independent” as defined under current Rule 4200(a)(15) ofthe Nasdaq listing standards. During the fiscal year ended October 31,2004, the Audit Committee met on fifteen occasions.

*AuditCommittee Financial Experts.**  *TheBoard of Directors has determined that Donald N. Ecker and Mitchell S. Saranoweach qualify as an “audit committee financial expert” and “independent” asdefined under the applicable Securities and Exchange Commission and Nasdaqrules.

*CompensationCommittee.**  *TheCompensation Committee, currently comprised of Dr. Gertler (Chairman), Mr. Saranow,Dr. Wilner and Ms. Wysenski, all non-employee Directors who meet theNasdaq listing standards for “independence”, oversees the Company’s executivecompensation programs and policies and is responsible for determining grants ofoptions to purchase Common Stock under the North American Scientific, Inc.Amended and Restated 1996 Stock Option Plan. During fiscal year 2004, theCompensation Committee met on six occasions.

*Nominatingand Corporate Governance Committee.*   TheNominating and Corporate Governance Committee is responsible for recommendingto the full Board candidates for election to the Board of Directors andreviewing matters of corporate governance. The Nominating and CorporateGovernance Committee will consider director nominees recommended bystockholders if properly submitted. This Committee currently consists of Mr. Saranow(Chairman), Mr. Ecker, Dr. Wilner, and Ms. Wysenski, each ofwhom is “independent” under current Nasdaq listing standards. During fiscalyear 2004, the Committee met on five occasions.

The Company has a written Code of Ethics that appliesto our Chief Executive Officer, Chief Financial Officer, and CorporateController.

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**Item 11.**                 EXECUTIVECOMPENSATION

**SummaryCompensation Table**
|                                                      | ** ** | **Annual Compensation ** | ** ** | **Long Term  Compensation  Awards ** | ** ** | ** **          | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|------------------------------------------------|------------|---------------------|------------|
| **Name and Principal Position ** | ** ** | ** **                         | ** ** | **Year **                                 | ** ** | **Salary ($)** | ** ** | **Bonus ($)** | ** ** | **Other Annual  Compensation ($)** | ** ** | **Securities  Underlying  Options/SARs (#)** | ** ** | **All Other  Compensation ($)(1) ** | ** ** |
| L. Michael Cutrer                                    |       | 2004                               |       | 314,000                                        |       | —              |       |   | — |   |   |   | 36,000 |   |   |   | 7,000 |   |   |
| *President and Chief*                                |       | 2003                               |       | 314,000                                        |       | 125,000             |       |   | — |   |   |   | 136,000 |   |   |   | 6,000 |   |   |
| *Executive Officer*                                  |       | 2002                               |       | 302,000                                        |       | 113,250             |       |   | — |   |   |   | 125,000 |   |   |   | 7,000 |   |   |
| Allan M. Green(2)                                    |       | 2004                               |       | 198,000                                        |       | —              |       |   | — |   |   |   | — |   |   |   | 4,000 |   |   |
| *Chief Technology Officer*                           |       | 2003                               |       | 208,000                                        |       | 20,000              |       |   | — |   |   |   | 20,000 |   |   |   | 9,000 |   |   |
| * *                                             |       | 2002                               |       | 208,000                                        |       | —              |       |   | — |   |   |   | 65,000 |   |   |   | 7,000 |   |   |
| James W. Klingler(3)                                 |       | 2004                               |       | 59,000                                         |       | 9,000               |       |   | — |   |   |   | 50,000 |   |   |   | — |   |   |
| *Senior Vice President and*                          |       |                               |       |                                           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Chief Financial Officer*                            |       |                               |       |                                           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Elliot Lebowitz(4)                                   |       | 2004                               |       | 237,000                                        |       | —              |       |   | — |   |   |   | — |   |   |   | 6,000 |   |   |
| *President, Theseus*                                 |       | 2003                               |       | 168,000                                        |       | 30,000              |       |   | — |   |   |   | 40,000 |   |   |   | 2,400 |   |   |
| *Imaging Corporation*                                |       |                               |       |                                           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| John W. Manzetti(5)                                  |       | 2004                               |       | 148,000                                        |       | —              |       |   | — |   |   |   | 40,000 |   |   |   | 5,000 |   |   |
| *President, NOMOS*                                   |       |                               |       |                                           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Oncology Division*                                  |       |                               |       |                                           |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |            |                                    |            |                                                |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          AllOther Compensation consists of the Company’s contribution to such executiveofficer’s 401(k) plan, Company paid life insurance premiums and profitsharing contributions made by the Company on behalf of such executive officers.

(2)          Dr. Greenended his employment on October 13, 2004.

(3)          Mr. Klinglerbegan his employment on July 26, 2004.

(4)          Dr. Lebowitzended his employment on October 12, 2004.

(5)          Mr. Manzettibegan his employment on May 4, 2004.

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**Option Grants**

The following table setsforth information on stock options granted by the Company during the fiscalyear ended October 31, 2004 to each of the named executive officers.

**OPTION GRANTS INLAST FISCAL YEAR**
| **Name**          | ** ** | ** ** | ** ** | **Number of  Securities  Underlying  Options/  SARs Granted ** | ** ** | **% of Total  Options/SARs  Granted to  Employees in  Fiscal Year ** | ** ** | **Exercise Price  Per Share ** | ** ** | **Expiration  Date** | ** ** | **Grant Date  Present  Value ($)(3) ** | ** ** |
|-------------------|------------|------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|--------------------------------------------------|------------|
| L. Michael Cutrer |       |       | 36,000     | (1)                                                                           |       |                                                                                               | 18.4       | %                                             |       |                 | $          | 10.01                                            |       |   |   | 2/25/14 |   |   |   | 209,000 |   |   |
| Allan M. Green    |       |       | —     |                                                                          |       |                                                                                               | —     |                                          |       |                 | —     |                                             |       |   | — |   |   |   | — |   |   |
| James W. Klingler |       |       | 50,000     | (2)                                                                           |       |                                                                                               | 25.5       | %                                             |       |                 | $          | 7.49                                             |       |   |   | 7/28/14 |   |   |   | 222,000 |   |   |
| Elliot Lebowitz   |       |       | —     |                                                                          |       |                                                                                               | —     |                                          |       |                 | —     |                                             |       |   | — |   |   |   | — |   |   |
| John W. Manzetti  |       |       | 40,000     | (2)                                                                           |       |                                                                                               | 20.4       | %                                             |       |                 | $          | 9.00                                             |       |   |   | 5/5/14 |   |   |   | 213,000 |   |   |

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(1)          Theseoptions were granted at the fair market value on the date of grant determinedpursuant to the Amended and Restated 1996 Stock Option Plan and vest 33.33% oneach of the first three anniversaries of the date of grant.

(2)          Theseoptions were granted at the fair market value on the date of grant determinedpursuant to the Amended and Restated 1996 Stock Option Plan and vest 25% oneach of the first four anniversaries of the date of grant.

(3)          Calculatedusing the Black-Scholes option-pricing model with the following assumptions:volatility of 74%, risk-free interest rate of 3.3% and an expected life of 5years. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options which have no vesting restrictions andare fully transferable. In addition, option valuation models require the inputof highly subjective assumptions including the expected stock price volatility.Because the Company’s stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the Black-Scholes model does not necessarily provide a reliablemeasure of the fair value of the Company’s stock options.

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**Option Exercises and Year-End Value**

The following table setsforth certain information concerning the exercise of stock options during thefiscal year ended October 31, 2004 by the Company’s named executiveofficers and the fiscal year-end value of unexercised options as of October 31,2004.

**AGGREGATEDOPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES**
| ** **        | ** ** | **Shares  Acquired** | ** ** | **Value**                     | ** ** | **Number of Securities  Underlying Unexercised  Options at 10/31/04 (#)** | ** ** | **Value of Unexercised  In-the-Money  Options at 10/31/04 ($)(1)** | ** ** |
|-------------------|------------|----------------------|------------|-------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** **           | ** ** | **on Exercise (#)** | ** ** | **Realized ($)**                                                                              | ** ** | **Exercisable**                                                                        | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| L. Michael Cutrer |       |                 | —     |                          |       |                                                                                               | —     |                                                                                   |       |   | 747,668 |   |   |   | 144,332 |   |   | 663,000 |   |   | — |   |   |
| Allan M. Green    |       |                 | —     |                          |       |                                                                                               | —     |                                                                                   |       |   | 192,501 |   |   |   | 52,499 |   |   | — |   |   | — |   |   |
| James W. Klingler |       |                 | —     |                          |       |                                                                                               | —     |                                                                                   |       |   | — |   |   |   | 50,000 |   |   | — |   |   | — |   |   |
| Elliot Lebowitz   |       |                 | —     |                          |       |                                                                                               | —     |                                                                                   |       |   | 4,500 |   |   |   | 30,000 |   |   | — |   |   | — |   |   |
| John W. Manzetti  |       |                 | —     |                          |       |                                                                                               | —     |                                                                                   |       |   | 373,070 |   |   |   | 40,000 |   |   | 1,272,000 |   |   | — |   |   |
|                   |            |                      |            |                               |            |                                                                                                    |            |                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Calculatedbased upon the difference between the exercise price and the fair market valueat fiscal year-end.

**Director Compensation**

Directors who are also employees of the Company or itssubsidiaries receive no separate compensation for serving as Directors or asmembers of any committees of the Board of Directors. Each non-employee Directorreceives a quarterly payment of $5,000, and receives $1,250 per Board orcommittee meeting if he attends in person or $500 per meeting if heparticipates via telephone. Directors may be reimbursed for certain expenses incurredin connection with attending Board or committee meetings. In addition, theChairman of the Board of Directors receives compensation of $125,000 per year(rather than the $5,000 quarterly payment); the Chairman of the Audit Committeereceives $5,000 per year; the Chairman of the Compensation Committee receives$2,500 per year; and the Chairman of the Nominating and Corporate GovernanceCommittees receives $2,500 per year.

In March, 2003, stockholders approved the 2003Non-Employee Directors’ Equity Compensation Plan. Each individual who is firstelected or appointed as a non-employee director on or after January 6,2003, shall automatically be granted, on the date of such initial election orappointment, a non-statutory stock option to purchase 25,000 shares of CommonStock. On the date of each Annual Shareholders Meeting after January 6,2003, each individual who is re-elected to serve as a non-employee director isautomatically granted a non-statutory stock option to purchase 15,000 shares ofCommon Stock, except for the Chairman of the Board, who is automaticallygranted a non-statutory stock option to purchase 25,000 shares of Common Stock.The annual grant of non-statutory stock options is only given to thosenon-employee directors who have served at least six months. In lieu ofreceiving the non-statutory stock options as described above, each non-employeedirector may elect to receive a grant of one share of restricted Common Stockfor every three shares of Common Stock underlying such stock option. To date, nonon-employee director has elected to receive restricted stock in lieu of stockoptions.

