**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the fiscal year ended October 31, 2006**


**Commission
      File Number 0-26670**





**NORTH
      AMERICAN SCIENTIFIC, INC.**


(Exact
      name of Registrant as specified in its charter)





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





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


(Address
      of principal executive offices)





**(818) 734-8600**


(Registrant's
      telephone number, including area code)





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




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




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





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


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


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


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


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


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


The
      aggregate market value of voting stock held by non-affiliates of the Registrant
      was approximately $27.6 million (based upon the price at which the common stock
      was last sold , as of the last business day of the Registrant’s most recently
      completed second fiscal quarter).


As
      of
      December 29, 2006, approximately 29,336,144 shares of the Registrant's Common
      Stock, $.01 par value per share, were outstanding.


**DOCUMENTS
      INCORPORATED BY REFERENCE**


Portions
      of the Registrant's Proxy Statement for the 2007 Annual Meeting of Stockholders
      to be held on or about April 30 2007,
      are
      incorporated by reference into Part III of this
      Form 10-K.











**NORTH
      AMERICAN SCIENTIFIC, INC.**





**Table
      of Contents**





**Form 10-K**





**Page****PART
                I**Item
                1.
            Business
            3Item
                1A
            Risk
                Factors
            26Item
                1B
            Unresolved
                Staff Comments
            45Item
                2.
            Properties
            45Item
                3.
            Legal
                Proceedings
            45Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            46Item
                4a.
            Executive
                Officers of the Registrant
            47**PART
                II**Item
                5.
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            48Item
                6.
            Selected
                Consolidated Financial Data
            49Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            51Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            66Item
                8.
            Consolidated
                Financial Statements and Supplementary Data
            67Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            67Item
                9A.
            Controls
                and Procedures
            67Item
                9B.
            Other
                Information
            69**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Company
            70Item
                11.
            Executive
                Compensation
            70Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            70Item
                13.
            Certain
                Relationships and Related Transactions
            70Item
                14.
            Principal
                Accounting Fees and Services
            70**PART
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            71Signatures
            114





2





**Item
      1. BUSINESS**





**INTRODUCTION**





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




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





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





In
      October 2000, we acquired Theseus Imaging Corporation (“Theseus”), a company
      engaged in the research and development of a proprietary radiopharmaceutical
      imaging agent (referred to as “Hynic-Annexin V”). Over the following four years,
      we made substantial investments in Theseus for clinical trials and additional
      research. In July and August 2004, we assessed the long-term prospects of
      Hynic-Annexin V and determined that its successful development and regulatory
      approval would not occur earlier than 2007 and that the additional costs to
      achieve completion and approval would be substantial. With limited capital
      resources and the additional need to fund product development of our recently
      acquired IMRT and IGRT products, we explored alternative options for Theseus.
      Discussions with potential financial and strategic partners ceased in August
      2004. As a direct result, we shut-down the operation in September 2004 (See
      Note
      3 of the Notes to Consolidated Financial Statements).





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




3




On
      May 4,
      2004, we acquired NOMOS Corporation (“NOMOS”), a developer, manufacturer and
      marketer of products and services for IMRT and IGRT. NOMOS was recognized as
      the
      pioneer of the IMRT and IGRT fields and its products are used to treat a variety
      of cancers at hospitals and free-standing radiation oncology centers. (See
      Note
      4 of the Notes to Consolidated Financial Statements)





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







**IMRT
      AND IGRT RADIATION TREATMENT OF CANCER**




In
      contrast to conventional external beam radiation therapy (“EBRT”), in which the
      patient is treated with relatively large, simple shapes of radiation, IMRT
      delivers many smaller radiation beams, with the intensity and angle of these
      radiation beams varied, or modulated, across the treatment target. This enables
      the doctor to deliver an elevated radiation dose to the tumor, while minimizing
      the amount of radiation directed at nearby healthy tissue. As a result, IMRT
      provides the potential for improved outcomes by more effectively treating
      tumors, and a better quality of life for patients by avoiding the side effects
      and risks associated with EBRT.




Treatment
      planning for IMRT is extremely complex due to the number of potential beam
      angles and intensities. Our IMRT planning software system, CORVUS®, addresses
      this complexity through a technique called inverse planning. CORVUS prompts
      the
      doctor to specify the desired radiation dose outcome, both for the tumor and
      for
      the surrounding healthy tissue, and then generates a plan to achieve the desired
      outcome by testing and rejecting millions of potential beam intensities and
      angles. This is in contrast to conventional radiation planning and those
      competing IMRT planning systems that rely on a technique called forward
      planning, in which the doctor essentially builds a treatment plan through a
      manual, iterative process. We believe that our inverse planning approach results
      in better treatment plans and reduces the amount of time required for doctors to
      create these plans as compared to many of the treatment planning systems of
      our
      competitors, including competing IMRT systems that use inverse planning
      techniques.




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




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




4




Our
      IGRT
      products, BAT®, BATCAMTM, and nTRAKTM, are used in conjunction with external beam
      radiation to locate targets, including tumors and surrounding organs that may
      move inside the patient's body from one treatment session to the next. Our
      customers use PEREGRINE®, our radiation dose calculation and simulation software
      product that uses advanced statistical techniques to simulate the path of
      radiation particles as they are absorbed by the patient's body. Our IGRT
      products and PEREGRINE are designed to be used in connection with both IMRT
      and
      conventional radiation therapy.







***IMRT/IGRT
      Products***




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




*CORVUS* .    The
      core of our proprietary IMRT treatment planning system is CORVUS. This
      software-based product uses images from conventional imaging technologies,
      such
      as computed tomography (“CT”), magnetic resonance imaging (“MRI”), or positron
      emission tomography (“PET”), to create a three-dimensional model of the tumor
      area to be treated. CORVUS, through its three-dimensional on-screen model,
      prompts the doctor to specify the parameters of the dose outcome desired, both
      for the tumor and for the surrounding healthy tissues. CORVUS then tests and
      rejects millions of beam intensities and angles as it builds a plan to achieve
      the doctor's desired objectives. This process, called inverse planning, starts
      with the desired outcome and then builds a plan to achieve it. Once the plan
      has
      been approved by the doctor, CORVUS works with the linear accelerator's
      multileaf collimator during each treatment session to provide the radiation
      output in accordance with the plan by dividing its radiation output into a
      large
      number of very small beams, each of which can carry a different level of
      radiation intensity. By hitting the target with these small, variable intensity
      beams from multiple angles, it becomes possible to deliver a high dose of
      radiation to the target with great precision, regardless of the shape of the
      target, while limiting the delivery of high dosage radiation to surrounding
      healthy structures, regardless of their proximity to the target. CORVUS can
      be
      used in conjunction with MIMiC, our multileaf collimator, and is also compatible
      with most other multileaf collimators on the market. Although there is no
      reliable independent market data available, we believe that the multileaf
      collimators with which CORVUS is currently compatible represent a substantial
      majority of all multileaf collimators in both the United States and worldwide
      markets.




We
      believe the CORVUS process of inverse planning is superior to conventional
      radiation technology and to competing IMRT technologies that rely on either
      forward planning or inverse planning. In forward planning, the doctor manually
      develops a radiation delivery plan and then uses a computer to calculate the
      results of that plan. This process is often repeated several times until an
      acceptable plan is obtained. This process is labor-intensive, time-consuming
      and
      highly sensitive to the quality and experience of the particular technician
      or
      doctor. All inverse planning systems, including those used by our competitors,
      utilize an algorithm that is designed to replicate the clinical decision-making
      process of a radiation oncologist. Our algorithm has been developed using
      clinical feedback received from previous versions of the product, and we believe
      it represents more closely than our competitors' systems the important factors
      used in an experienced clinician's evaluation. The CORVUS process results in
      increased accuracy and improved clinical outcomes over competing inverse
      planning systems, whose optimization strategies and evaluation functions we
      believe do not have the sophistication embodied in CORVUS. We also believe
      that
      our CORVUS planning software develops treatment plans more quickly and with
      less
      user interaction than our competitors' planning systems. In 2005, we released
      the Active Rx® module as part of CORVUS. Active Rx allows for real-time
      modification of the treatment plan through an interactive process which allows
      the clinician to directly change the dose distribution delivered by the plan
      in
      a highly efficient and direct manner. No other treatment planning system
      includes Active-Rx-like features.




5




*MIMiC* .    Our
      multileaf collimator, MIMiC, is primarily sold as a component of our integrated
      nomosSTAT system, but can also be sold to existing CORVUS customers. MIMiC
      is
      the first multileaf collimator on the market designed exclusively for IMRT
      delivery. MIMiC was also the first multileaf collimator specifically designed
      for dynamic or rotational mode treatment, where the head of the linear
      accelerator is moving during the delivery of radiation, called tomotherapy.
      MIMiC can deliver radiation from approximately 54 angles, which is significantly
      greater than the 5-9 angles of a typical commercial multileaf collimator. This
      contributes to MIMiC's ability to conform the radiation beams to the size and
      shape of a tumor in accordance with the treatment plan. Leakage refers to
      radiation that escapes from the linear accelerator, or is transmitted through
      or
      between the leaves 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 MIMiC can be added on to many linear accelerators that come already
      equipped with a multi-leaf collimator, the primary market for MIMiC is for
      the
      older linear accelerators that do not have a multi-leaf collimator.




MIMiC
      has
      40 tungsten leaves in two rows of 20. Each leaf is capable of defining a beam
      approximately one centimeter square and can direct these radiation beams to
      the
      target. With the addition of our BEAK product, MIMiC's beam size can be reduced
      to four-by-ten millimeters. This allows a customer with MIMiC to compete in
      the
      radiosurgery market. Radiosurgery is a form of specialized radiation therapy
      that involves the delivery of radiation to a precise, often small target volume
      in a limited number of treatment sessions.




*n* *omosSTAT.* n omos *STAT,* which
      the
      Company received U.S. Food and Drug Administration clearance to market in July
      2006, integrates the Company's core serial tomotherapy delivery products, n omos *STAT* MLC and
      AutoCraneTM, with a single user interface. This new interface, with network
      connection to the CORVUS® IMRT inverse planning system, streamlines the delivery
      process, improving efficiency and increasing patient throughput. As the only
      after-market, add-on serial tomotherapy delivery package offered as an upgrade
      to an existing linear accelerator, it provides an affordable, turnkey solution
      for facilities wanting to implement IMRT as part of their cancer treatment
      arsenal without the need to purchase a costly, IMRT-enabled linear
      accelerator.





n omos *STAT* 's
      serial
      tomotherapy delivery shapes and modulates the radiation beam while the gantry
      is
      rotating, providing up to 40 individual intensity-modulated beams per every
      5
      degrees of rotation. These beams can be fired from virtually any radial angle
      around the patient and can vary in intensity in 10% steps. Compared to
      step-and-shoot techniques that deliver multiple overlapping segments to modulate
      beam intensity at a limited number of angle positions, tomotherapy provides
      more
      degrees of freedom to deposit dose to the target while avoiding critical
      structures.




*BAT* .  BAT
      uses ultrasound images to confirm the location of target organs and tumor sites
      within the patient's body. Some organs, such as the prostate, move within the
      patient from day to day and even within a given day. As a result, a previously
      developed treatment plan may no longer be effective on a later treatment date.
      Treatments that require daily localization of this kind include those for
      cancers of the prostate, female pelvis, pancreas, breast and liver. The
      conventional approach to this problem is to include in the treatment plan a
      margin of error, which inevitably leads to exposing healthy tissue to radiation.
      BAT reduces this margin of error from the currently accepted standard practice
      of within 2 centimeters to within 2 millimeters. BAT determines the location
      of
      the target by means of either a jointed, mechanical arm, at the end of which
      is
      an ultrasound probe, or with the BATCAM, by a camera mounted in the treatment
      room which tracks passive markers placed on the ultrasound probe. Using a
      touch-screen monitor and ultrasound images, the practitioner maneuvers the
      probe
      to the exact location of the tumor. BAT then calculates the position of the
      target relative to the delivery point of the radiation beam. nTRAK expands
      the
      BAT and BATCAM capabilities by adding a head and neck positioning tool to
      provide more accurate patient positioning for radiation therapy treatments.
      BAT
      can be used in conjunction with IMRT as well as conventional radiation
      treatment. Currently, BAT is predominantly used by hospitals and clinics in
      treating prostate cancer.




6




*PEREGRINE* . Our
      radiation dosage calculation software product, PEREGRINE, is used to estimate
      the amount and distribution of the radiation dose in three dimensions that
      would
      be absorbed by a patient from a prescribed plan. The prevailing method of dose
      calculation is to estimate the absorption of radiation by the patient's body
      based on the absorption of radiation by water. This method can be reasonably
      accurate for areas of homogeneous tissue. However, most tumors are surrounded
      by
      heterogeneous tissue structures, such as bones, air sacs or other variants
      in
      density, each of which absorbs radiation at a different rate. PEREGRINE is
      designed to improve the accuracy of both IMRT and conventional radiation
      treatment planning systems by providing improved software modeling of impact
      of
      these heterogeneous tissues on the dose distribution delivered to the
      patient.




PEREGRINE
      is designed to work simultaneously and seamlessly with CORVUS to calculate
      and
      recommend adjustments to the dose distribution determined by the planning
      software before the radiation treatment plan is actually administered to the
      patient. In 1999, we acquired exclusive rights to the patents, trademarks and
      copyrights for the technology used in PEREGRINE through a 10-year licensing
      agreement with the Lawrence Livermore National Laboratory. In 2005, this
      agreement was renegotiated to include a non-exclusive license which resulted
      in
      reduced royalty payments to Lawrence Livermore.




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




• *BEAK®.* To
      provide additional market opportunities for MIMiC and n omosSTAT,
      we market BEAK, a device that attaches to MIMiC and reduces MIMiC's beam size
      from approximately one centimeter square down to four-by-ten millimeters. This
      allows MIMiC and n omosSTAT
      to compete with more expensive and dedicated radiosurgery systems.





• *NOMOS
      CRANE® and AUTOCRANETM.* Our
      NOMOS
      CRANE family of products is a series of devices used to position patients during
      radiation therapy. NOMOS CRANE, NOMOS MINI-CRANE, and NOMOS CRANE II are
      manually operated patient positioning devices that are specifically suited
      to
      the requirements of treatments using n omosSTAT,
      which deliver radiation in a slice-by-slice manner. The AUTOCRANE is our newest
      device, which remotely adjusts the patient's position during the course of
      a
      treatment session as necessary to deliver the radiation in accordance with
      the
      treatment plan. This eliminates the need for the radiation therapist to
      repeatedly enter the treatment room to manually adjust the patient's position
      in
      connection with slice-by-slice IMRT treatments. The AUTOCRANE shortens the
      average IMRT treatment session using n omosSTAT.
      We also offer two NOMOS MINICRANES that assist in the positioning of specific
      body parts such as the head and neck. We license some of the technology
      underlying our NOMOS CRANE family of products from the University of Texas.





• *Other
      System Accessories* . We
      offer several other system accessories that assist in the positioning and
      verification of patient alignment. Our TALON® product is a device used to
      position the head during radiation therapy and radiosurgery, which permits
      precise repositioning across multiple treatment days. Our radiotherapy table
      adapter and our computed tomography table adapter are adjustable, rigid
      structures that attach to a variety of treatment tables and imaging couches
      to
      provide a stable and consistent reference base for patient positioning. We
      also
      offer our Target Box, which is a device that connects to our radiotherapy table
      adapter and provides multiple means of achieving precise patient alignment,
      including the use of laser positioning. We also offer a verification cassette
      that stores film and which can be used to verify the accuracy of patient
      treatment dosages. Although sales of these accessory products currently
      represent a small portion of our revenues, we believe that they enhance our
      core
      product offerings and present additional market opportunities for us.





7





**BRACHYTHERAPY
      TREATMENT OF CANCER**





**Prostate
      Cancer**




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





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





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





**Prostate
      Brachytherapy**




*Overview*





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




8




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





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





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




*Our
      Brachytherapy Products*





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





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





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




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




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




9




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




*Radical
      Prostatectomy*





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





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




*External
      Beam Radiation Therapy (“EBRT”)*





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





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




*Cryosurgery*





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




*Other
      Treatments.*





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




10




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





**Prospera®
      for Ocular Melanoma**





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





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




**Breast
      Cancer**





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





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





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





**Breast
      Brachytherapy**





Approximately
      220,000 new cases of breast cancer are diagnosed in the U.S. each year. Only
      60%
      of breast cancers are discovered in early-stages, and are therefore applicable
      to BCT. Therefore, we estimate the total market for postlumpectomy brachytherapy
      is approximately 130,000 patients annually. With typical ASPs of approximately
      $2,700 **,** we
      estimate the U.S. brachytherapy market potential at approximately $350 million,
      excluding the cost of radiation sources and brachytherapy seeds, used in the
      treatment . Breast brachytherapy may utilize both high and low dose
      sources.




11




With
      high-dose-rate (HDR) breast brachytherapy the placement of the HDR radiation
      source (iridium192) directly into the post-lumpectomy site reduces the treatment
      time to approximately 5 days compared to 30-35 days for whole breast radiation
      therapy. HDR therapy can be used at the time of the lumpectomy or in the months
      after the procedure as with whole breast radiation therapy (WBRT). The HDR
      source can be placed and removed in a physician's office under local anesthesia
      in contrast to WBRT which must be performed in a radiation-safe heavily shielded
      room. Clinical outcomes, including recurrence rates, for HDR radiation therapy
      are similar to those obtained with the more invasive, longer treatment time,
      WBRT. HDR therapy can also be used as an adjunct therapy in patients who have
      received WBRT previously. In this application, patients generally receive
      treatments over one to two days.





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





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





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





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




12




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





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





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








**NON-THERAPEUTIC
      PRODUCTS**





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





**Radiation
      Calibration and Reference Source Products**





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





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




**Standards
      for Nuclear Medicine**





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




13




**Standards
      for Calibration and Control**





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





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





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





**INTELLECTUAL
      PROPERTY**





**Patents**





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





*IMRT/IGRT*





**Name
                with Patent Number**
            
            
            **Subject******
            
            **Date
                of Issuance and**
              **Expiration
                Date******Method
                and apparatus for performing stereotactic surgery
              (5,269,305)
            
            
            A
                method and apparatus for performing stereotactic surgery upon a target
                within a skull establishes a first, predetermined geometric relationship
                between a skull mount fixture mounted on the skull and a scanning
                table
                surface upon which the skull is supported; and that geometric relationship
                is duplicated by a displacement bar mounted upon the skull mount
                fixture.
            
            July
                15, 1992 until July 15, 2012Tissue
                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




14




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, 2013Method
                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, 2013Method
                and apparatus for conformal radiation therapy
              (5,596,619)
            
            
            A
                method and apparatus for conformal radiation therapy, with a radiation
                beam having a pre-determined, constant beam intensity, treats the
                entire
                tumor volume of a patient's tumor, and the beam intensity of the
                radiation
                beam is spatially modulated across the tumor, by separating the radiation
                into a plurality of treatment beam segments and independently modulating
                the beam intensity of the plurality of radiation beam
                segments.
            
            January 21,
                1997 until May 17, 2014Method
                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





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, 2016Planning
                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




15




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


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, 2019Method
                and apparatus for target position verification
              (6,961,405)
            
            
            A
                system and method for aligning the position of a target within a
                body of a
                patient to a predetermined position used in the development of a
                radiation
                treatment plan can include an ultrasound probe used for generating
                live
                ultrasound images, a position sensing system for indicating the position
                of the ultrasound probe with respect to the radiation therapy device,
                and
                a computer system.
            
            October
                7, 2003 until
              October
                7, 2023Method
                and apparatus for optimization of collimator angles in intensity
                modulated
                radiation therapy
              (7,015,490)
            
            
            A
                method and apparatus to determine an optimum collimator angel of
                a
                multi-leaf collimator having an opening and multiple leaf pairs for
                closing portions of the opening to form a radiation beam arrangement
                having multiple beam segments.
            
            August
                11, 2004 until August 11, 2024





16




*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, 2014Stepper
                apparatus for use in the imaging/treatment of internal organs using
                an
                ultrasound probe
              (5,871,448)
            
            
            The
                stepper apparatus for use in imaging/treatment of prostate cancer
                with
                radioactive seeds includes a body portion, a support element for
                holding
                the ultrasound probe, a slide portion for moving the support element
                relative to the body portion, and a support element for holding a
                template
                which has a plurality of openings therethrough, through which radiation
                seed insertion needles may be positioned.
            
            February
                16, 1999 until October 14, 2017Laser
                Welded Brachytherapy Source and Method of Making the Same
              (5,997,463)
            
            
            A
                brachytherapy source for use in radiation treatment of the body includes
                radioactive material, and a housing. The housing is used to contain
                the
                radioactive materials, and is formed by at least one tube having
                two ends.
                The two ends of the tube are sealed by welding such that a radiation
                distribution of the brachytherapy source approximates a point source
                that
                is free of cold zones to minimize underexposure or overexposure of
                the
                body to radiation and to simplify the placement of the brachytherapy
                source in the body.
            
            December
                7, 1999 until March 26, 2018Stabilizer
                assembly for stepper apparatus and ultrasound probe
              (6,179,262)
            
            
            The
                stabilizer assembly is used to position a stepper assembly for an
                ultrasound probe. The stabilizer includes two spaced apart swivel
                assemblies, each swivel assembly including clamps at one end thereof
                locking the stabilizer to a table.
            
            January
                30, 2001 until October 23, 2018Radioactive
                Seeds and Method for Using Same (6,440,058)
            
            
            A
                system and method of treating an affected region of diseased tissue
                in a
                patient is described. A plurality of first radioactive seeds and
                a
                plurality of second radioactive seeds are implanted in the affected
                region.
            
            August
                27, 2002 until August 25, 2019Radioactive
                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




17




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, 2020Radioactive
                Seed with Multiple Markers and Method for Using Same
              (6,638,207)
            
            
            A
                radioactive seed which discloses the orientation and the location
                of the
                seed when the seed is exposed to X-ray photography is provided. The
                seed
                contains multiple X-ray detectable markers which will disclose the
                orientation and the location of the seed when the seed is exposed
                to X-ray
                photography. The seed can also have a single marker which wraps around
                the
                external surface of the seed or wraps around a carrier body within
                the
                seed. The single marker will also disclose the orientation as well
                as the
                location of the seed.
            
            October
                28, 2003 until October 15, 2020Thin
                Radiation Source and Method of Making the Same
              (6,787,786)
            
            
            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, 2021Radioactive
                seed with multiple markers and method for using same
              (6,881,183)
            
            
            A
                radioactive seed which discloses the orientation and the location
                of the
                seed when the seed is exposed to X-ray photography is provided. The
                seed
                contains multiple X-ray detectable markers which will disclose the
                orientation and the location of the seed when the seed is exposed
                to X-ray
                photography. The single marker will also disclose the orientation
                as well
                as the location of the seed.
            
            October
                23, 2003 until October 23, 2023




In
      addition, as of December 31, 2006, we had 12 additional United States pending
      patent applications. We have also been issued 11 foreign patents and have 14
      foreign patent applications still pending.




**Third-Party
      License Agreements**




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




·
            Lawrence
                Livermore National Laboratory.In
                July 1999, we were granted a ten-year exclusive license by Lawrence
                Livermore National Laboratory, under the authority of The Regents
                of the
                University of California, to commercialize some of its advanced,
                proprietary statistical techniques that are now incorporated in PEREGRINE.
                This license agreement also gave us rights to the trademark PEREGRINE.
                Under this license agreement, we are required to pay earned royalties
                equal to 8% of net sales of our PEREGRINE product, which earned royalties
                are accrued and credited against the minimum annual royalty of $400,000.
                The license could be cancelled, renegotiated or made non-exclusive
                if we
                fail to meet specified performance obligations including gross revenues
                from the sale of our PEREGRINE product of at least $4 million per
                calendar year. In addition, the United States government retains
                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
                revenue performance obligation until March 2005.




18




In
      July
      2005, we entered into a revised license agreement for the technology
      incorporated in our PEREGRINE product with Lawrence Livermore National
      Laboratory.  This agreement lasts until the last of the licensed patents
      expires in July 2009. The rights granted in the renegotiated agreement give
      us
      non-exclusive rights to the same advanced, proprietary statistical techniques
      that the Company had previously held exclusively.  Under this license
      agreement, we are required to pay a flat per unit fee of $5,000 for each
      licensed product sold .  E arned
      royalties are credited against the minimum annual royalty of $25,000 , which
      replaces the minimum annual royalty of $400,000 in the previous agreement. 
The license no longer contains any minimum performance obligations.  In
      addition, the United States government retains a royalty-free license to the
      technology covered by this agreement .




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




·
            University
                of Texas.In
                October 1998, we began to license specific patent rights from the
                Board of Regents of the University of Texas System pursuant to a
                royalty-bearing, exclusive license agreement for a period of three
                years.
                These patent rights are related to a device that forms a critical
                component used in our NOMOS CRANE family of products. Effective
                March 31, 2006, the term of this agreement was extended for an
                additional two years, until March 31, 2008. In addition, the license
                will terminate upon 30 days notice from the Board of Regents if we
                fail to
                make any scheduled royalty payments. 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 aggregate minimum royalties of $50,000
                per year.




·
            National
                Research Council of Canada.We
                have a non-exclusive license from the National Research Council of
                Canada
                to use their BEAM 99 computer software in connection with PEREGRINE.
                This
                software, which allows us to develop beam characterization models
                for
                generic accelerators, is a key component of, and necessary to, our
                PEREGRINE product. Under this license agreement, we were required
                to pay
                an initial license fee of $30,000 and are required to pay an annual
                license fee of $30,000 as part of our annual renewal of this license.
                The
                initial term of the license agreement expired December 31, 2000.
                However, the license agreement grants us the right to continue this
                license for one-year periods following the initial term by paying
                an
                annual license fee. We have continued to renew this license annually
                pursuant to these renewal terms.




19




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




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





**COMPETITION**





**IMRT/IGRT
      Competitors**





Our
      most
      significant competitor for our IMRT planning and delivery products is Varian
      Medical Systems, Inc. (“Varian”). Varian produces more linear accelerators
      than any other manufacturer and markets its own line of IMRT and IGRT products,
      Siemens Medical Systems, Inc. (“Siemens”) and Elekta A.B. (“Elekta”) and
      TomoTherapy, Inc. are the other major manufacturers of linear accelerators,
      each
      of which offers its own multileaf collimators that compete with our IMRT
      products, and on-board imaging systems that compete with our IGRT
      products.




Several
      treatment planning companies, including ADAC Laboratories, Inc., which is a
      part of Royal Philips Electronics N.V., Computerized Medical Systems, Inc.
      and Nucletron compete with us in the market for standalone treatment planning
      systems.




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


**


**Brachytherapy
      Competitors**





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




20




Our
      SurTRAK strands and needles are subject to competition from a number of
      companies, including Worldwide Medical Technologies, Inc. Competitors for our
      proposed ClearPath product include MammoSite, manufactured by Cytyc Corp.,
      and
      SAVI, manufactured by BioLucent, Inc.