During the fiscal yearending October 31, 2004, Mr. Ecker, Dr. Gertler, Mr. Saranowand Dr. Wilner each received an annual grant of ten-year non-statutoryoptions to purchase 15,000 shares of Common Stock of the Company, at a price of$8.80 per share, with one-third vesting each year for the next three years, asmeasured from the grant date of June 3, 2004. Upon their election to theBoard of Directors during the fiscal year ended October 31, 2004, Mr. Friedeand Ms. Wysenski each received an initial grant of ten-year non-statutoryoptions to purchase 25,000 shares of Common Stock of the Company at a price of 

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$8.80per share with one-third vesting each year for the next three years, asmeasured from the grant date of June 3, 2004. During the fiscal yearending October 31, 2004, Mr. Gruverman received a grant of ten-yearnon-statutory options to purchase 25,000 shares of Common Stock of the company,at a price of $8.80 per share, with one-third vesting each year for the nextthree years, as measured from the grant date of June 3, 2004.

**Employment Agreements**

*L. Michael Cutrer*

In April 2002, theCompany entered into an employment agreement with L. Michael Cutrer inconnection with his employment as the Company’s Chief Executive Officer.Mr. Cutrer’s initial annual salary was $302,000 with a bonus to bedetermined at the discretion of the Board of Directors in accordance with theagreement. The employment agreement can be terminated by the Company at anytime with or without cause. If terminated without cause, the agreementprovides, among other things, for immediate vesting of any unvested stockoptions and a severance payment equal to three times his current base salary.In the event of a change of control of the Company, the agreement alsoprovides, among other things, for the immediate vesting of any unvested stockoptions and a severance payment equal to three times (a) base salary, (b) thehighest bonus awarded in the three previous years and (c) theBlack-Scholes value of any grant of options made during the prior year.

*Allan M. Green*

In October 2000, theCompany entered into an employment agreement with Dr. Allan M. Green,providing for his employment as President of Theseus Imaging Corporation andfor base compensation at a minimum rate of $200,000 per year, subject to annualreviews and increases in the sole discretion of the Board of Directors. In April 2002,Dr. Green’s position and title under the agreement were changed to ChiefTechnology Officer of the Company. All other terms of the agreement remained ineffect. The employment agreement could be terminated by the Company at any timewith or without cause. The agreement also provided, among other things, forseverance payments of up to one year’s base compensation in certaincircumstances and for a period of non-competition covering the remainder of theemployment term plus one year. The Company provided a timely notice ofnon-renewal of Dr. Green’s employment agreement, and Dr. Green’semployment with the Company ended on October 13, 2004.

*James W. Klingler*

In July, 2004, the Companyentered into a letter agreement with James W. Klingler in connection with hisemployment as the Company’s Chief Financial Officer. The letter agreement doesnot provide for a specific term of employment, however, it provides for atwelve month severance payment if Mr. Klingler’s employment is terminatedby the Company for any reason other than for cause.

*Elliot Lebowitz*

In February 2003, theCompany entered into an employment agreement with Elliot Lebowitz, providingfor his employment as President of Theseus Imaging Corporation and for basecompensation at a minimum rate of $250,000 per year, subject to annual reviewsand increases in the sole discretion of the Chief Executive Officer, subject toreview and approval by the Company’s Compensation Committee of the Board ofDirectors. The employment agreement with Mr. Lebowitz could be terminatedby the Company at any time with or without cause. If terminated without cause,the agreement provided for severancepayments to Mr. Lebowitz of up to one year’s base compensation, as well asfor vesting of any unvested options granted under the employment agreement. Inthe event of a change of control of the Company, the agreement also provided,among other things, for the immediate vesting of any unvested stock 

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options and a severance payment equal to one year’s basesalary and an immediate vesting of all unvested options granted under theagreement. The Company terminated Mr. Lebowitz’ employment without causeon October 12, 2004, and, in accordance with his employment agreement, theCompany paid Mr. Lebowitz one year’s base compensation, or $250,000, in October 2004.

*John W. Manzetti*

The Company entered into an employment agreement withJohn W. Manzetti, which became effective upon consummation of the merger ofNOMOS with the Company on May 4, 2004. The agreement provides that Mr. Manzettiwill serve as President of the NOMOS Radiation Oncology Division of theCompany, and will be entitled to an annual base salary of no less than $300,000and a minimum incentive bonus of 25% of his base salary if specifiedperformance goals are met. The agreement is for an initial term of two years,and will automatically renew for additional one-year terms unless notice ofnon-renewal is delivered at least 90 days prior to the date when the agreementterm is scheduled to expire. In addition, under the agreement, the Companygranted Mr. Manzetti stock options to purchase 40,000 shares of theCompany’s Common Stock at a per share exercise price equal to the fair marketvalue of the Common Stock on the date the merger was consummated. On theconsummation date, the price was $9.00 per share. The stock options will vestequally over a four-year period, with options to purchase 10,000 shares ofCommon Stock vesting on each of the first, second, third, and fourthanniversaries of the agreement. The options will expire on May 5, 2014.

Mr. Manzetti will be entitled to severancepayments if (a) the Company terminates or fails to renew the agreement,other than for “cause” (as defined in the agreement), or (b) the agreementis terminated or not renewed by Mr. Manzetti for “good reason” (as definedin the agreement). The severance amount payable to Mr. Manzetti is equalto (i) 24 months of Mr. Manzetti’s annual base salary if terminatedin his first year of employment, (ii) 18 months of Mr. Manzetti’sannual base salary if terminated in his second year of employment (or if hisemployment is not renewed for a third year) and (iii) 12 months of Mr. Manzetti’sannual base salary if terminated (or if his employment is not renewed) at anypoint thereafter. The Company may pay the severance in one lump sum or assalary continuation over a one-year period. In addition to the cash severance, Mr. Manzettiwill be entitled to health benefits for a period of 24 months following thetermination of (or failure to renew) his employment. If Mr. Manzetti isterminated because of a “disability” (as defined in the agreement), he will beentitled to a severance payment equal to six months of his annual base salary,and all unvested stock options owned by Mr. Manzetti at such time shallimmediately vest.

If there is a “change ofcontrol” (as defined in the agreement) and Mr. Manzetti is not employed bythe successor entity in the same or similar capacity (at the same level ofcompensation, including bonus opportunity) after such change of control, (i) Mr. Manzettiwill be entitled to a severance amount equal to his annual base salary, plushis highest bonus earned in the two prior years and (ii) all stock optionsowned by Mr. Manzetti at such time will become immediately vested.

**CompensationCommittee Interlocks and Insider Participation**

Messrs. Gertler,Saranow, Wilner & Ms. Wysenski were members of the CompensationCommittee during 2004. There were no Compensation Committee interlockingrelationships in 2004.

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

**Security Ownership**

Exceptas otherwise indicated below, the following table sets forth information knownto the Company with respect to the beneficial ownership of the Company’s CommonStock as of February 25, 2005 by (i) all those known by the Companyto own more than 5% of the Company’s outstanding Common Stock; 

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(ii) each of the Company’s directors; (iii) eachexecutive officernamedin the Summary Compensation Table; and (iv) all Directors and executiveofficers named in the Summary Compensation Table as a group:
| ** **                                                    | ** ** | **Beneficial Ownership** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|
| **Name and Address(1)**                             | ** ** | ** **                    | ** ** | **Number of Shares** | ** ** | **Approximate  Percent of  Total** | ** ** |
| L. Michael Cutrer                                             |       |                          | 1,078,251  | (2) |   |   | 6.3 |   |   |
| Donald N. Ecker                                               |       |                          | 16,667     | (3) |   |   |   | * |   |
| John A. Friede                                                |       |                          | 2,482,074  | (4) |   |   | 15.1 |   |   |
| Jonathan P.  Gertler                                          |       |                          | 16,667     | (5) |   |   |   | * |   |
| Allan M. Green                                                |       |                          |       | (6) |   |   |   |   |   |
| Irwin J.  Gruverman                                           |       |                          | 500,988    | (7) |   |   | 3.1 |   |   |
| James W. Klingler                                             |       |                          | —     |   |   |   |   | * |   |
| Elliot Lebowitz                                               |       |                          |       | (8) |   |   |   |   |   |
| John W. Manzetti                                              |       |                          | 352,559    | (9) |   |   | 2.1 |   |   |
| Mitchell H.  Saranow                                          |       |                          | 55,000     | (10) |   |   |   | * |   |
| Gary N. Wilner                                                |       |                          | 17,667     | (11) |   |   |   | * |   |
| Nancy J. Wysenski                                             |       |                          | —     |   |   |   |   | * |   |
| All directors and  executive officers as a group (12 persons) |       |                          | 4,519,873  | (12) |   |   | 25.5 |   |   |
| Wells  Fargo & Company                               |       |                          | 1,295,400  | (13) |   |   | 7.9 |   |   |
| Kennedy Capital  Management, Inc.                        |       |                          | 1,529,950  | (14) |   |   | 9.4 |   |   |
|                                                               |            |                               |            |  |  |  |  |  |  |  |  |

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*                    Denotesless than 1%

(1)          Thistable is based upon information supplied by officers, directors, and principalstockholders of the Company and by Schedules 13D and 13G filed with the SEC.Except where indicated, the address of each five percent stockholder is c/o theCompany, 20200 Sunburst Street, Chatsworth, CA 91311. Applicable percentagesare based on 16,320,774 shares of Company Common Stock outstanding on February 25,2005, adjusted as required. The information known to the Company with respectto each of the following’s beneficial ownership of the Company’s Common Stockis as of February 25, 2005: L. Michael Cutrer, Donald N. Ecker, JohnA. Friede, Jonathan P. Gertler, Irwin J. Gruverman, James W. Klingler, John W.Manzetti, Mitchell H. Saranow, Gary N. Wilner and Nancy J. Wysenski, exceptthat Allan M. Green’s information is as of October 14, 2004, and ElliotLebowitz’s information is as of October 12, 2004.

(2)          Includes799,668 shares subject to outstanding options which are deemed exercised. Alsoincludes 53,583 shares owned by a trust over which the reporting person hasshared voting and dispositive power with his spouse. Also includes 2,508 sharesheld in a trust for the reporting person’s sons.

(3)          Includes16,667 shares subject to outstanding options which are deemed exercised.