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





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





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





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





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








**SALES
      AND MARKETING**





Since
      January 2003, we have developed an internal sales force to directly market
      and
      sell our brachytherapy products. In May 2004, we acquired additional sales
      personnel through our acquisition of NOMOS. Since both companies market their
      products to the same call points within the radiation oncology community, we
      combined both sales organizations to increase market penetration and better
      leverage our sales and marketing efforts. In the second quarter of fiscal year
      2005, we determined, however, that we could achieve better results by organizing
      the sales force by product segment, so we assigned the sales representatives
      to
      either our Radiation Sources segment or our IMRT/IGRT segment. At the end of
      fiscal year 2006, the domestic sales staff consisted of nine full-time dedicated
      regional sales representatives and product specialists for the IMRT/IGRT
      business, six business development managers for the Radiation Sources business,
      and two senior sales managers, one for each business. In addition, we had ten
      customer service representatives, five for each business segment. We plan to
      expand our sales force in our Radiation Sources business in fiscal year 2007
      to
      market ClearPath, our proposed new product for breast cancer
      treatment.




21




Each
      of
      our sales representatives sells products and services to customers within an
      assigned territory. The sales representatives promote customer satisfaction
      with
      periodic service calls in addition to scheduled follow-up visits. Our products
      are principally marketed directly to the end-user physicians or purchasing
      groups that act on their behalf. In addition to our sales efforts in the United
      States market, we also market our products in Europe and Asia through the sales
      offices obtained in the NOMOS acquisition.





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








**GOVERNMENT
      REGULATION**





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





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





*United
      States Regulatory Process*





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





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





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




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




22




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




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




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




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





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





*Foreign
      Regulatory Process*





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





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




23




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





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








**MANUFACTURING**




**IMRT/IGRT**




We
      purchase all major components for our IMRT and IGRT products from third-party
      suppliers. We perform system design, final product assembly, testing and
      packaging at our facility in the Pittsburgh, Pennsylvania metropolitan area.
      We
      are required to meet and adhere to applicable requirements of the United States
      and foreign regulatory agencies, including the Quality System Regulation of
      the
      FDA, the Medical Device Directive of the European Union, and the Medical Device
      Regulations of Canada.




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




Currently,
      we utilize single source suppliers for a number of significant components for
      each of our major products. Of the ten suppliers representing our highest dollar
      volume in 2006, five represent sole source suppliers. Other suppliers exist
      for
      each of our components provided by single source suppliers. We have not in
      the
      past experienced any significant disruption in product availability because
      of
      single source suppliers, and we have in the past successfully transitioned
      from
      single source suppliers to new suppliers without significant disruptions in
      production. It is likely we will continue to change suppliers in the future
      as
      our products change and we look for ways to improve functionality and lower
      costs.




We
      have
      streamlined our product assembly process to allow for increased flexibility
      to
      respond to changes in business volume. In this regard, we have cross-trained
      our
      employees to provide additional production flexibility to respond to shifts
      in
      demand. As product line sales fluctuate from month to month,
      overlapping responsibilities and multi-tasked teams will enable us to provide
      quicker deliveries to customers while more effectively managing our costs.




**Radiation
      Sources**





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




24




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








**RESEARCH
      AND DEVELOPMENT**





Research
      and development ("R&D”) expenses in continuing operations totaled $5.8
      million, $6.3 million, and $3.2 million during the years ended October 31,
      2006, 2005 and 2004, respectively. Development costs of IMRT and IGRT products
      were $4.6 million, $5.7 million and $2.5 million during the years ended October
      31, 2006, 2005 and 2004, respectively. Development costs of Radiation Sources
      products increased to $1.2 million in the year ended October 31, 2006 from
      $0.7
      million annually in the years ended October 31, 2005 and 2004, primarily due
      to
      the development costs of ClearPath in fiscal year 2006. Costs associated with
      the development of Hynic-Annexin V the principal product candidate of our
      discontinued operation totaled $5.8 million during the year ended October 31,
      2004. Our R&D spending reflects our belief that to maintain our competitive
      position in a market characterized by rapid rates of technological advancement,
      we must continue to invest significant resources in new product development,
      as
      well as continue to enhance existing products.





**EMPLOYEES**





As
      of
      October 31, 2006, we had a total of 177 full-time employees. None of our
      employees are represented by a labor union. We have not experienced a work
      stoppage in our history, and we believe that our employee relations are
      good.





**AVAILABLE
      INFORMATION**





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





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





25




**Item
      1A. Risk Factors**





**We
      have experienced significant losses and may continue to incur such losses in
      the
      future. As a result, the amount of our cash, cash equivalents, and investments
      in marketable securities has materially declined. If we continue to incur
      significant losses and are unable to access sufficient working capital from
      our
      operations or through external financings, we will be unable to fund future
      operations and operate as a going concern.**





We
      have
      incurred substantial net losses in each of the last six fiscal years. As
      reflected in our financial statements, we have experienced net losses of $17.1
      million, $55.5 million and $36.3 million in our fiscal years ended October
      31,
      2006, 2005 and 2004, respectively. As a result, the amount of our cash, cash
      equivalents, and investments in marketable securities has significantly declined
      from approximately  $15.0
      million at October 31, 2004 to $9.3 million at October 31, 2006. The decrease
      over the past two year period was primarily attributed to net cash payments
      of
      $27.2 million used in continuing operating activities, $0.7 million used in
      the
      discontinued Theseus operations, and $0.8 million used for capital expenditures,
      partially offset by $22.0 million net proceeds from the sale of common stock
      and
      warrants, and $1.1 million in cash received from the exercise of stock options
      and our employee stock purchase plan.





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





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





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


•
            Continued
                scientific progress in our discovery and research
                programs;


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


•
            Levels
                of inventory and accounts receivable that we
                maintain;


•
            Level
                of capital expenditures;


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


•
            The
                time and costs involved in obtaining regulatory approvals;


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


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





If
      we are
      unsuccessful in these efforts or if any or some of these factors negatively
      impact us, we will need to raise additional capital, reduce operations or take
      other steps to achieve positive cash flow. Although we cannot assure you that
      we
      will be successful in these efforts or that any or some of these factors will
      not negatively impact us, we believe that we will have sufficient cash to
      sustain us at least through the fiscal year ending October 31, 2007.




26




**Future
      financing transactions may have a dilutive or other negative effect on our
      existing shareholders.**





In
      June
      2006, the Company completed a private placement of shares of its common stock
      that also includes a significant number of warrants. This financing resulted
      in
      significant dilution of the Company’s current shareholders. In the future, the
      Company may issue additional equity, debt or convertible securities to raise
      capital. If the Company does so, the percentage ownership of the Company held
      by
      existing shareholders would be further reduced, and existing shareholders may
      experience significant dilution. In addition, new investors in the Company
      may
      demand rights, preferences or privileges that differ from, or are senior to,
      those of our existing shareholders, such as warrants in addition to the
      securities purchased and other protections against future dilutive transactions.
      In addition, any debt securities that we may issue and sell in the future could
      result in increased debt on our balance sheet, additional interest and financing
      expense and/or decreased operating income.





**Success
      of our recently announced plans to introduce a breast brachytherapy product
      will
      be dependent upon a variety of factors.**





We
      recently announced the introduction of ClearPathTM, a new brachytherapy device
      for the treatment of breast cancer. We expect that this product may generate
      significant revenues in the future; however, successful technical development
      of
      our products does not guarantee successful commercialization. There are a number
      of factors which could adversely affect our ability to achieve this goal,
      including:




·
            Successful
                completion of the launch of this
                product;


·
            Our
                ability to protect our intellectual property through patents and
                licenses;


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


·
            The
                acceptance of the product by physicians and health professionals;
                and


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





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





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




**We
      have experienced a significant deterioration of revenues in our IMRT/IGRT
      business. If we are unable to successfully develop and market new generations
      of
      IMRT/IGRT products, such as nomosSTAT, we may be unable to retain our existing
      customers or attract new customers.**




We
      have
      seen a significant deterioration of revenues in our IMRT/IGRT business, in
      part
      because of our inability to timely and successfully develop and market new
      products. Many of our products and product candidates are technologically
      innovative and require significant planning, design, development and testing.
      These activities require significant capital commitments and investment. If
      we
      are unable to raise needed capital on favorable terms or at all, we may be
      unable to obtain a competitive advantage in the marketplace.




27




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




•
failure
      to prove feasibility;


•
time
      required from proof of feasibility to routine production;


•
timing
      and cost of regulatory approvals and clearances;


•
      competitors' response to new product developments;


•
      manufacturing, installation, warranty and maintenance cost overruns;


•
failure
      to obtain customer acceptance and payment;


•
      customer demands for retrofits of both old and new products; and


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




The
      high
      cost of technological innovation is coupled with rapid and significant change
      in
      the regulations governing the products that compete in our market, by industry
      standards that could change on short notice, and by the introduction of new
      products and technologies that could render existing products and technologies
      uncompetitive. We cannot be sure that we will be able to successfully develop
      new products or enhancements to our existing products. Without successful new
      product introductions, our revenues likely will continue to suffer. Even if
      customers accept new or enhanced products, the costs associated with making
      these products available to customers, as well as our ability to obtain capital
      to finance such costs, could reduce or prevent us from increasing our operating
      margins. In July, 2006 we received FDA 510(k) clearance for our nomosSTAT
      product, which represents the next generation of our previously marketed PEACOCK
      product. The successful introduction of nomosSTAT is critical to our ability
      to
      achieve our sales targets for fiscal 2007. Any lack of acceptance in the market
      for nomosSTAT may result in a materially adverse impact on our financial
      results.





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




We
      expect
      that our serial tomotherapy, intensity-modulated radiation therapy, or IMRT,
      and
      image-guided radiation therapy, or IGRT, product lines, including CORVUS,
      nomosSTAT and BAT, will generate a significant part of our revenues, and we
      also
      believe that our ClearPath product will generate substantial revenues in the
      future. We will need to continue to develop enhancements to these products
      and
      improvements on our core technologies in order to compete effectively. Rapid
      change and technological innovation characterize the marketplace for medical
      products, and our competitors could develop technologies that are superior
      to
      our products or that render such products obsolete. We anticipate that
      expenditures for research and development will continue to be significant.
      The
      domestic and foreign markets for radiation therapy equipment are highly
      competitive. Many of our competitors and potential competitors have substantial
      installed bases of products and significantly greater financial, research and
      development, marketing and other resources than we do. Competition may increase
      as emerging and established companies enter the field. In addition, the
      marketplace could conclude that the tasks our products were designed to perform
      are no longer elements of a generally accepted treatment regimen. This could
      result in us having to reduce production volumes or discontinue production
      of
      one or more of our products.




Our
      single largest competitor in the IMRT/IGRT market is Varian Medical
      Systems, Inc. (“Varian”). Varian is the largest worldwide manufacturer, in
      terms of market share, of linear accelerators. Linear accelerators are the
      machines that generate the radiation energy beams used in both IMRT and
      conventional radiation treatment. Varian also markets its own line of IMRT
      products, including several models of multileaf collimators and an IMRT inverse
      planning software package, which it often includes with its linear accelerators.
      Varian also offers an on-board imaging system (OBI) which integrates CT imaging
      capabilities for daily tumor localization. Varian is also one of the principal
      providers of record and verification systems, which are systems that keep track
      of all critical information in the treatment of radiation therapy patients
      and
      which allow the planning system to communicate with the linear accelerator.
      Varian acquired Zmed, Inc., one of our principal competitors for BAT.
      Varian expects the acquisition to enhance its 3-D ultrasound imaging
      capabilities and offer radiation oncology departments a new line of stereotactic
      positioning accessories and planning software, allowing Varian to directly
      compete against BAT.




28




We
      also
      compete with Siemens and Elekta, each of which manufactures one or more
      multileaf collimators that compete with MIMiC and, therefore, with our
      integrated system, nomosSTAT. Both companies offer, or plan to offer, on-board
      imaging systems that indirectly compete with BAT. In addition, there are several
      other companies that currently offer or plan to offer IMRT modules, which
      typically add IMRT functionality to conventional radiation treatment planning
      products.




Finally,
      we compete with all manufacturers of conventional radiation therapy products
      many of which are devoting substantial resources to promoting their products.




Our
      brachytherapy business is also subject to intense competition. Our primary
      competitors in the brachytherapy seed business include: Nycomed Amersham PLC
      (through its control of Oncura) and C.R Bard, Inc., both of whom
      manufacture and sell Iodine-125 brachytherapy seeds, as well as distribute
      Palladium-103 seeds manufactured by a third party (in the case of Oncura, we
      currently manufacture a portion of its Palladium-103 seed requirements pursuant
      to a distribution agreement reached in July, 2005); Mentor, which manufactures
      and sells Iodine-125 brachytherapy seeds and currently distributes third party
      manufactured Palladium-103 brachytherapy seeds; and Theragenics Corporation,
      which manufacturers Palladium-103 seeds and sells Palladium-103 and Iodine-125
      brachytherapy seeds directly and its Palladium-103 brachytherapy seeds through
      marketing relationships with third parties. Several additional companies
      currently sell brachytherapy seeds as well. Our SurTRAK strands and needles
      are
      subject to competition from a number of companies, including Worldwide Medical
      Technologies, Inc., and our new ClearPath product for treatment of breast cancer
      faces competition from Cytyc Corp. and BioLucent, Inc.





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





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





**We
      are highly dependent on our direct sales organization, which is small compared
      to many of our competitors and which has relatively limited marketing and sales
      experience in our products. We have also experienced a high degree of turnover
      in our sales organization. Any failure to build , manage and maintain our direct
      sales organization could negatively affect our revenues.**




29




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




In
      addition, we have experienced higher than anticipated turnover in our domestic
      direct sales force, which has resulted in a relative lack of experience in
      selling our products.  As
      a
      result of our relatively small sales force, the intense competition for skilled
      sales and marketing employees, and the high turnover in our sales force, there
      can be no assurance that our direct sales and marketing efforts will be
      successful. If we are not successful in our direct sales and marketing, our
      sales revenue and results of operations are likely to be materially adversely
      affected.




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




We
      currently rely, and will continue to rely, upon collaborative relationships
      with
      agents and distributors and other industry participants to maintain IMRT/IGRT
      market access to potential customers, particularly in Asia and Europe, and
      our
      business strategy includes entering into more of these relationships in the
      future. Some of the entities with whom we have relationships to help market
      and
      distribute our products also produce or distribute products that directly
      compete with our IMRT/IGRT products.




We
      cannot
      assure you that we will be able to maintain or develop these relationships
      with
      agents and distributors and other industry participants or that these
      relationships will continue to be successful. If any of these relationships
      is
      terminated, not renewed or otherwise unsuccessful, or if we are unable to
      develop additional relationships, our product sales could decline, and our
      ability to grow our IMRT/IGRT business could be adversely affected. This is
      particularly the case with respect to foreign sales of our IMRT/IGRT products,
      where we currently rely, and we will continue to rely, on our distributors'
      expertise regarding foreign regulatory matters and their access to actual and
      potential customers.




In
      addition, our 2005 agreement with Oncura for distribution of our Palladium-103
      brachytherapy seeds may be an important component of that business.




We
      do not
      have a direct sales force for our non-therapeutic radiation source products,
      and
      rely entirely on the efforts of agents and distributors for sales of those
      non-brachytherapy products. We cannot assure you that we will be able to
      maintain our existing relationships with our agents and distributors for the
      sale of our non-therapeutic radiation source products.




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




To
      date,
      a majority of our revenues from the sale of our IMRT products has been derived
      from the sale of these products to customers who decide to upgrade linear
      accelerators that do not have IMRT capabilities to enable them to deliver IMRT
      treatments. Most of these linear accelerators are older models. Selling CORVUS
      to customers with newer multileaf collimator-equipped linear accelerators can
      be
      difficult because these linear accelerators may be offered with IMRT planning
      software at little or no additional cost. Accordingly, to make a sale, we often
      must convince these potential customers that CORVUS is sufficiently superior
      to
      the IMRT or conventional radiation treatment planning software products offered
      by the manufacturer to justify the additional costs of purchase. Selling
      nomosSTAT and MIMiC to potential customers with newer multileaf
      collimator-equipped linear accelerators is even more difficult because, in
      addition to the incremental costs of purchase, these potential customers may
      be
      reluctant to incur the additional effort required to retrofit the factory
      installed multileaf collimator with MIMiC. Over time, if more institutions
      purchase new linear accelerators that are IMRT-equipped or upgrade their older
      accelerators with technology from us or our competitors, the market for
      upgrading linear accelerators that do not have IMRT capabilities will shrink
      and
      may become saturated, which could adversely affect our sales and limit our
      potential revenues from our products.




30




**We
      might not be able to make our IMRT products compatible with some existing linear
      accelerators and other radiation therapy products. In addition, any future
      changes in the configuration of the most common linear accelerators could
      require costly and time-consuming modifications to our products that could
      harm
      our business.**




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




Our
      PEREGRINE product is not currently fully compatible with the majority of the
      linear accelerators in the United States and worldwide markets. We cannot assure
      you that we will be successful in making PEREGRINE compatible with additional
      linear accelerators, and any future changes in the design of any linear
      accelerators could require us to redesign the functionality of PEREGRINE. We
      may
      not be successful at any such effort.




**If
      alternative technologies prove to be superior to IMRT/IGRT or brachytherapy,
      physician adoption of our products could substantially decrease.**




Our
      IMRT/IGRT products face competition from companies that sell conventional
      radiation therapy products as well as from companies that are developing,
      marketing and manufacturing alternative therapies to radiation for the treatment
      of solid tumor cancers. It is possible that advances in the pharmaceutical,
      bio-medical or gene-therapy fields could render some or all radiation therapies,
      whether conventional or based on IMRT/IGRT and brachytherapy, obsolete. Even
      incremental advances in competing technologies could result in the rejection
      of
      our products as a part of a generally accepted diagnostic or treatment regimen.
      If alternative therapies are proven or perceived to offer treatment options
      that
      are superior or more cost effective than the treatments our products provide,
      physician adoption of our products could be negatively affected and our revenues
      from our products could decline.




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




Although
      we estimate that our IMRT products have been used to treat thousands of patients
      worldwide, this is still a statistically small number, and these treatments
      have
      primarily involved tumors of the prostate, head, neck and spinal cord. Much
      of
      the data produced in current studies using IMRT and our products have involved
      small patient sample sizes, and any positive results of these studies may not
      be
      representative of the results 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 or our products, our sales could fail to increase
      or
      could decrease.




31




Some
      theoretical and non-clinical studies, meaning studies that are not based on
      significant empirical evidence, have suggested that the use of IMRT and
      potentially our products may cause serious negative side effects, such as a
      risk
      of induced cancer, as a result of the increased radiation delivered to the
      patient. At present, not enough time has passed to determine conclusively the
      long-term side effects. If future clinical studies confirm 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 that our products cause harmful
      side effects, the U.S. Food and Drug Administration, or FDA, could require
      us to
      change our product labeling to describe these potential side effects or could
      even rescind the clearances for our products and potentially require a recall
      of
      our products.




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




**IMRT
      treatments expose patients to increased radiation leakage, which could
      potentially cause long-term deleterious side effects, including induced cancer.**




In
      both
      IMRT and conventional radiation therapy, there is radiation leakage, which
      means
      radiation that escapes from the linear accelerator and is absorbed by the
      patient outside the area of the patient's body being treated. Linear
      accelerators are the machines that generate the radiation 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 for a longer period of time overall
      as compared to conventional radiation treatments. Also, in IMRT treatments
      there
      is additional leakage that is transmitted through or between the leaves of
      the
      multileaf collimator itself. As a result, there is an increase in the overall
      radiation leakage to which the patient is exposed due to the longer periods
      of
      radiation delivery.




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




These
      same studies suggest that an increase in the long-term risk of induced cancers
      from IMRT may be possible. The risk, or perceived risk, of induced cancers
      could
      slow or prevent expanded use of IMRT to treat additional types of cancers and
      could even result in decreased usage of IMRT to treat cancers currently treated
      with IMRT if the increased risk is shown or believed to be significant, which
      could cause our revenues from our products to decline and our business to
      suffer.




**Our
      IMRT/IGRT products are used in connection with the delivery of intense
      radiation. Defects in, or misuse of, our products, or any detrimental side
      effects that result from the use of our products, could result in serious injury
      or death and could require costly recalls or subject us to costly and
      time-consuming product liability claims. This could harm future sales and
      require us to pay substantial damages.**




32




Our
      IMRT/IGRT products are used in connection with the delivery of high-powered
      external beam radiation to cancer patients. One or more of our IMRT/IGRT
      products could malfunction or be misused and cause serious injury or death
      to a
      patient. In addition, our IMRT/IGRT products might otherwise be determined
      to
      cause serious injury or other detrimental side effects. There is an inherent
      risk in our industry that we could be sued if one of our products results in,
      or
      is alleged to result in, a personal injury. Although we believe that we
      currently have adequate insurance to address anticipated potential liabilities
      associated with product liability, any unforeseen product liability, exposure
      in
      excess of, or outside the scope of, such insurance coverage could adversely
      affect our operating results. Any such claim brought against us, with or without
      merit, could result in significant damage to our business.




The
      FDA's
      medical device reporting regulations require us to report any incident in which
      our products may have caused or contributed to a death or serious injury, or
      in
      which our products malfunctioned in a way that would be likely to cause or
      contribute to a death or serious injury if the malfunction recurred. Any
      required filing could result in an investigation of our products and possibly
      subsequent regulatory action against us if it is found that one of our products
      caused the death or serious injury of a patient.




Because
      of the nature of our IMRT/IGRT products and their use, the tolerance for error
      in the design, manufacture or use of our IMRT/IGRT products may be small or
      nonexistent. If a product designed or manufactured by us is defective, whether
      due to design or manufacturing defects, or improper assembly, use or servicing
      of the product or other reasons, the product may need to be recalled, possibly
      at our expense. Furthermore, the adverse effect of a product recall might not
      be
      limited to the cost of the recall. For example, a product recall could cause
      applicable regulatory authorities to investigate us as well as cause our
      customers to review and potentially terminate their relationships with us.
      Recalls, especially if accompanied by unfavorable publicity or termination
      of
      customer contracts, could cause us to suffer substantial costs, lost revenues
      and a loss of reputation, each of which could harm our business. Products as
      complex as our planning and dose calculation software systems may also contain
      undetected software errors or defects when they are first introduced or as
      new
      versions are released. Our products may not be free from errors or defects
      even
      after they have been tested, which could result in the rejection of our products
      by our customers and damage to our reputation, as well as lost revenue, diverted
      development resources and increased support costs. We may also be subject to
      claims for damages related to any errors in our products.




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




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





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




33




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




Currently,
      our IMRT/IGRT products are predominantly used in the treatment of tumors of
      the
      prostate, head, neck and spinal cord, while our brachytherapy products are
      used
      almost exclusively for the treatment of prostate cancer. Further research,
      clinical data and years of experience will likely be required before there
      can
      be broad acceptance for the use of both our IMRT/IGRT as well as our
      brachytherapy products for additional types of cancer. In particular, some
      recognized members of the radiation oncology community have expressed skepticism
      as to the relative benefits of IMRT treatments other than for limited types
      of
      cancer such as prostate cancer, where mortality is closely linked to recurrence
      of the local tumor. They point out that in many types of cancer, such as breast
      cancer, mortality is usually a result of metastasis, meaning the expansion
      of
      the cancer to other parts of the patient's body, and that eliminating or
      controlling the growth of the local tumor, which is the goal of IMRT treatments,
      does little to prevent this from occurring. If our products do not become more
      widely accepted in treating other types of cancer, our sales could fail to
      increase or could decrease.




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




Under
      SFAS 142 and SFAS 144, goodwill and intangible assets having an indefinite
      life
      are not amortized but are subject to testing at least annually, or more often
      if
      an event occurs or circumstances indicate that the carrying values for goodwill
      and/or intangible assets may be impaired, using a fair value based approach.
      Accounting for impairment contains uncertainty because management must use
      judgment in determining appropriate assumptions to be used in the measurement
      of
      fair value. The Company engaged an appraisal firm to perform an analysis of
      the
      goodwill and intangible assets acquired from NOMOS, to determine the fair value
      thereof under the applicable standards as of the Company’s annual test date of
      September 30, 2005. As a result of this testing, in the fourth quarter of 2005,
      the Company recorded impairments of goodwill and intangible assets of NOMOS
      in
      the amount of $39,884,000, and impairments of goodwill and intangible assets
      of
      Radiation Therapy Products (“RTP”) in the amount of $329,000, in each case due
      to negative operating performance indications including declining sales and
      continued operating losses of the respective business segments.




In
      fiscal
      year 2006, the Company engaged an appraisal firm to perform an analysis of
      the
      goodwill and intangible assets acquired from NOMOS, to determine the fair value
      thereof under the applicable standards as of the Company’s annual test date of
      September 30, 2006. As a result of this testing, the Company determined there
      was no impairment of its goodwill and intangible assets in fiscal year
      2006.




The
      Company will continue to monitor impairment indicators in any of our reporting
      segments. If our future financial performance, including the expected revenue
      growth in the IMRT/IGRT business related to n omosSTAT,
      or other events indicate that the value of our recorded goodwill or intangible
      assets is further impaired, we may record additional impairment charges that
      could have a material adverse effect on our reported results.




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




Although
      we perform final product assembly of our IMRT/IGRT products, we purchase all
      major components for those products from third-party suppliers. We currently
      rely on a single source of supply for several key materials and components,
      the
      most important of which are the tungsten leaves used in our MIMiC multi-leaf
      collimator and all major components used in our BAT targeting system. We also
      obtain various other components for our IMRT/IGRT products from a limited number
      of sources. We cannot produce IMRT/IGRT products without these components.
      In
      the event of any extended or recurring interruption in supply, or if any of
      the
      significant components to our IMRT/IGRT products become obsolete or are no
      longer manufactured, we could be required to redesign our products or seek
      alternative supply sources, which could significantly impair our ability to
      sell
      these products. In some cases, we expect that it would take several months,
      or
      longer, for a new supplier to begin providing components to specification.
      In
      addition, we could be required to make a new or supplemental filing with the
      FDA
      and other applicable regulatory authorities and might have to obtain clearance
      or other regulatory approvals prior to marketing a product containing new
      components. We may be unable to obtain the necessary regulatory clearances
      or
      approvals on a timely basis, if at all, which could cause our revenues to
      decline and our business to suffer.




34





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




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




Our
      success is materially dependent on a limited number of key employees, and,
      in
      particular, the continued services of L. Michael Cutrer, our president and
      chief
      executive officer, and James W. Klingler, our chief financial officer. In
      November 2006, we announced that L. Michael Cutrer plans to transition from
      the
      position of president and chief executive officer to become the Company’s
      executive vice president and chief technology officer. The Board of Directors
      has initiated a search for his successor; however, there can be no certainty
      as
      to whether or when a successor will be identified and hired. As chief technology
      officer, we expect that Mr. Cutrer would, in addition to other responsibilities,
      continue to play an active leadership role in the Company’s breast brachytherapy
      program and to remain a member of the Company’s Board of Directors. We carry key
      employee insurance for Mr. Cutrer in the amount of $2.5 million. Our
      future business and financial results could be adversely affected if the
      services of Messrs Cutrer or Klingler or other key employees cease to be
      available. To our knowledge, none of our key employees have any plans to retire
      or leave in the near future.




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




35




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


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




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




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




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




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




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




36




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




In
      1998
      (prior to our acquisition of NOMOS Corporation), NOMOS became involved in a
      lawsuit, which NOMOS initiated, involving a NOMOS patent relating to the
      ultrasound localization techniques that is used in BAT. In January 2003,
      the district court entered judgment against NOMOS on its infringement claims.
      NOMOS appealed this judgment to the United 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 for rehearing, which was denied on
      March 11, 2004. We cannot predict what the adverse effect the result of
      this litigation will have on our future sales of related products.