(4)          Includes90,456 shares subject to outstanding options which are deemed exercised. Alsoincludes 1,147,487 shares owned by two trusts over which the reporting personhas voting and dispositive power.

(5)          Includes16,667 shares subject to outstanding options which are deemed exercised.

(6)          Theemployment contract for Dr. Green expired on October 14, 2004. As ofthat date, Dr. Green beneficially owned 335,750 shares.

(7)          Includes86,667 shares subject to outstanding options which are deemed exercised.

(8)          Dr. Lebowitzended his employment on October 12, 2004. As of that date, Dr. Lebowitzbeneficially owned 4,500 shares.

(9)          Includes352,559 shares subject to outstanding options which are deemed exercised.

(10)   Includes50,000 shares subject to outstanding options which are deemed exercised.

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(11)   Includes16,667 shares subject to outstanding options which are deemed exercised.

(12)   Includes1,429,351 shares subject to outstanding options which are deemed exercised.

(13)   Schedule13G dated December 31, 2004 states that Wells Fargo & Company andits subsidiary, Wells Capital Management Incorporated, are beneficial owners of1,295,400 shares. The principal address for Wells Fargo & Company is420 Montgomery Street, San Francisco, CA 94104.

(14)   Schedule13G dated December 31, 2004 states that Kennedy Capital Management, Inc.is a beneficial owner of 1,529,950 shares. The principal address for this partyis 10829 Olive Blvd., St. Louis, MO 63141.

**Equity Compensation**

Thefollowing table sets forth information about the Company’s equity compensationplans as of October 31, 2004.
| **Plan category**                                  | ** ** | ** ** | ** ** | **Number of Shares  to be Issued Upon  Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted Average   Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Shares  Remaining Available  For Future Issuance Under  Equity Compensation Plans  (excluding securities reflected  in column (a))** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  stockholders(1)  |       |       | 3,253,821  |                                                                                                                                         |       |                                                                                                                   | $          | 6.96                                                                                                                                                                                                         |       |   |   | 1,809,812 | (2) |   |
| Equity compensation plans not approved by  stockholders |       |       | None       |                                                                                                                                         |       |                                                                                                                   | None       |                                                                                                                                                                                                         |       |   | None |   |   |
| Total                                                   |       |       | 3,253,821  |                                                                                                                                         |       |                                                                                                                   | $          | 6.96                                                                                                                                                                                                         |       |   |   | 1,809,812 |   |   |

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(1)          Consistsof the 1996 Stock Option Plan, as amended (the “1996 Plan”), the 2003Non-Employee Directors’ Equity Compensation Plan (the “2003 Plan”) and the 2000Employee Stock Purchase Plan (the “ESPP”).

(2)          Includesshares available for issuance under the ESPP. As of October 31, 2004 anaggregate of 230,070 shares of common stock were available for issuance underthe ESPP.

**Item13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Friede, aDirector of the Company, owed NOMOS Corporation (“NOMOS”) $287,160 plus interest,which principal amount was loaned to Mr. Friede on May 22, 2003. Uponthe consummation of the merger with NOMOS on May 4, 2004, and in partialconsideration for the time, efforts and resources that Mr. Friede providedNOMOS in the past, NOMOS had agreed to cancel this indebtedness. Thecancellation of this indebtedness was conditioned upon the consummation of themerger and became effective immediately prior to the consummation of themerger.

NOMOS was party to aletter agreement dated February 11, 2002 with Mr. Friede, whichprovided that if Mr. Friede’s employment was terminated without cause, hewould receive continued payment of his base salary, which was $180,000 peryear, and health benefits for twelve months after the termination date. Mr. Friedewas terminated as an employee without cause following the consummation of themerger of NOMOS on May 4, 2004. Therefore the Company, as NOMOS’successor, was obligated to pay this severance to Mr. Friede.

The merger agreement withNOMOS provided for a combination of cash and the Company’s Common Stock to bepaid to the NOMOS stockholders. All of the cash consideration in the merger,other than with respect to fractional shares, has been paid to the holders ofNOMOS series B preferred stock and series C preferred stock. Mr. Friedebeneficially owned approximately 80% of the outstanding NOMOS series Bpreferred stock. Upon consummation of the merger, the sum of approximately$180,000 was paid by the Company to Mr. Friede. As a result of the merger,Mr. Friede received Common Stock of 

67

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theCompany in exchange for those shares of his stock of NOMOS that were notcovered by cash compensation. Mr. Friede received 2,330,563 shares ofCommon Stock of the Company.

Effective on thecompletion of the merger with NOMOS, all outstanding unvested NOMOS stockoptions held by Mr. Friede and Mr. Manzetti, a Director of theCompany and President of the NOMOS Radiation Oncology Division of the Company,and other NOMOS directors and employees immediately vested and becameexercisable for the Company’s Common Stock, as provided by the merger agreement.As a result, Mr. Friede has options to purchase a total of 146,991 sharesof the Company’s Common Stock at a blended exercise price of $15.31 per share;and Mr. Manzetti has options to purchase a total of 373,070 shares of theCompany’s Common Stock at a blended exercise price of $1.71 per share.

**Item14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

**PrincipalAccountant Audit Fees and Services Fees**

Thefollowing table describes fees for professional audit services rendered byPricewaterhouseCoopers LLP, our independent resistered public accounting firm,for the audit of our annual financial statements for the years ended October 31,2004 and 2003, respectively, and fees billed for other services rendered byPricewaterhouseCoopers LLP during those periods. 
| **Type of Fee** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|----------|------------|
| Audit Fees(1)             |       | $          | 506,000    |     | $          | 200,000  |       |
| Audit Related  Fees(2)    |       | 334,000    |       | 156,000  |       |
| Tax Fees(3)               |       | 120,000    |       | 72,000   |       |
| All Other Fees            |       | —     |       | —   |       |
| Total                     |       | $          | 960,000    |     | $          | 428,000  |       |

----

(1)          AuditFees include fees for professional services rendered by PricewaterhouseCoopersLLP for the audit of our annual financial statements and reviews of quarterlyinterim financial statements included in our Form 10-Q. This category alsoincludes fees for services that generally only the independent registered publicaccounting firm reasonably can provide to a company, such as procedures relatedto consents and assistance with and review of documents filed with theSecurities and Exchange Commission.

(2)          AuditRelated Fees include fees for professional services rendered byPricewaterhouseCoopers LLP associated with assurance and related servicestraditionally performed by the independent registered public accounting firmand that are reasonably related to the performance of the audit or review ofthe Company’s financial statements.  Thiscategory includes fees related to assistance in financial due diligence relatedto mergers and acquisitions, accounting consultations, consultations concerningfinancial accounting and reporting standards.

(3)          Tax Fees include thefees for professional services rendered by PricewaterhouseCoopersLLP for tax compliance, tax advice and tax planning.

**AuditCommittee Pre-Approval Policies and Procedures**

The Audit Committee on anannual basis reviews audit and non-audit services performed by the independent registeredpublic accounting firm. All audit and non-audit services are pre-approved bythe Audit Committee, which considers, among other things, the possible effectof the performance of such services on the auditors’ independence. The AuditCommittee has considered the role of PricewaterhouseCoopers LLP in providingservices to us for the fiscal year ended October 31, 2004 and hasconcluded that such services are compatible with their independence as ourauditors. The Audit Committee has established its pre-approval policies andprocedures, pursuant to which the Audit Committee approved the foregoing auditand other services provided by PricewaterhouseCoopers LLP in fiscal 2004 and2003.

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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         | 72 |
|   |       |                                                                                                                                                 | Consolidated  Balance Sheets                                     | 73 |
|   |       |                                                                                                                                                 | Consolidated  Statements of Operations                           | 74 |
|   |       |                                                                                                                                                 | Consolidated  Statements of Changes in Stockholders’ Equity | 75 |
|   |       |                                                                                                                                                 | Consolidated  Statements of Cash Flows                           | 76 |
|   |       |                                                                                                                                                 | Notes  to Consolidated Financial Statements                      | 77 |
| 2.     |       | Financial  Statement Schedule                                                                                                                        |                                                             |
|   |       |                                                                                                                                                 | Schedule  II—Valuation and Qualifying Accounts              | 100 |
|   |       | 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.                                              |
| 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.                                                                                                                                                                  |

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| 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  | 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.                                                                                                                                                          |
| 10.17  | 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.                                                                                                 |

70

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| 10.18  | 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19* | Employment  Agreement dated May 5, 2004, by and between John W. Manzetti and the Registrant.                                                                                                                        |
| 10.20* | Lease Agreement dated  August 22, 2002, by and between NOMOS Corporation and Cranberry 200  Venture, L.P.                                                                                                           |
| 10.21* | Amendment to Lease  Agreement dated September 27, 2002, by and between NOMOS Corporation and  Cranberry 200 Venture, L.P.                                                                                           |
| 10.22* | Secured Loan Agreement  dated as of October 15, 2003 by and between the Registrant and Prostate  Centers of America.                                                                                                |
| 10.23* | Settlement Agreement  dated as of August 4, 2004, by and between NOMOS Corporation and  Parker/Hunter, Incorporated.                                                                                                |
| 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  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

71

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**REPORT**OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the consolidated financial statementslisted in the index appearing under Item 15(a)(1) present fairly, inall material respects, the financial position of North American Scientific, Inc.and its subsidiaries (the “Company”) at October 31, 2004 and 2003, and theresults of their operations and their cash flows for each of the three years inthe period ended October 31, 2004 in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in ouropinion, the financial statement schedule listed in the index appearing underItem 15(a)(2) presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements. These financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

Asdiscussed in Note 5 to the consolidated financial statements, the Companychanged the manner in which it accounts for variable interest entities duringthe year ended October 31, 2003. As discussed in Note 6 to theconsolidated financial statements, the Company changed the manner in which itaccounts for asset retirement costs as of November 1, 2002.
| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
| Los Angeles, California        |
| February 25, 2005              |

 