Even
      if
      we are able to effectively enforce our existing proprietary rights to the
      fullest extent permitted by law, this would not protect us from competition.
      We
      do not have any patents on IMRT delivery or planning generally, and we have
      competitors that currently market and sell IMRT planning and delivery products
      including inverse planning systems similar to our CORVUS product. In addition,
      our competitors could design around our patents or develop products that provide
      comparable or superior outcomes without infringing on our patents or other
      proprietary rights. The confidentiality agreements with our employees,
      consultants and other third parties may not be enforceable or may not provide
      meaningful protection for our trade secrets or other proprietary information
      in
      the event of unauthorized use or disclosure.




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




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





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





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





37




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




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




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




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




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




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




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




38




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




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





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





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





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




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




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




39




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





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




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




•
fines,
      injunctions and civil penalties;


•
the
      recall or seizure of our products;


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


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


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


•
      criminal prosecution.




40




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




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




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




•
doctor
      and patient awareness and acceptance of IMRT/IGRT and our products;


•
the
      real or perceived effectiveness and safety of IMRT/IGRT and our products;


•
the
      relationship between the cost of our products and the real or perceived medical
      benefits of IMRT/IGRT and our products;


•
the
      relationship between the cost of our products and the financial benefits to
      our
      customers of using our products, which will be greatly affected by the coverage
      of, and reimbursement for, IMRT/IGRT treatment and ultrasound guidance by
      governmental and private third-party payors; and


•
market
      perception of our ability to continue to grow our business and develop enhanced
      IMRT/IGRT products.




Failure
      of our products to gain broad market acceptance could cause our revenues to
      decline and our business to suffer.




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




Our
      future profitability will depend in part on our ability to establish, grow
      and
      ultimately maintain our product sales in foreign markets, particularly in Asia
      and Europe. However, we have limited experience in marketing, servicing and
      distributing our products in other countries. In 2006, less than 5% of our
      product revenues and less than 5% of our total revenues were derived from sales
      to customers outside the United States and Canada. Our foreign operations
      subject us to additional risks and uncertainties, including:




41




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


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


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


•
longer
      accounts receivable collection times;


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


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


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




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




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





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





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





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





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


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


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




42


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


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


·
            Sales
                of our IMRT/IGRT products are typically heavier in the final month
                of a
                fiscal quarter, leading to a disproportionately high use of cash
                in the
                first two months of a quarter.


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


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


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


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


·
            Unfavorable
                outcome of any litigation; and


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




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





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







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




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





**The
      liquidity of our common stock could be adversely affected if we are delisted
      from The Nasdaq Global Market.**




43




In
      the
      event that we are unable maintain compliance with all relevant Nasdaq Listing
      Standards, our securities may be subject to delisting from the Nasdaq Global
      Market. If such delisting occurs, the market price and market liquidity of
      our
      common stock may be adversely affected.





Alternatively,
      if faced with such delisting, we may submit an application to transfer the
      listing of our common stock to The Nasdaq Capital Market. Among other
      requirements, The Nasdaq Capital Market has a minimum $2.5 million stockholders’
equity requirement and a $1.00 minimum bid price requirement for continued
      listing.





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




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





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





The
      market price of our common stock has historically been, and we expect it to
      continue to be, volatile. The price of our common stock has ranged between
      $1.03
      and $2.58 in the fifty-two week period ended October 31, 2006. The stock market
      has from time to time experienced extreme price and volume fluctuations,
      particularly in the medical device sector, which have often been unrelated
      to
      the operating performance of particular companies. Factors such as announcements
      of technological innovations or new products by our competitors or disappointing
      results by third parties, as well as market conditions in our industry, may
      significantly influence the market price of our common stock. Our stock price
      has also been affected by our own public announcements regarding such things
      as
      quarterly sales and earnings. Consequently, events both within and beyond our
      control may cause shares of our stock to lose their value rapidly.





In
      addition, sales of a substantial number of shares of our common stock by
      stockholders could adversely affect the market price of our shares. In
      the fourth quarter of 2006, our shares had an average daily trading volume
      of only approximately 36,000 shares. In connection with our June 2006 sale
      of common stock and accompanying warrants, we filed two resale registration
      statements covering an aggregate of up to 12,291,934 shares of common stock
      and
      6,145,967 shares of common stock issuable to upon exercise of warrants for
      the
      benefit of the selling security holders. The actual or anticipated resale by
      such investors under these registration statements may depress the market price
      of our common stock. Bulk sales of shares of our common stock in a short period
      of time could also cause the market price for our shares to decline.




44




**Item
      1B. UNRESOLVED STAFF COMMENTS**





None.





**Item
      2. PROPERTIES**





We
      are
      headquartered in the Los Angeles, California metropolitan area where we occupy
      two properties totaling approximately 40,000 square feet used for manufacturing
      and administration. Our leases for each of these facilities expire in November
      2007, with renewal options. We also have leased manufacturing and administration
      offices in the Pittsburgh, Pennsylvania metropolitan area of approximately
      35,000 square feet. The lease expires in February 2013 with an extension option
      and the option to obtain additional space within the building. In addition,
      we
      have a small engineering facility in Seattle, Washington and small sales offices
      in Germany and China. We believe that our facilities are adequate, suitable
      and
      of sufficient capacity to support our current operations.





**Item
      3. LEGAL PROCEEDINGS**





In
      December 2004, an individual plaintiff, Steven Weeks, filed a complaint in
      the
      Coos County Circuit Court of the State of Oregon against Bay Area Health
      District, North American Scientific, Inc., NOMOS Corporation and Carl Jenson,
      M.D., alleging the defendants caused Mr. Weeks to receive excessive radiation
      during the course of his IMRT treatment, as a result of a manufacturing and/or
      design defect(s) in our CORVUS and BAT products. In
      September, 2005, prior to the case going to trial, the Company was party to
      a
      settlement agreement and the lawsuit is no longer an ongoing matter. Under
      the
      settlement agreement, the parties mutually agreed to dismiss all claims and
      counterclaims against each other without admitting any wrongdoing. The Company
      has also settled pre-litigation claims asserted against the same set of
      defendants by three separate plaintiffs, and believes that no other claims
      are
      forthcoming. These pre-litigation claims were subject to a settlement agreement
      whereby the parties agreed not to bring any claims or counterclaims against
      each
      other without admitting any wrongdoing.





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




45




On
      April
      20, 2006, a lawsuit captioned *J.P.
      Morgan Trust Company, N.A. v. John Alan Friede, et al.* was
      filed in the U.S. District Court for the Southern District of New York against
      John A. Friede, a current director and stockholder of the Company, Mr. Friede’s
      wife, and NOMOS Corporation, a subsidiary of the Company. The plaintiff, J.P.
      Morgan Trust Company, filed the lawsuit in its capacity as personal
      representative of the Estate of Evelyn A.J. Hall, Mr. Friede’s deceased mother.
      The complaint, as amended on August 8, 2006, asserts claims for reimbursement
      and contribution, constructive fraud, breach of contract and other related
      claims arising out of loans made by Mrs. Hall to, or for the benefit of, Mr.
      and
      Mrs. Friede and/or NOMOS, or acting as an accommodation party in additional
      loans made to Mr. and Mrs. Friede by financial institutions that were not
      subsequently repaid. During the time periods alleged in the complaint, Mr.
      Friede was the Chairman, Chief Executive Officer and the largest stockholder
      of
      NOMOS. With respect to NOMOS, the complaint seeks at least approximately
      $5,250,000 principal amount of loans allegedly made to and still outstanding
      and
      owed by NOMOS, and other related equitable remedies plus interest, costs and
      expenses.





On
      the
      basis of copies of documents that have been made available to us, we believe
      that the claims made against NOMOS in the lawsuit appear to be without merit
      and
      we intend to vigorously defend against them. However, in accordance with the
      indemnification provisions of the merger agreement under which we acquired
      NOMOS
      on May 4, 2004, and the related indemnity escrow agreement, we have made a
      claim
      for indemnification against the escrow to preserve our right of indemnity.
      Under
      these provisions, an indemnifying party will not have any indemnification
      obligations until such time as the aggregate indemnified losses for which we
      are
      entitled to indemnification equals or exceeds $400,000, at which point, the
      indemnifying party will be liable for the full amount of all such indemnified
      losses without regard to the $400,000 basket. As of the date hereof, the
      indemnity escrow account holds approximately $1,225,000 of cash and 526,810
      shares of our common stock. We also intend to review various other legal
      remedies that may be available to us.




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




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





None.





46




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







**L.
      Michael Cutrer 50,** has been
      the President and Chief Executive Officer and a Director of the Company since
      1990. Previously, Mr. Cutrer was a Manager of Isotope Products
      Laboratory, Inc., a radioisotope manufacturing company, where he was
      responsible for industrial product manufacturing, research and development.
      In
      November 2006, the Company announced that Mr. Cutrer plans to transition from
      the position of president and chief executive officer to become the Company’s
      executive vice president and chief technology officer. As chief technology
      officer, we expect that Mr. Cutrer would, in addition to other responsibilities,
      continue to play an active leadership role in the Company’s breast brachytherapy
      program and to remain a member of the Company’s Board of Directors.




**David
      N. King 39** ,
      joined
      the Company in 1998, and currently serves as General Counsel, Corporate
      Secretary, and Vice President of Human Resources. Mr. King was Corporate Counsel
      for Virco Corporation and, prior to that, an associate with the law firm of
      Gibson, Dunn & Crutcher (Los Angeles). Mr. King received his law degree from
      the University of Southern California Law Center in 1994 and received his B.A.
      in International Relations (Soviet Studies) from the University of Southern
      California in 1988.




**James
      W. Klingler 59** ,
      joined
      North American Scientific, Inc. in July, 2004 as Senior Vice President and
      Chief
      Financial Officer. Previously, he was Vice President-Finance and Chief Financial
      Officer of Troy Group, Inc., a provider of secure check printing products and
      wireless connectivity solutions, from January 2002 to July 2004. From
      February 2001 to November 2001, he served as Senior Vice President,
      Business Operations and Chief Financial Officer of Trinagy, Inc., a
      software company that was merged into Hewlett-Packard Company. In prior
      positions, Mr. Klingler was Vice President, Finance and Administration of
      Triconex Corporation, a supplier of products, systems and services for safety,
      critical control and turbomachinery applications and a subsidiary of Invensys
      plc, from February 1999 to February 2001, and Vice President and Chief
      Financial Officer of Wilshire Technologies Inc., a company that
      manufactures polyurethane products, from October 1994 to
      February 1999. Mr. Klingler holds a B.A. from The Ohio State
      University and an M.B.A. from the Columbia University Graduate School of
      Business.




**Michael
      J. Ryan 60** ,
      joined
      North American Scientific, Inc. January 2006, as Senior Vice President and
      General Manager of the NOMOS Radiation Oncology Division.  Previously, from
      1992 through 2005, he served in a variety of positions with InterV (now known
      as
      Angiotech), originally as Vice President of Sales & Marketing, then as
      Senior Vice President of Sales & Marketing, and lastly as Executive Vice
      President of Business Development.  InterV is a market leader in image
      guided, interventional medical devices for Radiology, Oncology, Cardiology,
      and
      Endo-vascular Surgery.  Prior  to
      InterV, Mr. Ryan held senior management positions, in Sales, Marketing, Business
      Development, and General Management, with several companies, including Johnson
      & Johnson, Medtronic, Healthdyne, NAMIC, and Coeur Laboratories.  Mr.
      Ryan holds a B.A. degree from John F. Kennedy College.




47


**PART
      II**





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





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





**High**
            
            **Low****Fiscal
                2006**First
                Quarter
            
            
            2.58
            
            
            1.89Second
                Quarter
            
            
            2.49
            
            
            1.96Third
                Quarter
            
            
            2.16
            
            
            1.57Fourth
                Quarter
            
            
            1.85
            
            
            1.03**Fiscal
                2005**First
                Quarter
            
            
            6.20
            
            
            4.10Second
                Quarter
            
            
            5.94
            
            
            2.55Third
                Quarter
            
            
            3.62
            
            
            1.85Fourth
                Quarter
            
            
            4.13
            
            
            1.90





As
      of
      December 29, 2006, we had approximately 254 shareholders of record.





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




**Issuer
      Purchases of Equity Securities**




The
      following table provides information with respect to the shares of common stock
      repurchased by us during the quarter ended October 31, 2006.




**Period**
            
            **Total
                Number of**
              **Shares Purchased**
            
            **Average Price**
              **Paid
                Per**
              **Share**
            
            **Total
                Number of**
              **Shares Purchased as**
              **Part
                of Publicly**
              **Announced Plans or**
              **Programs**
            
            **Approximate
                Dollar Value**
              **of Shares that May**
              **Yet
                Be Purchased**
              **Under the Plans or**
              **Programs**August
                1 - August 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            $
            9,871,000.September
                1 - September 30, 2006
            
            
            —
            
            
            —
            
            
            —
            
            $
            9,871,000.October 1—October
                31, 2006
            
            
            3,100
            
            $
            1.04
            
            
            3,100
            
            $
            9,867,000.Total
            
            
            3,100
            
            $
            1.04
            
            
            3,100





In
      October 2001, the Board of Directors authorized a stock repurchase program
      to acquire up to $10 million of the Company's common stock in the open
      market at any time. The number of shares of common stock actually acquired
      by
      the Company will depend on subsequent developments and corporate needs, and
      the
      repurchase of shares may be interrupted or discontinued at any time. As of
      October 31, 2006 and 2005, a total of 22,100 shares and 19,000 shares had
      been repurchased by the Company at a cost of $133,000 and $129,000, respectively
      and are reflected as Treasury Stock on the Balance Sheet at the respective
      dates. We
      expect repurchases will be made in accordance with Rule 10b-18 and include
      a
      plan designed to satisfy the Rule 10b5-1 safe harbor.