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**NORTH AMERICANSCIENTIFIC, INC.**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                                          | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2004**             | ** ** | **2003** | ** ** |
| **Assets**                                                                                                                                                                          |       |                 |       |   |   |
| Current assets                                                                                                                                                                      |       |                 |       |   |   |
| Cash and cash  equivalents                                                                                                                                                          |       | $                    | 2,334,000  |   | $ | 1,761,000 |   |
| Marketable securities                                                                                                                                                               |       | 10,046,000           |       | 32,587,000 |   |
| Accounts receivable                                                                                                                                                                 |       | 7,132,000            |       | 2,167,000 |   |
| Inventories                                                                                                                                                                         |       | 4,871,000            |       | 692,000 |   |
| Income tax receivable                                                                                                                                                               |       | —               |       | 496,000 |   |
| Prepaid expenses and  other current assets                                                                                                                                          |       | 1,061,000            |       | 1,053,000 |   |
| Total current assets                                                                                                                                                                |       | 25,444,000           |       | 38,756,000 |   |
| Non-current marketable securities                                                                                                                                                   |       | 2,600,000            |       | 14,767,000 |   |
| Equipment and leasehold improvements                                                                                                                                                |       | 4,127,000            |       | 2,996,000 |   |
| Goodwill                                                                                                                                                                            |       | 18,732,000           |       | 3,866,000 |   |
| Intangible assets                                                                                                                                                                   |       | 29,504,000           |       | 813,000 |   |
| Other assets                                                                                                                                                                        |       | 132,000              |       | 1,334,000 |   |
| Total assets                                                                                                                                                                        |       | $                    | 80,539,000 |   | $ | 62,532,000 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                      |       |                 |       |   |   |
| Current liabilities                                                                                                                                                                 |       |                 |       |   |   |
| Accounts payable                                                                                                                                                                    |       | $                    | 2,061,000  |   | $ | 1,620,000 |   |
| Accrued expenses                                                                                                                                                                    |       | 6,808,000            |       | 5,166,000 |   |
| Deferred revenue                                                                                                                                                                    |       | 6,293,000            |       | — |   |
| Total liabilities                                                                                                                                                                   |       | 15,162,000           |       | 6,786,000 |   |
| 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; 16,308,487 (2004) and 10,298,241 (2003)  shares issued; and 16,200,461 (2004) and 10,279,241 (2003) shares outstanding |       | 163,000              |       | 103,000 |   |
| Additional paid-in  capital                                                                                                                                                         |       | 120,220,000          |       | 74,343,000 |   |
| Treasury stock, at  cost—108,026 (2004) and 19,000 (2003) common shares                                                                                                        |       | (129,000             | )          | (129,000 | ) |
| Accumulated deficit                                                                                                                                                                 |       | (54,877,000          | )          | (18,571,000 | ) |
| Total stockholders’  equity                                                                                                                                                    |       | 65,377,000           |       | 55,746,000 |   |
| Total liabilities and stockholders’ equity                                                                                                                                     |       | $                    | 80,539,000 |   | $ | 62,532,000 |   |

 

The accompanying notes are an integral part of the consolidated financialstatements.

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**NORTH AMERICANSCIENTIFIC, INC.**

**ConsolidatedStatements of Operations**
| ** **                                                                             | ** ** | **For the Years Ended October 31,** | ** **  |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                                             | ** ** | **2004**                                                     | ** **  | **2003** | ** ** | **2002** | ** ** |
| Revenue                                                                                |       |                                                         |        |   |   |   |   |
| Product                                                                                |       | $                                                            | 19,486,000  |   | $ | 14,683,000 |   | $ | 20,780,000 |   |
| Service                                                                                |       | 5,251,000                                                    |        | — |   | — |   |
| Total revenue                                                                          |       | 24,737,000                                                   |        | 14,683,000 |   | 20,780,000 |   |
| Cost of revenues                                                                       |       |                                                         |        |   |   |   |   |
| Product                                                                                |       | 13,482,000                                                   |        | 6,944,000 |   | 7,581,000 |   |
| Service                                                                                |       | 2,336,000                                                    |        | — |   | — |   |
| Total cost of revenue                                                                  |       | 15,818,000                                                   |        | 6,944,000 |   | 7,581,000 |   |
| Gross profit                                                                           |       | 8,919,000                                                    |        | 7,739,000 |   | 13,199,000 |   |
| Selling expenses                                                                       |       | 6,709,000                                                    |        | 3,411,000 |   | 521,000 |   |
| General and  administrative expenses                                                   |       | 12,179,000                                                   |        | 6,163,000 |   | 5,369,000 |   |
| Research and development                                                               |       | 3,209,000                                                    |        | 499,000 |   | 491,000 |   |
| Amortization of  intangible assets                                                     |       | 1,172,000                                                    |        | 13,000 |   | 1,000 |   |
| In-process research and  development                                                   |       | 9,200,000                                                    |        | — |   | — |   |
| Merger and integration  costs                                                          |       | 1,056,000                                                    |        | — |   | — |   |
| Total operating expenses                                                               |       | 33,525,000                                                   |        | 10,086,000 |   | 6,382,000 |   |
| Income (loss) from  operations                                                         |       | (24,606,000                                                  | )           | (2,347,000 | ) | 6,817,000 |   |
| Interest and other  income, net                                                        |       | 579,000                                                      |        | 1,749,000 |   | 1,834,000 |   |
| Income (loss) before  provision (benefit) for income taxes                             |       | (24,027,000                                                  | )           | (598,000 | ) | 8,651,000 |   |
| Provision (benefit) for  income taxes                                                  |       | (257,000                                                     | )           | — |   | 2,087,000 |   |
| Income (loss) from  continuing operations                                              |       | (23,770,000                                                  | )           | (598,000 | ) | 6,564,000 |   |
| Loss from discontinued  operation (including a loss on disposal of $5,231,000 in 2004) |       | (12,537,000                                                  | )           | (8,536,000 | ) | (11,808,000 | ) |
| Loss before cumulative  effect of change in accounting principle                       |       | (36,307,000                                                  | )           | (9,134,000 | ) | (5,244,000 | ) |
| Cumulative effect of  change in accounting principle                                   |       | —                                                       |        | (306,000 | ) | — |   |
| Net loss                                                                               |       | $                                                            | (36,307,000 | ) | $ | (9,440,000 | ) | $ | (5,244,000 | ) |
| Basic loss per share:                                                                  |       |                                                         |        |   |   |   |   |
| Continuing operations                                                                  |       | $                                                            | (1.81       | ) | $ | (0.06 | ) | $ | 0.65 |   |
| Discontinued operations                                                                |       | (0.95                                                        | )           | (0.83 | ) | (1.16 | ) |
| Cumulative effect of change in accounting principle                                    |       | —                                                       |        | (0.03 | ) | — |   |
| Net loss                                                                               |       | $                                                            | (2.76       | ) | $ | (0.92 | ) | $ | (0.51 | ) |
| Diluted loss per  share:                                                               |       |                                                         |        |   |   |   |   |
| Continuing operations                                                                  |       | $                                                            | (1.81       | ) | $ | (0.06 | ) | $ | 0.57 |   |
| Discontinued operations                                                                |       | (0.95                                                        | )           | (0.83 | ) | (1.02 | ) |
| Cumulative effect of change in accounting principle                                    |       | —                                                       |        | (0.03 | ) | — |   |
| Net loss                                                                               |       | $                                                            | (2.76       | ) | $ | (0.92 | ) | $ | (0.45 | ) |
| Weighted average  number of common shares outstanding                                  |       |                                                         |        |   |   |   |   |
| Basic                                                                                  |       | 13,138,721                                                   |        | 10,257,688 |   | 10,209,584 |   |
| Diluted                                                                                |       | 13,138,721                                                   |        | 10,257,688 |   | 11,596,074 |   |

 

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

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**NORTH AMERICANSCIENTIFIC, INC.**

**ConsolidatedStatements of Changes in Stockholders’ Equity**
| ** **                                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’ ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**             | ** ** | **Shares**      | ** ** | **Amount**                            | ** ** | **Deficit**                         | ** ** | **Income** | ** ** | **Equity** | ** ** |
| Balance at  October 31, 2001                           |       | 10,163,470            |       | $                       | 102,000    |                    | $          | 73,568,000      |       | —                                |       | $                                   | —     |   | $ | (3,887,000 | ) |   | $ | 90,000 |   |   |   | $ | 69,873,000 |   |   |
| Common stock  issued upon exercise of stock options         |       | 73,340                |       | 1,000                   |       | 232,000                 |       | —          |       | —                                |       | —                              |       |   | — |   |   |   | 233,000 |   |   |
| Common stock  issued under employee stock purchase plan     |       | 13,326                |       | —                  |       | 129,000                 |       | —          |       | —                                |       | —                              |       |   | — |   |   |   | 129,000 |   |   |
| Change in  unrealized gain on securities available for sale |       | —                |       | —                  |       | —                  |       | —          |       | —                                |       | —                              |       |   | (90,000 | ) |   |   | (90,000 | ) |   |
| Net loss                                                    |       | —                |       | —                  |       | —                  |       | —          |       | —                                |       | (5,244,000                          | )          |   | — |   |   |   | (5,244,000 | ) |   |
| 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 |   |   |

 

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

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**NORTH AMERICANSCIENTIFIC, INC.**

**ConsolidatedStatements of Cash Flows**
| ** **                                                                                 | ** ** | **For the Years Ended October 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2004**                                                     | ** **  | **2003** | ** ** | **2002** | ** ** |
| Cash flows from  operating activities:                                                     |       |                                                         |        |   |   |   |   |
| Net loss                                                                                   |       | $                                                            | (36,307,000 | ) | $ | (9,440,000 | ) | $ | (5,244,000 | ) |
| Loss from discontinued operations                                                          |       | 12,537,000                                                   |        | 8,536,000 |   | 11,808,000 |   |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                         |        |   |   |   |   |
| Write-off in-process  research and development                                             |       | 9,200,000                                                    |        | — |   | — |   |
| Depreciation and  amortization                                                             |       | 2,139,000                                                    |        | 780,000 |   | 793,000 |   |
| Provision for doubtful  accounts                                                           |       | 522,000                                                      |        | 65,000 |   | 343,000 |   |
| Non-cash stock  compensation expense                                                       |       | 351,000                                                      |        | 47,000 |   | — |   |
| Cumulative effect of  change in accounting principle                                       |       | —                                                       |        | 306,000 |   | — |   |
| Deferred income taxes                                                                      |       | —                                                       |        | — |   | 3,371,000 |   |
| Gain on sale of non-marketable  securities                                                 |       | —                                                       |        | (600,000 | ) | (45,000 | ) |
| Other                                                                                      |       | —                                                       |        | 113,000 |   | 247,000 |   |
| Changes in assets and liabilities, net of  acquisitions and discontinued operations:       |       |                                                         |        |   |   |   |   |
| Accounts receivable                                                                        |       | (2,579,000                                                   | )           | 295,000 |   | (974,000 | ) |
| Inventories                                                                                |       | 414,000                                                      |        | (24,000 | ) | 13,000 |   |
| Income taxes                                                                               |       | 496,000                                                      |        | 510,000 |   | (699,000 | ) |
| Prepaid expenses and  other assets                                                         |       | 2,081,000                                                    |        | (997,000 | ) | 238,000 |   |
| Accounts payable                                                                           |       | (1,310,000                                                   | )           | 361,000 |   | — |   |
| Accrued expenses                                                                           |       | (3,965,000                                                   | )           | 2,415,000 |   | 387,000 |   |
| Deferred revenue                                                                           |       | 1,552,000                                                    |        | — |   | — |   |
| Net cash provided by  (used in) continuing operations                                 |       | (14,869,000                                                  | )           | 2,367,000 |   | 10,238,000 |   |
| Net cash used in  discontinued operations                                                  |       | (8,393,000                                                   | )           | (8,630,000 | ) | (8,513,000 | ) |
| Net cash provided by  (used in) operating activities                                       |       | (23,262,000                                                  | )           | (6,263,000 | ) | 1,725,000 |   |
| Cash flows from  investing activities:                                                     |       |                                                         |        |   |   |   |   |
| Proceeds from sale of marketable securities                                                |       | 52,108,000                                                   |        | 39,649,000 |   | 34,329,000 |   |
| Purchases of marketable securities                                                         |       | (17,400,000                                                  | )           | (33,766,000 | ) | (36,353,000 | ) |
| Proceeds from sales of non-marketable  securities                                          |       | —                                                       |        | 408,000 |   | — |   |
| Acquisitions, net of cash acquired                                                         |       | (13,248,000                                                  | )           | (662,000 | ) | — |   |
| Capital expenditures                                                                       |       | (1,308,000                                                   | )           | (365,000 | ) | (439,000 | ) |
| Net cash provided by  (used in) investing activities                                       |       | 20,152,000                                                   |        | 5,264000 |   | (2,463,000 | ) |
| Cash flows from  financing activities:                                                     |       |                                                         |        |   |   |   |   |
| Net proceeds from stock options and stock purchase  plan                                   |       | 3,683,000                                                    |        | 181,000 |   | 362,000 |   |
| Purchase of common stock as treasury stock                                                 |       | —                                                       |        | (129,000 | ) | — |   |
| Net cash provided by  financing activities                                                 |       | 3,683,000                                                    |        | 52,000 |   | 362,000 |   |
| Net increase (decrease) in cash and cash equivalents                                       |       | 573,000                                                      |        | (947,000 | ) | (376,000 | ) |
| Cash and cash equivalents at beginning of period                                           |       | 1,761,000                                                    |        | 2,708,000 |   | 3,084,000 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                                            | 2,334,000   |   | $ | 1,761,000 |   | $ | 2,708,000 |   |

 

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

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**NORTH AMERICANSCIENTIFIC, INC.**

**Notes** to Consolidated FinancialStatements

**NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

*Business*

North American Scientific, Inc.(the “Company”), a Delaware corporation, designs, develops and manufacturesproducts 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. The Companyhas incurred net losses of $36.3 million, $9.4 million, and $5.2 million forthe years ended October 31, 2004, 2003 and 2002, respectively and has usedcash in operations of $23.3 million and $6.3 million for the years ended October 31,2004 and 2003, respectively offset by $1.7 million of cash provided byoperations in 2002. As of October 31, 2004, the Company has cash, cashequivalents and marketable securities of $15.0 million, no long-term debt, andan accumulated deficit of $54.9 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, realizing the benefits of the integration of historicoperation and NOMOS operations and a focus on cost control. There is noassurance that management will be successful with these plans. However, ifevents and circumstances occur such that the Company does not meet its currentoperating plan as expected, and the Company is unable to raise additionalfinancing, the Company may be required to further reduce certain discretionaryspending, which could have a material adverse effect on the Company’s abilityto achieve its intended business objectives.

*Principles of Consolidation*

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 years 2003 and 2002 have been restated to present the discontinuedTheseus operations separate from continuing operations (See Note 3). Certainother reclassifications have been made to prior year balances in order toconform to the 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 Cash Equivalents*

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 of Financial 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.

*Marketable Securities*

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 Receivable and Allowance for DoubtfulAccounts:*

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 and Leasehold 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 are amortized on a straight-linebasis over periods ranging up to fifteen years. The amortization periods ofpatents are based on the lives of the license agreements to which they areassociated or the approximate remaining lives of the patents, whichever isshorter. Purchased intangible assets with finite lives are carried at cost lessaccumulated amortization and are amortized on a straight-line basis or anaccelerated basis over the expected periods of benefit which range from threeto fourteen 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*

The Company applies theprovisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition” for the sale of non-software products. SAB No. 104, whichsupercedes 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 

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exists, (ii) deliveryhas occurred, (iii) the fee is fixed or determinable, and (iv) collectibilityis reasonably assured.

*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, SoftwareRevenue Recognition, with respect to Certain Transactions”. Under theprovisions of SOP 97-2, the Company recognizes software revenue upon deliveryand acceptance, provided all significant obligations have been met, persuasiveevidence of an arrangement exists, fees are fixed or determinable, collectionis probable, and the Company is not involved in providing services that areessential 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 fair valueof the element exists, the determination is based on vendor specific objectiveevidence. If such evidence of fair value for each element of the arrangementdoes not exist, all revenue from the arrangement is deferred until such timethat evidence of fair value of each element does exist or until all elements ofthe arrangement are delivered. If in a multiple element arrangement, fair valuedoes not exist for one or more of the undelivered elements, the residual methodof accounting is applied. Under the residual method, the fair value of theundelivered elements is deferred, and the remaining portion of the arrangementfee 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 and Development 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-process researchand development projects and technologies which have no alternative future use.Research and development costs are expensed as incurred.

*Stock-based Compensation*

The Company accounts for its stock option awards 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-based

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compensation, which theCompany has adopted as of November 1, 2002. The Company has elected tocontinue to account for its stock-based compensation using the intrinsicvalue method of accounting according to the provisions of APB Opinion No. 25.

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,** | ** **  |
|------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                               | ** ** | **2004**                                  | ** **  | **2003** | ** ** | **2002** | ** ** |
| Net loss, as reported                    |       | $                                         | (36,307,000 | ) | $ | (9,440,000 | ) | $ | (5,244,000 | ) |
| Add: stock-based compensation recognized |       | 351,000                                   |        | — |   | — |   |
| Less: total stock-based compensation (1) |       | (2,561,000                                | )           | (2,151,000 | ) | (2,298,000 | ) |
| Net loss, as adjusted                    |       | $                                         | (38,517,000 | ) | $ | (11,591,000 | ) | $ | (7,542,000 | ) |
| Basic loss per share, as  reported       |       | $                                         | (2.76       | ) | $ | (0.92 | ) | $ | (0.51 | ) |
| Diluted loss per share, as reported      |       | $                                         | (2.76       | ) | $ | (0.92 | ) | $ | (0.45 | ) |
| Basic loss per share, as adjusted        |       | $                                         | (2.93       | ) | $ | (1.13 | ) | $ | (0.74 | ) |
| Diluted loss per  share, as adjusted     |       | $                                         | (2.93       | ) | $ | (1.13 | ) | $ | (0.65 | ) |

 

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(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.

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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,** | ** **  |
|---------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                        | ** ** | **2004**                                  | ** **  | **2003** | ** ** | **2002** | ** ** |
| Net loss, as reported                             |       | $                                         | (36,307,000 | ) | $ | (9,440,000 | ) | $ | (5,244,000 | ) |
| Weighted average shares outstanding—Basic    |       | 13,138,721                                |        | 10,257,688 |   | 10,209,584 |   |
| Dilutive effect of stock options and warrants     |       | —                                    |        | — |   | 1,386,490 |   |
| Weighted average shares  outstanding—Diluted |       | 13,138,721                                |        | 10,257,688 |   | 11,596,074 |   |
| Basic loss per share                              |       | $                                         | (2.76       | ) | $ | (0.92 | ) | $ | (0.51 | ) |
| Diluted loss per  share                           |       | $                                         | (2.76       | ) | $ | (0.92 | ) | $ | (0.45 | ) |

 

Stock options and warrantsto purchase 3,673,210, 2,313,726 and 615,260 common shares for the years ended October 31,2004, 2003 and 2002, respectively, were not included in the computation ofdiluted loss per share for those years because their effect would have beenanti-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 of CreditRisk*

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.

The Company extendsdiffering levels of credit to customers, does not require collateral, andmaintains reserves for potential credit losses based upon the collectibility ofaccounts receivable. The Company monitors the credit worthiness of itscustomers and makes provision whenever there are indications of potentialcredit losses.

*Significant Concentrations*

As of October 31,2004, there were no customers that made up more than 10% of the accountsreceivable or generated more than 10% of sales for the year ended October 31,2004. The Company had an exclusive agreement with Mentor Corporation (“Mentor”)for the distribution of its brachytherapy products which terminated in January 2003.This customer represented 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.

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*Recent AccountingPronouncements*

In December 2003, theSEC issued SAB No. 104. SAB No. 104 revises or rescinds portions ofthe interpretive guidance included in Topic 13 of the codification of staffaccounting bulletins in order to make this interpretive guidance consistentwith current authoritative accounting and auditing guidance and SEC rules andregulations. It also rescinds the Revenue Recognition in Financial StatementsFrequently Asked Questions and Answers document issued in conjunction withTopic 13. Selected portions of that document have been incorporated into Topic13. The adoption of SAB No. 104 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

In July 2004, the EmergingIssues Task Force (“EITF”) published its consensus on Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and its Application to CertainInvestments.” EITF Issue No. 03-1 addresses the meaning of otherthan temporary impairment and its application to debt and equity securitieswithin the scope of SFAS No. 115, certain debt and equity securitieswithin the scope of SFAS No. 124, and equity securities that are notsubject to the scope of SFAS No. 115 and accounted for under the equitymethod. In September 2004, the FASB issued FASB Staff Position (“FSP”)EITF Issue No. 03-1-1, which delays the effect date for therecognition and measurement guidance in EITF Issue No. 03-1. Inaddition, the FASB has issued a proposed FSP to consider whether furtherapplication guidance is necessary for securities analyzed for impairment underEITF issue No. 03-1. The Company continues to assess the potentialimpact that the adoption of the proposed FSP could have on our financialstatements.

In December 2004, theFASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” thataddresses the accounting for share-based payment transactions in which aCompany receives employee services in exchange for (a) equity instrumentsof the Company or (b) liabilities that are based on the fair value of theCompany’s equity instruments or that may be settled by the issuance of suchequity instruments. SFAS No. 123R addresses all forms of share-basedpayment awards, including shares issued under employee stock purchase plans,stock options, restricted stock and stock appreciation rights. SFAS No. 123Reliminates the ability to account for share-based compensation transactionsusing APB Opinion No. 25, “Accounting for Stock Issued to Employees”, thatwas provided in Statement 123 as originally issued. Under SFAS No. 123Rcompanies are required to record compensation expense for all share basedpayment award transactions measured at fair value. This statement is effectivefor quarters ending after June 15, 2005. The Company has not yetdetermined the impact of applying the various provisions of SFAS No. 123R.