48




**Item
      6. SELECTED CONSOLIDATED FINANCIAL DATA**





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




**Year
                Ended October 31,****2006**
            
            
            **2005**
            
            
            **2004****(1)**
            
            
            **2003****(2)**
            
            
            **2002****(In
                thousands, except for per share amounts)****Statement
                of Operations:**Net
                sales
            
            $
            28,988
            
            $
            32,224
            
            $
            24,737
            
            $
            14,683
            
            $
            20,780Cost
                of goods sold
            
            
            19,102
            
            
            20,056
            
            
            15,818
            
            
            6,944
            
            
            7,581Gross
                profit
            
            
            9,886
            
            
            12,168
            
            
            8,919
            
            
            7,739
            
            
            13,199Operating
                expenses
            
            
            27,130
            
            
            68,164
            
            
            33,525
            
            
            10,086
            
            
            6,382Income
                (loss) from operations
            
            
            (17,244
            )
            
            (55,996
            )
            
            (24,606
            )
            
            (2,347
            )
            
            6,817Interest
                and other income, net
            
            
            (139
            )
            
            121
            
            
            579
            
            
            1,749
            
            
            1,834Income
                (loss) before provision (benefit) for income taxes
            
            
            (17,383
            )
            
            (55,875
            )
            
            (24,027
            )
            
            (598
            )
            
            8,651Provision
                (benefit) for income taxes
            
            
            —
            
            
            —
            
            
            (257
            )
            
            —
            
            
            2,087Income
                (loss) from continuing operations
            
            
            (17,383
            )
            
            (55,875
            )
            
            (23,770)
            )
            
            (598
            )
            
            6,564Income
                (loss) from discontinued operations**(3)**
            
            
            253
            
            
            362
            
            
            (12,537)
            )
            
            (8,536
            )
            
            (11,808
            )Cumulative
                effect of change in accounting principle
            
            
            —
            
            
            —
            
            
            —
            
            
            (306
            )
            
            —Net
                loss
            
            $
            (17,130
            )
            $
            (55,513
            )
            $
            (36,307
            )
            $
            (9,440)
            )
            $
            (5,244
            )Basic
                earnings (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (3.38
            )
            $
            (1.81
            )
            $
            (0.06
            )
            $
            0.65Income
                (loss) from discontinued operations**(3)**
            
            
            0.01
            
            
            0.02
            
            
            (0.95
            )
            
            (0.83
            )
            
            (1.16
            )Cumulative
                effect of change in accounting principle
            
            
            —
            
            
            —
            
            
            —
            
            
            (0.03
            )
            
            —Net
                loss
            
            $
            (0.78
            )
            $
            (3.36
            )
            $
            (2.76
            )
            $
            (0.92
            )
            $
            (0.51
            )Diluted
                earnings (loss) per share:Income
                (loss) from continuing operations
            
            $
            (0.79
            )
            $
            (3.38
            )
            $
            (1.81
            )
            $
            (0.06
            )
            $
            0.57
            )Income
                (loss) from discontinued operations**(3)**
            
            
            0.01
            
            
            0.02
            
            
            (0.95
            )
            
            (0.83
            )
            
            (1.02
            )Cumulative
                effect of change in accounting principle
            
            
            —
            
            
            —
            
            
            —
            
            
            (0.03
            )
            
            —Net
                loss
            
            $
            (0.78
            )
            $
            (3.36
            )
            $
            (2.76
            )
            $
            (0.92
            )
            $
            (0.45
            )Shares
                used in per share calculationBasic
            
            
            21,956
            
            
            16,502
            
            
            13,139
            
            
            10,258
            
            
            10,210Diluted
            
            
            21,956
            
            
            16,502
            
            
            13,139
            
            
            10,258
            
            
            11,596




49




**As
                of October 31,****2006**
            
            **2005**
            
            **2004****(1)**
            
            **2003**
            
            **2002****(In
                thousands)****Balance
                Sheet Data:**Cash,
                cash equivalents and marketable securities
            
            $
            9,323
            
            $
            3,623
            
            $
            14,980
            
            $
            49,115
            
            $
            55,945Total
                assets
            
            
            27,198
            
            
            22,333
            
            
            80,539
            
            
            62,532
            
            
            69,135Total
                debt
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                stockholders' equity
            
            
            17,188
            
            
            10,801
            
            
            65,377
            
            
            55,746
            
            
            64,901




(1)
            In May 2004, the Company acquired NOMOS
              Corporation, which has a significant impact on the 2004 selected financial
              data. The 2004 results include a $9.2 million charge for in-process
              research and development and $1.1 million charge for merger and
              integration costs in connection with the Company’s purchase of NOMOS.
              These items had a $(0.78) impact on basic and diluted loss per share.
              See
              Note 4 to the Consolidated Financial Statements.(2)
            The 2003 results include a $0.3 million
              charge for the cumulative effect of a change in accounting principle
              to
              recognize future decommissioning costs of leased manufacturing facilities.
              This item had a ($0.03) impact on basic and diluted loss per
              share.(3)
            In September 2004, the Company’s Theseus
              operation was shut down. The Statement of Operations data include Theseus
              as a discontinued operation. The 2004 results include a loss on
              discontinued operations of $5.2 million and loss from operations of
              $7.3
              million. Loss from operations consisted primarily of research and
              development expenses.




50


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





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





**Overview**





We
      manufacture, market and sell products for the radiation oncology community,
      including brachytherapy seeds and ancillary devices used primarily in the
      treatment of prostate cancer, as well as intensity modulated and image guidance
      radiation therapy products and services for localization and treatment of
      cancer.  Our business is organized into two operating segments: IMRT/IGRT,
      and Radiation Sources.




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




In
      October 2000, we acquired Theseus Imaging Corporation (“Theseus”), a company
      that had been engaged in the research and development of a proprietary
      radiopharmaceutical agent (referred to as “Hynic-Annexin V”). Over the following
      four years, we spent over $33 million on clinical trials and additional
      research. In July and August 2004, we assessed the long-term prospects of the
      Theseus product candidate and confirmed our previous estimates that the
      successful completion of development and receipt of regulatory approvals of
      Hynic-Annexin V would not occur earlier than 2007 and that the additional costs
      to achieve successful completion would be substantial. With limited capital
      resources and the additional need to fund product development of our recently
      acquired IMRT and IGRT products, we decided to explore alternative options
      for
      Theseus. Discussions with potential financial and strategic partners ceased
      in
      August 2004. As a direct result we shut-down the operation in September
      2004.





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





On
      May 4,
      2004, we acquired NOMOS Corporation (“NOMOS”), a privately held developer,
      manufacturer, and marketer of IMRT and IGRT products and services.  This
      acquisition was intended to significantly expand our product offerings to
      radiation oncologists.  Under the terms of the agreement and plan of merger
      we paid approximately $58 million consisting of $11.5 million in cash, the
      issuance of 5.2 million shares of the Company’s common stock with a fair value
      of approximately $37.3 million, the assumption of 1.4 million of stock options
      and warrants with a fair value of $4.6 million, direct transaction costs of
      $3.0
      million and the assumption of acquisition related liabilities of $1.6 million
      in
      exchange for all of the outstanding capital stock of NOMOS.  We manage this
      business as our IMRT/IGRT operating segment. Our financial results include
      12
      months of IMRT/IGRT operating results in fiscal years 2006 and 2005 and 6 months
      in fiscal 2004.




51




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







**Critical
      Accounting Policies**





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





*Revenue
      Recognition*




We
      sell
      products for the radiation oncology community, including brachytherapy seeds
      used in the treatment of cancer, as well as IMRT and IGRT products and
      services.  Product revenue consists of brachytherapy, non-therapeutic
      sources, and certain IMRT hardware devices, including our MiMIC and Crane
      products.  Software revenues consist of IMRT treatment planning software
      Corvus, Peregrine and Peacock and our IGRT products. Service revenue consists
      of
      warranty revenue and maintenance service agreements.




52




Product
      revenue




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




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





Software
      revenue




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




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




Our
      software sales are generally multiple element arrangements, which could include
      the product, first year annual maintenance and support, and training and
      installation.  Revenues from the multiple element arrangements are
      allocated to each element based on the relative fair value of the
      elements.  If the fair value of the element exists, the determination is
      based on vendor specific objective evidence.  If such 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 of fair value of each
      element does exist or until all elements of the arrangement are delivered. 
If in a multiple element arrangement, fair value does not exist for one or
      more
      of the undelivered elements, the residual method of accounting is applied. 
Under the residual method, the fair value of the undelivered elements is
      deferred, and the remaining portion of the arrangement fee is recognized as
      revenue.




Service
      revenue




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




53




*Allowance
      for Doubtful Accounts and Sales Returns*





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





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





*Inventory
      Reserves*





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





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





*Goodwill*





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





*Impairment
      of Long-lived Assets*





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




The
      Company engaged an appraisal firm to perform an analysis of the goodwill and
      intangible assets acquired from NOMOS Corporation on May 4, 2004 to determine
      the fair value thereof under SFAS 142 and SFAS 144 as of the Company's annual
      test date of September 30, 2005. The Company's management and Audit Committee
      of
      the Board reviewed and agreed with the appraisal firm's conclusions that the
      NOMOS goodwill and intangible assets were impaired, due to negative operating
      performance indicators of our IMRT/IGRT business, including three successive
      years of declining sales and continued net operating losses. As a result, the
      Company wrote down the NOMOS goodwill and intangible assets to their fair value
      in the quarter ended October 31, 2005, as follows:




54




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




In
      addition, the Company performed an internal analysis under SFAS 142 and SFAS
      144
      as of the Company's annual test date of September 30, 2005 of the goodwill
      and
      intangible assets acquired from Radiation Therapy Products (RTP) in August,
      2003
      to determine the fair value thereof under the applicable standards. The Company
      concluded that the goodwill and intangible assets acquired from RTP were
      impaired due to negative operating performance indicators, including the RTP
      products lower sales and net operating losses. As a result, the Company wrote
      down the RTP goodwill by $207,000 and the RTP intangible assets by $122,000
      to
      their fair value in the quarter ended October 31, 2005. The Company engaged
      an
      appraisal firm to perform an analysis of the goodwill and intangible assets
      acquired from NOMOS Corporation on May 4, 2004 to determine the fair value
      thereof under SFAS 142 and SFAS 144 as of the Company's annual test date of
      September 30, 2006. As a result of this testing, the Company
      determined there was no impairment of its goodwill and intangible assets in
      fiscal year 2006.




*Loss
      Contingencies*





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





*Income
      Taxes*





We
      utilize SFAS No. 109 “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Deferred taxes are determined based on the differences between
      the
      financial statement and tax bases of assets and liabilities, using enacted
      tax
      rates in effect for the year in which the differences are expected to reverse.
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amounts expected to be realized. In addition, we are subject
      to
      examination of our income tax returns by the Internal Revenue Service and other
      tax authorities. We regularly assess the likelihood of adverse outcomes
      resulting from these examinations.





*Stock-based
      Compensation*





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




55




We
      adopted SFAS 123(R) using the modified prospective transition method as of
      and
      for the fiscal year ended October 31, 2006. In accordance with the modified
      prospective transition method, the Company’s financial statements for prior
      periods have not been restated to reflect, and do not include, the impact of
      SFAS 123(R). Share-based compensation expense recognized is based on the value
      of the portion of share-based payment awards that is ultimately expected to
      vest. Share-based compensation expense recognized in the Company’s Condensed
      Consolidated Statement of Operations during the fiscal year ended October 31,
      2006 includes compensation expense for share-based payment awards granted prior
      to, but not yet vested as of, October 31, 2005 based on the grant date fair
      value estimated in accordance with the pro forma provisions of SFAS 123 and
      new
      stock option grants made during the fiscal year ended October 31, 2006. A total
      of 1,303,000 stock option grants were awarded to employees on March 16, 2006
      and
      a total of 150,000 stock option grants were awarded to directors on May 3,
      2006
      and June 14, 2006.





**Results
      of Operations**





**Fiscal
      2006 vs. Fiscal 2005**


**Total
      Revenue**


**Year
                Ended October 31,****2006**
            
            **2005**
            
            **%
                Change****($
                millions)**IMRT/IGRT
                Products
            
            $
            7.1
            
            $
            8.8
            
            
            (19)
            %IMRT/IGRT
                Services
            
            
            9.3
            
            
            11.4
            
            
            (19)
            %Total
                IMRT/IGRT
            
            $
            16.4
            
            $
            20.2
            
            
            (19)
            %Radiation
                Sources
            
            
            12.6
            
            
            12.0
            
            
            5
            %$
            29.0
            
            $
            32.2
            
            
            (10)
            %




Total
      revenue decreased $3.2 million, or 10%, to $29.0 million for the year ended
      October 31, 2006 from $32.2 million for the year ended October 31,
      2005. The decrease in revenue is due to a $3.8 million decline in product and
      service revenues from our IMRT/IGRT business segment acquired in the purchase
      of
      NOMOS in May 2004, partially offset by a $0.6 million increase of net sales
      in
      our Radiation Sources business. The decrease in the IMRT/IGRT revenue results
      from a decline in both the number of products sold and in average selling prices
      due to competition. The increase in our Radiation Sources business reflects
      a 5%
      increase in sales of our brachytherapy seeds due to increased shipments of
      brachytherapy seeds, partially offset by a decline in average selling prices
      due
      to competition, and a 4% increase in sales of our non-therapeutic products.
      Our
      service revenue is related to our IMRT/IGRT business, and decreased $2.1
      million, or 19%, to $9.3 million for the fiscal year ended October 31, 2006
      from $11.4 million for the fiscal year ended October 31, 2005.