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs”. This Statement amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). In addition, this Statement requiresthat allocation of fixed production overhead to the costs of conversion bebased on the normal capacity of the production facilities. The provisions ofthis Statement will be effective for the Company beginning with its fiscal yearending 2005. The Company is currently evaluating the impact of this newstandard, but believes that it will not have a material impact on the Company’sfinancial position, results of operations or cash flows.

In December 2004, theFASB issued SFAS No. 153 “Exchanges of Non-monetary Assets—an amendment ofAPB Opinion No. 29”. This Statement amended APB Opinion No. 29 toeliminate the exception for non-monetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of non-monetary assetsthat do not have commercial substance. A non-monetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. The Company is currently evaluatingthe impact of this new standard, but believes that it will not have a materialimpact upon the Company’s financial position, results of operations or cashflows.

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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 andare managed separately because they operate with distinct manufacturing anddevelopment processes.
| ** **                         | ** ** | **Year Ended October 31,** | ** **  |
|------------------------------------|------------|-------------------------------------------|-------------|
| ** **                         | ** ** | **2004**                                  | ** **  | **2003** | ** ** | **2002** | ** ** |
| **Net  sales**                     | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| IMRT/IGRT                          |       | $                                         | 11,759,000  |   | $ | — |   | $ | — |   |
| Radiation Sources                  |       | 12,978,000                                |        | 14,683,000 |   | 20,780,000 |   |
|                               |       | $                                         | 24,737,000  |   | $ | 14,683,000 |   | $ | 20,780,000 |   |
| **Income  (loss) from operations** | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| IMRT/IGRT                          |       | $                                         | (17,766,000 | ) | $ | — |   | $ | — |   |
| Radiation Sources                  |       | (6,840,000                                | )           | (2,347,000 | ) | 6,817,000 |   |
|                               |       | $                                         | (24,606,000 | ) | $ | (2,347,000 | ) | $ | 6,817,000 |   |

 
| ** **             | ** ** | **October 31,** | ** ** |
|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **2004**             | ** ** | **2003** | ** ** |
| **Goodwill**           | ** ** | ** **           | ** ** | ** ** | ** ** |
| IMRT/IGRT              |       | $                    | 18,525,000 |   | $ | — |   |
| Radiation Sources      |       | 207,000              |       | 207,000 |   |
| Discontinued operation |       | —               |       | 3,659,000 |   |
| Total goodwill         |       | $                    | 18,732,000 |   | $ | 3,866,000 |   |
| **Total  assets**      | ** ** | ** **           | ** ** | ** ** | ** ** |
| IMRT/IGRT              |       | $                    | 61,719,000 |   | $ | — |   |
| Radiation Sources      |       | 18,608,000           |       | 57,790,000 |   |
| Discontinued operation |       | 212,000              |       | 4,742,000 |   |
| Total assets           |       | $                    | 80,539,000 |   | $ | 62,532,000 |   |

 

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**NOTE 3—DISCONTINUEDOPERATION**

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 million charge forthe impairment of goodwill and long-lived assets. Discussions with the variouspotential financial and strategic partners ceased in August 2004, whichresulted 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, licensetermination fees and facility shut down costs, offset by $0.2 in proceeds fromthe sale of long-lived assets and research materials during the quarter ended October 31,2004.

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 and 2002 have been restated accordingly.

Revenuesand loss from the discontinued operation were as follows:
| ** **                                 | ** ** | **For the Years Ended October 31,** | ** **  |
|--------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                 | ** ** | **2004**                                                     | ** **  | **2003** | ** ** | **2002** | ** ** |
| Net sales                                  |       | $                                                            | —      |   | $ | — |   | $ | — |   |
| Loss from discontinued  operation          |       | $                                                            | (7,306,000  | ) | $ | (8,536,000 | ) | $ | (11,808,000 | ) |
| Loss on disposal of discontinued operation |       | (5,231,000                                                   | )           | — |   | — |   |
| Loss from discontinued  operation          |       | $                                                            | (12,537,000 | ) | $ | (8,536,000 | ) | $ | (11,808,000 | ) |

 

Assetsand liabilities of the discontinued operations were as follows:
| ** **                                          | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Prepaid and other current assets                    |       | $                    | 186,000    |   | $ | 84,000 |   |
| Equipment and leasehold improvements                |       | —               |       | 634,000 |   |
| Goodwill                                            |       | —               |       | 3,659,000 |   |
| Intangible assets                                   |       | —               |       | 437,000 |   |
| Other assets                                        |       | 16,000               |       | 16,000 |   |
| Accounts payable                                    |       | (45,000              | )          | (389,000 | ) |
| Accrued expenses                                    |       | (1,516,000           | )          | (1,662000 | ) |
| Net assets (liabilities)  of discontinued operation |       | $                    | (1,359,000 | ) | $ | 2,779,000 |   |

 

**NOTE 4—ACQUISITIONS**

*Radiation Therapy Products*

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 (20,000shares). The cost of the acquisition, including approximately $68,000 in direct

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transactioncosts, was allocated to the assets acquired and liabilities assumed based onestimates of their respective fair values at the date of acquisition. TheCompany recorded the fair value of assets and liabilities acquired, whichconsisted primarily of net tangible assets ($0.2 million), purchased technology($0.2 million), other intangible assets ($0.1 million), and goodwill ($0.2million). RTP’s historical operations were not considered material to theCompany’s financial position or results of operations. The intangible assetsare being amortized over periods ranging from three to ten years. The Companyaccounts for the operations of the RTP in its Radiation Sources businesssegment.

*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.

As discussed in the Company’s Form 10-Q/A (AmendmentNo. 3) filed on March 11, 2005, we restated the Company’s financial statementsas of July 31, 2004 and for the three and nine month periods then ended torevise the initial allocation of the purchase price of NOMOS. The restatementresulted in increases to the IPR & D charge by $1.4 million, purchasedtechnology by $5.2 million; existing customer relationships by $0.9 millionwith corresponding decreases in the values assigned to trademark by $3.3million and goodwill by $4.2 million. The revised values are reflected in theamounts assigned to the intangible assets presented below.

The purchase price of approximately $58 million consistedof $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 assumptionof 1.4 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. The fair value of the common stock used indetermining the purchase price was $7.21 per share based on the average of theclosing price of the common stock for the period two days before and after the October 27,2003 merger agreement announcement date. The stock options and warrants, whichfully vested at the acquisition date, were valued using a Black-Scholesvaluation model with the following assumptions: risk-free interest rate of4.5%, volatility factor of 60%, expected term of 1.5 years for stockoptions, contractual term of 0.5 years for warrants and no dividend yield.The acquisition was accomplished through a reverse triangular merger into awholly owned subsidiary of the Company, and is reflected in the Company’sfinancial statements, including the footnotes thereto, as the IMRT/IGRToperating segment.

Pursuant to the 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 $1.2million of cash will be held for a period of two years following theacquisition date, as a source of reimbursement for losses arising from anybreach by NOMOS of its representations or obligations under the purchaseagreement. With respect to the second escrow fund, 307,617 shares of theCompany’s common stock and $0.7 million of cash were held in escrow as a sourceof reimbursement for any losses incurred in connection with the demand madeagainst NOMOS by Parker/Hunter Incorporated (“Parker/Hunter”). The escrowedfunds were deemed contingently returnable for accounting purposes until theParker/Hunter matter was 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 toenhance existing products, develop new products and to allow the combinedcompany to generate new product sales to further penetrate and expandgeographic markets for 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 will not result in futureincome tax deductions since the acquisition is expected to be a nontaxabletransaction. The deferred tax liabilities related to such temporary differenceswere offset by deferred tax assets (primarily net operating loss carryforwardssubject to change 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 

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will file consolidated andcombined federal and state income tax returns with NOMOS. Goodwill is notdeductible for income tax purposes. Accordingly, no provision or benefit forincome taxes were recognized in the accompanying pro forma results ofoperations.

Theacquired identifiable intangible assets are amortized over their useful livesas 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 a $1.1 million in merger inintegration 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** | ** ** | **2002** | ** ** |
| Revenue                                                 |       | $                                         | 38,976,000 |   | $ | 45,046,000 |   | $ | 51,261,000 |   |
| Loss before cumulative effect of accounting change  (1) |       | (31,988,000                               | )          | (14,313,000 | ) | (11,694,000 | ) |
| Net loss (1)                                            |       | (31,988,000                               | )          | (14,624,000 | ) | (11,694,000 | ) |
| Net loss per  share, basic and diluted                  |       | (2.02                                     | )          | (0.95 | ) | (0.76 | ) |
|                                                         |            |                                           |            |  |  |  |  |  |  |  |

 

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(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 also determinedthat revenue recognition of the BAT product should be deferred from the time ofshipment, as NOMOS had historically recognized revenue, to the time ofacceptance 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, $1.3 million, for the years ended October 31,2004, 2003, respectively, and a decrease of $0.6 million for the year ended October 31,2002. The impact of the changes in revenue recognition of the BAT product forthe periods presented on net loss was a decrease in net loss of $1.0million  and  $1.0 million for the years ended October 31,2004 and 2003, respectively and an a increase in net loss of $0.4 million forthe year ended October 31, 2002.

**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 is obligated to make periodic advances subject to PCAachieving certain milestones.

As of October 31, 2004, the Company’s advances toPCA totaled $950,000, with an obligation, contingent upon certain milestones,to advance an additional $250,000. The secured note bears interest at 

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6% per annum and isrepayable in four installments commencing on December 1, 2004, with allunpaid principal and interest due on September 1, 2005. As of February 28,2005, the first payment had not been received. The Company has no equityinterest in PCA. The funds are to be used for general working capital toprovide various brachytherapy services to ambulatory surgical centers. Adistributor who has agreed to procure all of its brachytherapy seeds exclusivelyfrom the Company though October 2008, has a majority interest in PCA.Based on the terms of the lending and supply agreements with the aboveentities, the Company determined that PCA is a variable interest entity (“VIE”)and the Company is the primary beneficiary under FIN No. 46 since PCA doesnot have sufficient equity at risk for the entity 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. As of October 31, 2004, the amount oflosses from PCA consolidated in the results of operations has approximated theamount of the Company’s advances to PCA.