56





**Gross
      profit**


**Year
                Ended October 31,****2006**
            
            **2005**
            
            **%
                Change****($
                millions)**IMRT/IGRT
                Products
            
            $
            0.5
            
            $
            1.3
            
            
            (38)
            %IMRT/IGRT
                Services
            
            
            5.8
            
            
            7.0
            
            
            (17)
            %Total
                IMRT/IGRT
            
            $
            6.3
            
            $
            8.3
            
            
            (24)
            %Radiation
                Sources
            
            
            3.6
            
            
            3.9
            
            
            (8)
            %$
            9.9
            
            $
            12.2
            
            
            (19)
            %




**Year
                Ended October 31,****2006**
            
            **2005**
            
            **%
                Point Change****(%
                of Revenue)**IMRT/IGRT
                Products
            
            
            7
            %
            
            15
            %
            
            (8
            )%IMRT/IGRT
                Services
            
            
            62
            %
            
            61
            %
            
            1
            %Total
                IMRT/IGRT
            
            
            38
            %
            
            41
            %
            
            (3)
            %Radiation
                Sources
            
            
            29
            %
            
            32
            %
            
            (3)
            %34
            %
            
            38
            %
            
            (4)
            %





Gross
      profit decreased $2.3 million, or 19%, to $9.9 million for the year ended
      October 31, 2006 from $12.2 million for the fiscal year ended
      October 31, 2005. The decrease in our gross profit is primarily due to
      reduced revenues of our IMRT/IGRT business and the start-up costs of in-house
      seed stranding of our Radiation Sources business. Gross profit for fiscal year
      2006 consisted of $6.3 million from our IMRT/IGRT business and $3.6 million
      from
      our Radiation Sources business. The gross profit on our service revenue related
      to our IMRT/IGRT business decreased $1.2 million, or 17%, to $5.8 million for
      the full year ended October 31, 2006 from $7.0 million for the fiscal year
      ended October 31, 2005.





Gross
      profit as a percent of sales decreased from 38% in fiscal year 2005 to 34%
      in
      fiscal year 2006 primarily due to the decline in product and service revenue
      in
      our IMRT/IGRT business in fiscal 2006 compared to fiscal 2005. Gross profit
      as a
      percent of sales by business segment for fiscal year 2006 consisted of 38%
      of
      sales from our IMRT/IGRT business and 29% of sales from our Radiation Sources
      business. The gross profit as a percent of sales of our IMRT/IGRT business
      was
      impacted by an increase in the reserve for excess and obsolete inventory of
      $0.3
      million, or 1% of sales. We anticipate that gross profit margins of both
      businesses will improve over time with the anticipated increase in sales volumes
      as new products are introduced.





57




**Selling
      expenses**


**Year
                Ended October 31,****2006**
            
            **2005**
            
            **%
                Change****($
                millions)**Selling
                expenses
            
            $
            8.6
            
            $
            8.9
            
            
            (3)
            %As
                a percent of total revenue
            
            
            30
            %
            
            28
            %





Selling
      expenses comprised primarily of salaries, commissions, and marketing costs,
      decreased $0.3 million or 3%, to $8.6 million for the fiscal year ended
      October 31, 2006, from $8.9 million for the fiscal year ended
      October 31, 2005. The decrease in selling expenses is primarily attributed
      to reduced sales commissions related to the decline in sales of IMRT/IGRT
      products.





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


**Year
                Ended October 31,****2006**
            
            
            **2005**
            
            
            **%
                Change****($
                millions)**General
                and administrative expenses
            
            $
            12.1
            
            $
            10.4
            
            
            16
            %As
                a percent of total revenue
            
            
            42
            %
            
            32
            %





G&A
      increased $1.7 million or 16%, to $12.1 million for the fiscal year ended
      October 31, 2006, from $10.4 million for the fiscal year ended
      October 31, 2005. The increase in G&A is primarily attributed to $0.9
      million of stock
      compensation expense as a result of the implementation of SFAS 123R which
      requires the expensing of stock options , and
      $1.1
      in litigation-related legal fees, partially offset by a reduction in personnel
      expenses.





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


**Year
                Ended October 31,****2006**
            
            **2005**
            
            **%
                Change****($
                millions)**Research
                and development expenses
            
            $
            5.8
            
            $
            6.3
            
            
            (9)
            %As
                a percent of total revenue
            
            
            20
            %
            
            20
            %





R&D
      decreased $0.5 million or 9%, to $5.8 million for the fiscal year ended
      October 31, 2006, from $6.3 million for the fiscal year ended
      October 31, 2005. The decrease in R&D spending is primarily due to
      reduced project spending in IMRT/IGRT business, partially offset by increased
      spending on product development in our Radiation Sources business relating
      to
      in-house stranding and breast brachytherapy. Our R&D spending reflects our
      belief that to maintain our competitive position in a market characterized
      by
      rapid rates of technological advancement, we must continue to invest significant
      resources in new product development, as well as continue to enhance existing
      products.





**Amortization
      of intangible assets.** Amortization of intangible assets decreased by $1.7 million to $0.6 million
      for
      the fiscal year ended October 31, 2006 from $2.3 million for the fiscal year
      ended October 31, 2005. The decrease is attributed to the write-down of certain
      intangible assets in the fourth quarter of 2005.




58




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





**Gain
      from discontinued operation.** A gain
      of $0.3 million was recorded on the discontinued Theseus operation for the
      fiscal year ended October 31, 2006 compared to a gain of $0.4 million for
      the fiscal year ended October 31, 2005. The gain in both fiscal years
      resulted from actual shut-down expenses that were below estimated expenses
      that
      we had previously accrued.




**Fiscal
      2005 vs. Fiscal 2004**


**Total
        Revenue**


**Year
                Ended October 31,****2005**
            
            **2004**
            
            **%
                Change****($
                millions)**IMRT/IGRT
                Products
            
            $
            8.8
            
            $
            6.4
            
            
            38
            %IMRT/IGRT
                Services
            
            
            11.4
            
            
            5.3
            
            
            115
            %Total
                IMRT/IGRT
            
            $
            20.2
            
            $
            11.7
            
            
            73
            %Radiation
                Sources
            
            
            12.0
            
            
            13.0
            
            
            (8)
            %$
            32.2
            
            $
            24.7
            
            
            30
            %





Total
      revenue increased $7.5 million, or 30%, to $32.2 million for the year ended
      October 31, 2005 from $24.7 million for the year ended October 31,
      2004. The increase in revenue is attributed an additional $8.5 million of
      revenue from our IMRT/IGRT business segment acquired in the purchase of NOMOS
      in
      May 2004, reflecting a full year’s results from that business segment, offset by
      a $1.0 million decrease of net sales in our Radiation Sources business. The
      decrease in our Radiation Sources business reflects a decline in average selling
      prices due to competition. Our service revenue is related to our IMRT/IGRT
      business, and increased $6.1 million, or 115%, to $11.4 million for the full
      year ended October 31, 2005 from $5.3 million for the six months ended
      October 31, 2004.





**Gross
      profit**


**Year
                Ended October 31,****2005**
            
            
            **2004**
            
            
            **%
                Change****($
                millions)**IMRT/IGRT
                Products
            
            $
            1.3
            
            $
            0.5
            
            
            160
            %IMRT/IGRT
                Services
            
            
            7.0
            
            
            2.9
            
            
            141
            %Total
                IMRT/IGRT
            
            $
            8.3
            
            $
            3.4
            
            
            144
            %Radiation
                Sources
            
            
            3.9
            
            
            5.5
            
            
            (29)
            %$
            12.2
            
            $
            8.9
            
            
            36
            %




59




**Year
                Ended October 31,****2005**
            
            **2004**
            
            **%
                Point Change****(%
                of Revenue)**IMRT/IGRT
                Products
            
            
            15
            %
            
            8
            %
            
            7
            %IMRT/IGRT
                Services
            
            
            61
            %
            
            56
            %
            
            5
            %Total
                IMRT/IGRT
            
            
            41
            %
            
            29
            %
            
            12
            %Radiation
                Sources
            
            
            32
            %
            
            43
            %
            
            (11)
            %38
            %
            
            36
            %
            
            2
            %





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





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




**Selling
      expenses**


**Year
                Ended October 31,****2005**
            
            **2004**
            
            **%
                Change****($
                millions)**Selling
                expenses
            
            $
            8.9
            
            $
            6.7
            
            
            32
            %As
                a percent of total revenue
            
            
            28
            %
            
            27
            %





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





60





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


**Year
                Ended October 31,****2005**
            
            
            **2004**
            
            
            **%
                Change****($
                millions)**General
                and administrative expenses
            
            $
            10.4
            
            $
            12.2
            
            
            (14)
            %As
                a percent of total revenue
            
            
            32
            %
            
            49
            %





G&A
      decreased $1.8 million or 14%, to $10.4 million for the fiscal year ended
      October 31, 2005, from $12.2 million for the fiscal year ended
      October 31, 2004. The decrease in G&A is primarily attributed to
      expenses in fiscal year 2004 which did not recur in fiscal year 2005, including
      severance costs associated with the resignation of our former chief financial
      officer ($0.9 million), and the consolidation of Prostate Centers of America
      ($1.0 million). See Note 5 to the consolidated financial statements for a
      discussion of Prostate Centers of America. The increase in G&A expense in
      fiscal year 2005 resulting from the acquisition of our IMRT/IGRT business was
      offset by cost reductions in G&A expense in Radiation Sources.




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


**Year
                Ended October 31,****2005**
            
            **2004**
            
            **%
                Change****($
                millions)**Research
                and development expenses
            
            $
            6.3
            
            $
            3.2
            
            
            97
            %As
                a percent of total revenue
            
            
            20
            %
            
            13
            %





R&D
      increased $3.1 million or 97%, to $6.3 million for the fiscal year ended
      October 31, 2005, from $3.2 million for the fiscal year ended
      October 31, 2004. The increase in R&D spending is primarily due to the
      acquisition of IMRT/IGRT business in May 2004. Our R&D spending reflects our
      belief that to maintain our competitive position in a market characterized
      by
      rapid rates of technological advancement, we must continue to invest significant
      resources in new product development, as well as continue to enhance existing
      products. We expect that the majority of our R&D expense will be related to
      our IMRT/IGRT business segment.





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





**Write-down
      of intangible assets.** A $40.2
      million impairment charge was recorded in our fiscal fourth quarter ended
      October 31, 2005 to write-down the goodwill and intangible assets acquired
      in
      the NOMOS acquisition in May, 2004 ($40.0 million), and the RTP acquisition
      in
      August, 2003 ($0.2 million). See Notes 10 and 11 to the consolidated financial
      statements for a discussion of the impairment charge.





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




61




**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 tax refund received during 2004.
      No
      benefits were recognized for losses incurred in 2005 and 2004 due to the
      uncertainty of our ability to realize the future benefit of our deferred tax
      assets.




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





**Liquidity
      and Capital Resources**





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





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business.  We have incurred net losses of $17.1
      million, $55.5 million, and $36.3 million for the years ended October 31, 2006,
      2005 and 2004, respectively, and have used cash in operations of $15.9 million,
      $11.9 million, and $23.1 million for the years ended October 31, 2006 2005
      and
      2004, respectively.  As of October 31, 2006, we had an accumulated deficit
      of $127.5 million; cash, cash equivalents and marketable securities of $9.3
      million, and no debt or other borrowings.





Based
      on
      our current operating plans, we believe that the existing cash resources, cash
      forecasted by our plans to be generated by operations, the issuance of our
      common stock and/or debt as well as our anticipated available bank lines of
      credit will be sufficient to meet working capital and capital requirements
      through at least the next twelve months.  Also, our plans to attain
      profitability and generate additional cash flows include increasing revenues
      from existing and new products and services and a focus on cost control. 
However, there is no assurance that we will be successful with these
      plans.  If events and circumstances occur such that we do not meet our
      current operating plan as expected, and we are unable to raise additional debt
      or equity financing, we may be required to further reduce expenses or take
      other
      steps which could have a material adverse effect on our future performance,
      including but not limited to, the premature sale of some or all of our assets
      or
      product lines on undesirable terms, merger with or acquisition by another
      company on unsatisfactory terms, or the cessation of operations.





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




**Balance
      Sheet and Cash Flows**




Cash,
      cash equivalents, and investments in marketable securities . 
      At October 31, 2006, we had cash and cash equivalents, and investments in
      marketable securities aggregating approximately $9.3 million, an increase of
      approximately $5.7 million from $3.6 million at October 31, 2005. The increase
      was primarily attributed to $22.0 million in net proceeds from the private
      placement of our common stock and warrants, $0.1 million in cash received from
      the exercise of stock options and the employee stock purchase plan, partially
      offset by $15.8 million used in continuing operating activities, $0.1 million
      used in discontinued Theseus operations, and $0.5 million used for capital
      expenditures.




62




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




During
      the year ended October 31, 2006, we received $0.1 million from the exercise
      of
      stock options and the purchase of shares related to our employee stock purchase
      plan.  Proceeds from the exercise of stock options and the employee stock
      purchase plan will vary from period to period based upon, among other factors,
      fluctuations in the market value of our stock relative to the exercise price
      of
      such options.




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




Equipment
      and leasehold improvements . 
      Equipment and leasehold improvements (“Fixed Assets”) decreased approximately
      $0.4 million to $2.4 million at October 31, 2006, from $2.8 million at October
      31, 2005.  The decrease in Fixed Assets reflects capital expenditures of
      $0.5 million offset by $0.9 million in depreciation expense.




Accounts
      payable and accrued expenses. Accounts payable and accrued expenses decreased approximately $0.6 million
      to
      $6.3 million as of October 31, 2006, from $6.9 million at October 31, 2005,
      primarily due to a reduction in accrued expenses.




Deferred
      revenue. Deferred revenue decreased approximately $1.0 million as of October 31, 2006
      from October 31, 2005. The decrease was attributable to a reduction in the
      sales
      of products and services in our IMRT/IGRT business. Deferred revenue consists
      of
      unearned service revenue and the deferral of software product revenue where
      customer acceptance has not been received or for new products where acceptance
      by our customers has not been clearly established.