Includedin the Company’s consolidated balance sheet at October 31, 2004 and 2003were the following net assets of PCA:
| ** **                           | ** ** | **October 31,** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Cash                                 |       | $                    | 473,000    |   | $ | 350,000 |   |
| 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     |   | $ | 350,000 |   |

 

Consolidationof PCA’s results of operations included the following:
| ** **           | ** ** | **Year Ended October 31,** | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales            |       | $                                         | 180,000    |   | $ | — |   | $ | — |   |
| Loss from operations |       | $                                         | (932,000   | ) | $ | — |   | $ | — |   |

 

**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’s estimatedcredit-adjusted borrowing rate. The resulting capitalized costs arerecorded 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.”

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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, 2004 and 2003.  During the year ended October 31, 2004,accretion was immaterial and there were not any liabilities incurred or settled.

**NOTE 7—MARKETABLE SECURITIES**

Marketablesecurities consist of the following:
| ** **                     | ** ** | **October 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Securities held to maturity:   |       |                 |       |   |   |
| Corporate and government bonds |       | $                    | 10,272,000 |   | $ | 43,016,000 |   |
| Annuity contract               |       | 560,000              |       | 545,000 |   |
| Commercial paper               |       | 1,814,000            |       | 1,793,000 |   |
|                           |       | 12,646,000           |       | 45,354,000 |   |
| Securities available for sale  |       | —               |       | 2,000,000 |   |
|                           |       | 12,646,000           |       | 47,354,000 |   |
| Less: current portion          |       | 10,046,000           |       | 32,587,000 |   |
| Non-current  portion           |       | $                    | 2,600,000  |   | $ | 14,767,000 |   |

 

The amortized cost of allheld to maturity securities approximates fair value. At October 31, 2004,investments in debt securities with scheduled maturities within one year were$10.0 million and for one to three years were $2.6 million.

**NOTE 8—ACCOUNTS RECEIVABLE**

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.

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Accountsreceivable consist of the following:
| ** **                            | ** ** | **October 31,** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Accounts receivable—trade        |       | $                    | 7,757,000  |   | $ | 2,270,000 |   |
| Less: allowance for doubtful accounts |       | (625,000             | )          | (103,000 | ) |
|                                  |       | $                    | 7,132,000  |   | $ | 2,167,000 |   |

 

The provision for doubtfulaccounts was $0.5 million, $0.1 million, and $0.3 million for the fiscal yearsended October 31, 2004, 2003 and 2002, respectively.

**NOTE 9—INVENTORIES**

Inventoriesconsist of the following:
| ** **      | ** ** | **October 31,** | ** ** |
|-----------------|------------|----------------------|------------|
| ** **      | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Raw materials   |       | $                    | 4,249,000  |   | $ | 639,000 |   |
| Work in process |       | 47,000               |       | 25,000 |   |
| Finished goods  |       | 575,000              |       | 28,000 |   |
|            |       | $                    | 4,871,000  |   | $ | 692,000 |   |

 

In the fiscal year endedOctober 31, 2004, the Company recorded a charge in the IMRT/IGRT segment forexcess inventory of $0.7 million and a charge for excess warranty replacementparts of $0.5 million.  In the fiscalyear ended October 31, 2003 and 2002, inventory consisted only of RadiationSources inventory, and no charges were recorded.

**NOTE 10—EQUIPMENTAND LEASEHOLD IMPROVEMENTS**

Equipmentand leasehold improvements consist of the following:
| ** **                                      | ** ** | **October 31,** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Furniture, fixtures and equipment               |       | $                    | 6,192,000  |   | $ | 4,383,000 |   |
| Leasehold improvements                          |       | 2,386,000            |       | 2,306,000 |   |
|                                            |       | 8,578,000            |       | 6,689,000 |   |
| Less: accumulated depreciation and amortization |       | (4,451,000           | )          | (3,693,000 | ) |
|                                            |       | $                    | 4,127,000  |   | $ | 2,996,000 |   |

 

Depreciation andamortization expense was $1.0 million, $0.8 million, and $0.7 million for thefiscal years ended October 31, 2004, 2003 and 2002, respectively.

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**NOTE 11—GOODWILL**

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 |   |

 

**NOTE 12—INTANGIBLE ASSETS**
| ** **                       | ** ** | **October 31, ** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| 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   |       | (1,204,000                 | )          |
|                             |       | $                          | 29,504,000 |   |

 

Amortization expense was $1,172,000, $13,000, and$1,000 for the fiscal years ended October 31, 2004, 2003 and 2002,respectively, and $18,000 in prior years.

Theestimate of aggregate amortization expense for the subsequent years is asfollows:
| **For the Years Ended October 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                                         |       | $          | 2,320,000  |       |
| 2006                                                         |       | 2,346,000  |       |
| 2007                                                         |       | 2,330,000  |       |
| 2008                                                         |       | 2,301,000  |       |
| 2009                                                         |       | 2,273,000  |       |
| Thereafter                                                   |       | 17,934,000 |       |
|                                                         |       | $          | 29,504,000 |       |

 

**NOTE13—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.

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*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 number ofshares 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. During the year ended October 31, 2004, 360,696 additional shareswere reserved for the 1996 Plan.

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’s stockon 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, 2004, a total of 4,833,563 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, 2001  |       | 214,601                                      |       | 1,878,695                    |       |   | $ | 9.84 |   |   |
| Granted                           |       | (595,900                                     | )          | 595,900                      |       |   | 9.32 |   |   |
| Canceled or expired               |       | 112,117                                      |       | (112,117                     | )          |   | 12.43 |   |   |
| Exercised                         |       | —                                       |       | (73,340                      | )          |   | 3.18 |   |   |
| Additional shares reserved        |       | 356,387                                      |       | —                       |       |   |   |   |   |
| 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 |   |   |

 

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There were 1,591,598, 1,530,468 and 1,080,043 optionsexercisable with weighted average exercise prices of $9.31, $9.56 and $9.30 at October 31,2004, 2003, and 2002, respectively.

Thefollowing table summarizes options outstanding at October 31, 2004 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 - $  0.07               |       | 160,500                      |       |                         | 2.00       |   |   |   | $ | 0.66 |   |   | 160,500 |   |   | $ | 0.66 |   |   |
| $1.11 - $  1.11               |       | 724,187                      |       |                         | 6.13       |   |   |   | 1.11 |   |   | 48,485 |   |   | 1.11 |   |   |
| $1.12 - $  7.17               |       | 718,348                      |       |                         | 6.60       |   |   |   | 5.24 |   |   | 275,839 |   |   | 6.33 |   |   |
| $7.21 - $  8.80               |       | 721,408                      |       |                         | 7.84       |   |   |   | 7.87 |   |   | 372,439 |   |   | 7.62 |   |   |
| $8.93 - $24.54                          |       | 929,378                      |       |                         | 6.50       |   |   |   | 13.23 |   |   | 734,335 |   |   | 13.72 |   |   |
|                                    |       | 3,253,821                    |       |                         | 6.53       |   |   |   | $ | 6.96 |   |   | 1,591,598 |   |   | $ | 9.31 |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The average fair value foraccounting purposes of options granted was $5.19, $4.45 and $5.86  per share for the years ended October 31,2004, 2003 and 2002, 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,** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Dividend yield          |       | 0                                         | %          | 0 | % | 0 | % |
| Expected volatility     |       | 74                                        | %          | 76 | % | 80 | % |
| Risk-free interest rate |       | 3.3                                       | %          | 3.6 | % | 4.1 | % |
| 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 

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of up to15% of their salary to purchase shares of the Company’s common stock at adiscount of up to 15% of the market value at certain plan-defined dates. Infiscal 2004, 2003 and 2002, the shares issued under the ESPP were 24,285,21,005 and 13,226 shares, respectively. At October 31, 2004, 230,070shares were available for issuance under the ESPP.

*Common StockWarrants and Stock Options Issued to Third Parties*

The Company may grantstock options to consultants for services performed. In fiscal 2003, theCompany granted 20,000 options with an exercise price of $8.94 per share to athird party. Fifty percent of such options vested immediately and the remainingfifty percent vest upon the achievement of certain objectives. The Companyrecognized $47,000 in compensation expense in fiscal 2003 related to the vestedoptions.

*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 31,2004, 19,000 shares had been repurchased by the Company at a cost of $129,000.

**NOTE 14—INCOMETAXES**

Theprovision (benefit) for income taxes is comprised as follows:
| ** ** | ** ** | **Year Ended October 31,** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:   |       |                                      |       |   |   |   |   |
| Federal    |       | $                                         | (257,000   | ) | $ | — |   | $ | (1,286,000 | ) |
| State      |       | —                                    |       | — |   | 2,000 |   |
|       |       | (257,000                                  | )          | — |   | (1,284,000 | ) |
| Deferred:  |       |                                      |       |   |   |   |   |
| Federal    |       | —                                    |       | — |   | 3,109,000 |   |
| State      |       | —                                    |       | — |   | 262,000 |   |
|       |       | —                                    |       | — |   | 3,371,000 |   |
|       |       | $                                         | (257,000   | ) | $ | — |   | $ | 2,087,000 |   |

 

During the year ended October 31, 2002, avaluation allowance of $2.1 million was recorded due to the uncertainty of theCompany’s ability to realize the future benefit of its deferred tax assets. TheCompany did not recognize a benefit for the losses during the year ended October 31,2004, 2003 or 2002. 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 the Company’snet deferred tax assets are as follows:
| ** **                                                             | ** ** | **October 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Deferred tax  assets:                                                  |       |                 |       |   |   |
| Accrued liabilities                                                    |       | $                    | 506,000    |   | $ | 371,000 |   |
| Accrued decommissioning                                                |       | 138,000              |       | 161,000 |   |
| Allowance for doubtful  accounts and write-offs from NOMOS acquisition |       | 742,000              |       | 44,000 |   |
| Inventory reserve and  capitalized inventory                           |       | 1,902,000            |       | 33,000 |   |
| Other                                                                  |       | 5,000                |       | 20,000 |   |
| Net operating loss  carryforwards                                      |       | 40,510,000           |       | 6,704,000 |   |
| Depreciation and amortization                                          |       | 155,000              |       | 163,000 |   |
| Tax credits                                                            |       | 5,050,000            |       | 2,091,000 |   |
| Theseus impairment                                                     |       | 2,005,000            |       | — |   |
|                                                                   |       | 51,013,000           |       | 9,587,000 |   |
| Deferred tax  liabilities:                                             |       |                 |       |   |   |
| Purchased intangible  assets                                           |       | (12,497,000          | )          | — |   |
| Other                                                                  |       | (313,000             | )          | — |   |
|                                                                   |       | (12,810,000          | )          | — |   |
| Net deferred tax assets                                                |       | 38,203,000           |       | 9,587,000 |   |
| Less: valuation allowance                                              |       | (38,203,000          | )          | (9,587,000 | ) |
|                                                                   |       | $                    | —     |   | $ | — |   |

 

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

At October 31, 2004, the Company had federal netoperating loss (“NOL”) carryforwards of approximately $100 million whichbegin to expire in 2013, of which $63 million was acquired in the NOMOSacquisition. The Company has federal research and experimentation credits of $5million, which begin to expire in 2008, of which $3 million was acquired in theNOMOS acquisition. The Company also has state NOL carryforwards ofapproximately $69 million which begin to expire in 2008, of which $51million was acquired in the NOMOS acquisition. The utilization of NOLcarryforwards and tax credits is subject to statutory limitations.

Areconciliation of tax expense computed at the U.S. federal statutory rate is asfollows:
| ** **                                     | ** ** | **Year Ended October 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **  2004  **          | ** ** | **  2003  ** | ** ** | **  2002  ** | ** ** |
| Federal tax provision at U.S. statutory rate   |       |                                      | (34        | )% |   |   | (34 | )% |   |   | (34 | )% |   |
| State income taxes, net of federal tax benefit |       |                                      | —     |   |   |   | (4 | ) |   |   | (3 | ) |   |
| Other                                          |       |                                      | (1)        |   |   |   | — |   |   |   | — |   |   |
| Other non-deductible expenses                  |       |                                      | 9          |   |   |   | — |   |   |   | — |   |   |
| Tax credits                                    |       |                                      | —     |   |   |   | (5 | ) |   |   | (52 | ) |   |
| Valuation allowance                            |       |                                      | 25         |   |   |   | 43 |   |   |   | 155 |   |   |
|                                           |       |                                      | (1)        | % |   |   | — | % |   |   | 66 | % |   |

 

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**NOTE 15—RETIREMENTPLAN**

The Company has a 401(k)retirement plan that allows eligible employees to contribute up to the statutoryannual limits. Under this plan, the Company makes certain contributions basedupon the compensation of eligible employees and makes additional matchingcontributions for those employees who elect to contribute to the plan. TheCompany’s expense for its plan totaled $0.2 million, $0.2 million, and $0.1million, for the years ended October 31, 2004, 2003, and 2002,respectively.

**NOTE 16—COMMITMENTS AND CONTINGENCIES**

*Contract Commitments*

The Company has enteredinto purchase commitments of $0.9 million to suppliers under blanket purchaseorders and has a $0.3 million obligation to further fund PCA, contingent uponPCA achieving certain milestones.

*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, 2004, 2003 and 2002 was$1,034,000, $705,000 and $524,000, respectively.

Futureminimum annual lease payments under all operating leases are as follows:
| **For the Years Ended October 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                                         |       | $          | 938,000    |       |
| 2006                                                         |       | 521,000    |       |
| 2007                                                         |       | 492,000    |       |
| 2008                                                         |       | 492,000    |       |
| 2009                                                         |       | 492,000    |       |
| Thereafter                                                   |       | 1,640,000  |       |
|                                                         |       | $          | 4,575,000  |       |

 

*Employment Agreements*

The Company maintainsemployment agreements with certain key members of management. The agreementsprovide for minimum base salaries, eligibility for stock options andperformance bonuses and severance payments.

*Litigation*

In October 2002, Mentor filed suit in Los AngelesSuperior Court against the Company alleging breach of the exclusive marketingand distribution agreement arising out of the Company’s direct sales effortsfor Prospera® Pd-103. Mentor’s suit further alleged that the Company hadmisappropriated purported trade secrets and that the Company engaged in unfaircompetition. In January 2003, the Company filed a responsive pleading, aswell as counterclaims against Mentor. In June 2003, the Company agreed toa settlement arrangement to resolve all claims and counterclaims in the lawsuitinvolving Mentor. Under the arrangement, the parties mutually agreed to dismissall claims and counterclaims against each other without admitting anywrongdoing.

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In March 2004 (prior to our acquisition ofNOMOS), Parker/Hunter filed a complaint against NOMOS in the Court of CommonPleas of Allegheny County Pennsylvania, alleging breach by NOMOS of aninvestment banking fee arrangement. NOMOS filed an answer denying allsubstantive allegations of liability. In May 2004, NOMOS became awholly-owned subsidiary of the Company. In August 2004, the Companyreached a settlement with Parker/Hunter for $1.1 million in exchange forsettlement and a release of all claims related to its complaint filed againstNOMOS. The Company has been reimbursed the $1.1 million in stock and cash froma special escrow established in the Company’s acquisition of NOMOS.

In 1998 (prior to our acquisition of NOMOS), NOMOSbecame involved in an infringement lawsuit against BrainLAB, USA, which NOMOSinitiated in the United States District Court for the District of Delaware,involving a NOMOS patent relating to the ultrasound localization techniquesthat are 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 petition forrehearing, which was denied on March 11, 2004. No further appeals areplanned. The defendants filed a post-trial motion in the district court seekingreimbursement of their attorneys’ fees, which it alleges are in excess of $0.4million. The district court originally denied the motion, without prejudice,because an appeal was still pending. Because the Company’s petition forrehearing was denied, the Court will reconsider this motion at some point inthe future.

In October, 2002 (prior to our acquisition of NOMOS),two individual plaintiffs, Daniel Klimkowski and Nancy Klimkowski, filed apetition in Oklahoma County District Court against Mercy Health Center, Inc.,Varian Medial Systems, Inc., NOMOS Corporation, Siemens MedicalCorporation, Radiation Oncology Associates, Inc., Morris J. Weizenberg,M.D., and Gary L. Larson, M.D., alleging the defendants caused Mr. Klimkowskito receive excess radiation in the treatment of his brain tumor. The plaintiffssought compensatory and punitive damages in excess of $10,000. The plaintiffsasserted a manufacturer’s product liability claim alleging that the Company’sPEACOCK system was defective, causing Mr. Klimkowski to receive anexcessive amount of radiation to areas surrounding Mr. Klimkowski’s tumor.The plaintiffs were unable to provide evidence that the Company’s PEACOCKsystem malfunctioned or was otherwise deficient. As a result, the Company fileda motion for summary judgment, which the district court granted, dismissing theaction against the Company. Although the Company does not anticipate an appealby the plaintiffs, the plaintiffs maintain a right to appeal until 30 daysafter the conclusion of the entire case (which is still ongoing). If appealed,the Company will continue to pursue the defense of this case aggressively.

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 CORVUS andBAT products. Mr. Weeks is alleging non-economic and economic damages notto exceed approximately $3.2 million. The Company has yet to answer thecomplaint, and discovery has not yet commenced in the matter. The Companydenies liability and intends 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.

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**NOTE 17—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)(Restated)**

Thefollowing table presents summarized quarterly financial data (in thousands,except per share data):
| ** **              | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **              | ** ** | ** **         | ** ** | ** **          | ** ** | **Restated(1)**    | ** ** | ** **          | ** ** |
| **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 | ) |
| **Fiscal 2003**         |       |               |       |                |       |               |       |                |       |
| Net sales               |       | $                  | 5,141      |                | $          | 2,904              |       | $                   | 3,011      |   | $ | 3,627 |   |
| Gross profit            |       | 3,298              |       | 1,492               |       | 1,278              |       | 1,671               |       |
| Net loss                |       | (1,027             | )          | (2,425              | )          | (2,837             | )          | (3,151              | )          |
| Diluted loss per share  |       | $                  | (0.10      | )                   | $          | (0.24              | )          | $                   | (0.28      | ) | $ | (0.31 | ) |

 

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(1)   As previously disclosed in our filing on Form 10-Q/A (AmendmentNo. 3) for the quarter ended July 31, 2004, the Company’s financialstatements as of July 31, 2004 and for the three and nine months then endedwere restated to (a) account for changes in the values of certain intangibleassets acquired from NOMOS, and (b) properly account for certain contingentlyreturnable consideration issued into escrow in connection with the acquisitionof NOMOS and certain of the related contingently returnable shares that wereheld in escrow as liabilities rather than equity as of July 31, 2004.

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**SCHEDULEII**NORTH 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  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 |   |
| **Fiscal 2002**                             |       |       |       |                                           |       |                                         |       |                                 |       |   |   |
| Allowance for doubtful accounts and returns |       | $          | 107,000    |                                           | $          | 293,000                                      |       | $                                    | 50,000     |   | $ | — |   | $ | 450,000 |   |
| Deferred tax  asset valuation allowance     |       | $          | —     |                                           | $          | 5,098,000                                    |       | $                                    | —     |   | $ | — |   | $ | 5,098,000 |   |
|                                             |            |            |            |                                                |            |                                              |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

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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. |
|-----------------|---------------------------------------|
| March  11, 2005 | By:                                   | /s/ L.  MICHAEL CUTRER |
|            |                                  | 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       |          | Chairman of the Board of Directors                                               |       | March  11, 2005 |
| Irwin J.  Gruverman           |          |                                                                             |
| /s/  L. MICHAEL CUTRER        |          | President, Chief Executive Officer and Director  (Principal Executive Officer)   |       | March 11, 2005  |
| L. Michael Cutrer             |          |                                                                             |
| /s/ ERIK  l. JOHNSON     |          | Corporate Controller and   Chief Accounting Officer                              |       | March 11, 2005  |
| Erik L. Johnson               |          |                                                                             |
| /s/  JAMES W. KLINGLER        |          | Senior Vice President and Chief Financial Officer  (Principal Financial Officer) |       | March 11, 2005  |
| James W. Klingler             |          |                                                                             |
| /s/  JOHN W. MANZETTI         |          | President of NOMOS Radiation Oncology Division and  Director                     |       | March 11, 2005  |
| John W. Manzetti              |          |                                                                             |
| /s/  DONALD N. ECKER          |          | Director                                                                         |       | March  11, 2005 |
| Donald N. Ecker               |          |                                                                             |
| /s/  JOHN A. FRIEDE           |          | Director                                                                         |       | March  11, 2005 |
| John A. Friede                |          |                                                                             |
| /s/  JONATHAN P. GERTLER      |          | Director                                                                         |       | March  11, 2005 |
| Dr. Jonathan  P. Gertler |          |                                                                             |
| /s/  MITCHELL H. SARANOW      |          | Director                                                                         |       | March  11, 2005 |
| Mitchell H.  Saranow          |          |                                                                             |
| /s/  GARY N. WILNER           |          | Director                                                                         |       | March  11, 2005 |
| Dr. Gary N.  Wilner      |          |                                                                             |
| /s/  NANCY W. WYSENSKI        |          | Director                                                                         |       | March  11, 2005 |
| Nancy W. Wysenski             |          |                                                                             |

 

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