**Liquidity
      and Capital Resource Requirements**




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




**Payments
                due by period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1**
              **year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than**
              **5
                years**Operating
                leases
            
            $
            3,706,000
            
            $
            909,000
            
            $
            1,076,000
            
            $
            1,065,000
            
            $
            656,000Purchase
                commitments
            
            
            120,000
            
            
            120,000
            
            
            —
            
            
            —
            
            
            —$
            3,826,000
            
            $
            1,029,000
            
            $
            1,076,000
            
            $
            1,065,000
            
            $
            656,000




63




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




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




•     
      Our future operating results;


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


•     
      Market acceptance of our products;


•     
      Levels of inventory and accounts receivable that we maintain;


•     
      Competitors’ responses to our products;


•     
      Level of capital expenditures; and


•     
      Acquisition or development of other businesses, technologies or
      products.




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





**Recent
      Accounting Pronouncements**





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





In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which
      amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
      Activities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS
      140).  SFAS 155 amends SFAS 133 to narrow the scope exception for
      interest-only and principal-only strips on debt instruments to include only
      such
      strips representing rights to receive a specified portion of the contractual
      interest or principle cash flows.  SFAS 155 also amends SFAS 140 to allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument.  SFAS No. 155 is effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. The
      Company does not believe that SFAS No. 155 will have a material impact on the
      Company’s financial position, results of operations or cash flows.




64




In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to
      obtain hedge-like (offset) accounting. This Statement amends FASB Statement
      No.
      140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities”, with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. The Statement (1)
      requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract in certain situations; (2) requires that a separately
      recognized servicing asset or servicing liability be initially measured at
      fair
      value, if practicable; (3) permits an entity to choose either the amortization
      method or the fair value method for subsequent measurement for each class of
      separately recognized servicing assets or servicing liabilities; (4) permits
      at
      initial adoption a one-time reclassification of available-for-sale securities
      to
      trading securities by an entity with recognized servicing rights, provided
      the
      securities reclassified offset the entity’s exposure to changes in the fair
      value of the servicing assets or liabilities; and (5) requires separate
      presentation of servicing assets and servicing liabilities subsequently measured
      at fair value in the balance sheet and additional disclosures for all separately
      recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
      for all separately recognized servicing assets and liabilities as of the
      beginning of an entity’s fiscal year that begins after September 15, 2006, with
      earlier adoption permitted in certain circumstances. The Statement also
      describes the manner in which it should be initially applied. The Company does
      not believe that SFAS No. 156 will have a material impact on its financial
      position, results of operations or cash flows.





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





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





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”), to address diversity in practice in quantifying financial statement
      misstatements. SAB 108 requires the quantification of misstatements based on
      their impact on both the balance sheet and the income statement to determine
      materiality. The guidance provides for a one-time cumulative effect adjustment
      to correct for misstatements that were not deemed material under a company’s
      prior approach but are material under the SAB 108 approach. SAB 108 is effective
      for fiscal years ending after November 15, 2006. The Company is assessing the
      potential impact that SAB 108 may have on our consolidated financial position,
      results of operations or cash flows.




65




**Related
      Party Transactions**





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 was
      a variable
      interest entity (“VIE”) as defined in Financial Accounting Standards Board
      Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest
      Entities—an interpretation of ARB No. 51., and, therefore we were required
      to include the operations of PCA in our consolidated financial statements even
      though we did not have an equity interest in PCA (See Note 5).





In
      October 2003, we also entered into a sales agreement with TC2B, LLC, the
      majority shareholder of PCA to provide brachytherapy seeds. On October 31,
      2006
      and 2005, total trade receivables due from TC2B were none and $1.0 million,
      respectively and sales to TC2B during the years ended October 31, 2006 and
      2005
      were none and $0.8 million, respectively. The trade receivable balance has
      been
      written off to the allowance for doubtful accounts, and we recognized no revenue
      and $0.4 million of the revenue from sales to TC2B in the fiscal year ended
      October 31, 2006 and 2005, respectively. No amounts related to PCA were included
      in the Company’s consolidated balance sheets at October 31, 2006, and October
      31, 2005.





On
      August
      28, 2006, a hearing was held in California federal court on the Company’s
      Application for Default Judgment against Randy Tibbits, who has personally
      guaranteed the obligations of PCA and TC2B. The court awarded the Company a
      judgment of $2.4 million. The Company has not recorded the judgement award
      in
      its financial statements as of October 31, 2006.





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








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





Our
      financial instruments include cash and marketable securities. At
      October 31, 2006, the carrying values of our financial instruments
      approximated their fair values based on current market prices and rates. These
      securities are subject to interest rate risk and will decline in value if
      interest rates increase. Due to the short duration of our investment portfolio,
      changes in interest rates are not expected to have a material effect on our
      near-term financial condition or results of operations.





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





66





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





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





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





None





**Item
      9A. CONTROLS AND PROCEDURES.**





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





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




**Management's
      Report on Internal Control Over Financial Reporting**




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. The Company's internal control framework and processes
      were
      designed to provide reasonable assurance to management and the Board of
      Directors regarding the reliability of financial reporting and the preparation
      of the Company's consolidated financial statements for external purposes in
      accordance with accounting principles generally accepted in the United States
      of
      America.




Management
      recognizes its responsibility for fostering a strong ethical climate so that
      the
      Company's affairs are conducted according to the highest standards of personal
      and corporate conduct. The Company's internal control over financial reporting
      includes those policies and procedures that:




·
            pertain to the maintenance of records
              that,
              in reasonable detail, accurately and fairly reflect the transactions
              and
              dispositions of the assets of the Company;·
            provide
                reasonable assurance that transactions are recorded properly to allow
                for
                the preparation of financial statements in accordance with generally
                accepted accounting principles, and that receipts and expenditures
                of the
                Company are being made only in accordance with authorizations of
                management and Directors of the Company; and·
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use, or disposition of the Company's assets
                that
                could have a material effect on the consolidated financial statements.




67




Because
      of its inherent limitations, a system of internal control over financial
      reporting can provide only reasonable assurance and may not prevent or detect
      misstatements. Further, because of changing conditions, effectiveness of
      internal control over financial reporting may vary over time. The Company's
      processes contain self-monitoring mechanisms, and actions are taken to correct
      deficiencies as they are identified.




To
      comply
      with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the
      Company designed and implemented a structured and comprehensive compliance
      process to evaluate its internal control over financial reporting across the
      enterprise.




*Management's
      Process to Assess the Effectiveness of Internal Control Over Financial Reporting*




Management's
      conclusion on the effectiveness of internal control over financial reporting
      is
      based on a thorough and comprehensive evaluation and analysis of the five
      elements of the criteria set forth by the Committee of Sponsoring Organizations
      of the Treadway Commission ("COSO") in *Internal
      Control - Integrated Framework* .
      (shown
      in italics below), and is based on, but not limited to, the following:


·
              Documentation
                  of entity-wide controls establishing the culture and "tone-at-the-top"
                  of
                  the organization, in support of the Company’s*Control
                  Environment, Risk Assessment*Process,*Information
                  and Communication*policies and the ongoing*Monitoring*of
                  these control processes and systems.·
              An
                    evaluation of*Control
                    Activities*by
                    work process. Key controls and compensating controls were documented
                    and
                    tested by each work process within the Company, including controls
                    over
                    all relevant financial statement assertions related to all significant
                    accounts and disclosures. Internal control deficiencies were
                    identified
                    and prioritized, and appropriate remediation action plans were
                    defined,
                    implemented and retested.·
              A
                    centralized review and analysis of all internal control deficiencies
                    across the enterprise to determine whether such deficiencies,
                    either
                    separately or in the aggregate, represented a significant deficiency
                    or
                    material weakness.·
              An
                  evaluation of any changes in work processes, systems, organization
                  or
                  policy that could materially impact internal control over financial
                  reporting.


Management
      assessed the effectiveness of the Company's internal control over financial
      reporting and concluded that, as of October 31, 2006, such internal
      control is effective. In making this assessment, management used the criteria
      set forth by COSO. In coming to the conclusion that the internal controls over
      financial reporting are effective, management considered, among other things,
      some control deficiencies identified in the accounting close process due to
      unexpected vacancies in the Controller and Senior Accountant positions at
      year-end. None of these deficiencies, either alone or aggregated with other
      deficiencies, resulted in a material misstatement of the financial statements.
      Management’s assessment of the effectiveness of our internal control over
      financial reporting has been audited by Singer Lewak Greenbaum & Goldstein
      LLP, an independent registered public accounting firm, as stated in their report
      which is included herein.




68




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





There
      were no changes in our internal controls over financial reporting during the
      quarter ended October 31, 2006, that have materially affected or are reasonably
      likely to materially affect our internal control over financial
      reporting.





**Item
      9B. OTHER INFORMATION.**





None.


69




**PART
      III**





**Item
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





Other
      than the information with respect to our executive officers, which is set forth
      in Item 4A of Part I, the information required under this Item is incorporated
      by reference to our definitive proxy statement pursuant to Regulation 14A
      to be filed with the Commission no later than 120 days after the close of
      our fiscal year ended October 31, 2006.





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





**Item
      11. EXECUTIVE COMPENSATION**





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2006.





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





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2006.





**Item
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2006.





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





The
      information required under this Item is incorporated by reference to our
      definitive proxy statement pursuant to Regulation 14A to be filed with the
      Commission no later than 120 days after the close of our fiscal year ended
      October 31, 2006.




70


**PART
      IV**





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





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





**Page**1.
            Financial
                Statements of the CompanyReport
                of Independent Registered Public Accounting Firm - Singer Lewak Greenbaum
                & Goldstein LLP
            74Report
                of Independent Registered Public Accounting Firm - PricewaterhouseCoopers
                LLP
            77Consolidated
                Balance Sheets
            78Consolidated
                Statements of Operations
            79Consolidated
                Statements of Changes in Stockholders' Equity
            80Consolidated
                Statements of Cash Flows
            81Notes
                to Consolidated Financial Statements
            832.
            Financial
                Statement ScheduleReport
                of Independent Registered Public Accounting Firm - Singer Lewak Greenbaum
                &  Goldstein LLP
            112Schedule
                II—Valuation and Qualifying Accounts
            113All
                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, 1998.10.6
            
            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.




71




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 No. 333-110766), filed November 26, 2003.10.16+
            
            Employment
                Agreement dated May 5, 2004, by and between John W. Manzetti. and
                the
                Company, incorporated by reference to the Registrant's Registration
                Statement on Form S-4 (Registration #333-110766), filed November
 26,
                2003.10.17
            
            Second
                Amendment to Agreement and Plan of Merger by and among the Registrant,
                AM
                Capital I, Inc. and NOMOS Corporation, incorporated by reference
                to
                Exhibit 2 to the Registrant's Form 8-K filed March 5,
                2004.10.18
            
            The
                First Amendment dated as of April 28, 2004, to the Rights Agreement,
                dated
                as of October 12, 1998 by and between the Registrant and U.S. Stock
                Transfer Corporation, incorporated by reference to Exhibit 10 to
                the
                Registrant’s Form 8-K filed April 30, 2004.10.19
            
            Agency
                Agreement dated as of March 17, 2004, by and between the Registrant
                and
                NOMOS Corporation, incorporated by reference to Exhibit 10 to the
                Registrant’s Form 8-K filed March 22, 2004.10.20
            
            Lease
                Agreement dated August 22, 2002, by and between NOMOS Corporation
                and
                Cranberry 200 Venture, L.P., incorporated by reference to Exhibit
                10.20 to
                the Registrant’s Form 10-K filed March 11, 2005.10.21
            
            Amendment
                to Lease Agreement dated August 22, 2002, by and between NOMOS Corporation
                and Cranberry 200 Venture, L.P., incorporated by reference to Exhibit
                10.21 to the Registrant’s Form 10-K filed March 11, 200510.22
            
            Secured
                Loan Agreement dated as of October 15, 2003 by and between the Registrant
                and Prostate Centers of America, incorporated by reference to Exhibit
                10.22 to the Registrant’s Form 10-K filed March 11,
                200510.23
            
            Settlement
                Agreement dated as of August 4, 2004, by and among the Registrant,
                NOMOS
                Corporation and Parker/Hunter, Incorporated, incorporated by reference
                to
                Exhibit 10.23 to the Registrant’s Form 10-K filed March 11,
                200510.24
            
            Loan
                Agreement and Security Agreement, dated October 5, 2005, between
                NASI, the Subsidiaries and Silicon Valley Bank.,incorporated
                by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed October
                11, 2005.




72




10.25
            
            Amendment
              to Loan
              Agreement and Security Agreement, dated January 12, 2006, between NASI,
              the Subsidiaries and Silicon Valley Bank, incorporated by reference
              to
              Exhibit 10.25 of Form 10-K filed on January 18, 2006.10.26
            
            Loan and Security
              Agreement, dated March 28, 2006, by and among NASI, certain subsidiaries
              and Partners for Growth II, L.P., incorporated by reference to the
              Company’s Current Report on Form 8-K filed on April 3, 2006.10.27
            
            North American
              Scientific, Inc. 2006 Stock Plan, incorporated by reference to Appendix
              A
              to the Company’s Definitive Proxy Statement filed on April 5,
              2006.10.28
            
            Securities
              Purchase
              Agreement dated June 6, 2006 between the Company and the investors,
              incorporated by reference to the Company’s Current Report on Form 8-K
              filed on June 7, 2006.10.29
            
            Form of Warrant
              Agreement between the Company and Three Arch Partners, incorporated
              by
              reference to the Company’s Current Report on Form 8-K filed on June 7,
              2006.10.30
            
            Form of Warrant
              Agreement between the Company and certain other investors, incorporated
              by
              reference to the Company’s Current Report on Form 8-K filed on June 7,
              2006.10.31
            
            Second Amendment
              to
              Rights Agreement, dated June 5, 2006 by and between the Company and
              U.S.
              Stock Transfer Corporation, incorporated by reference to the Company’s
              Current Report on Form 8-K filed on June 7, 2006.10.32
            
            Second Amendment
              to
              Loan
              Agreement and Security Agreement, dated October 31, 2006, between NASI,
              the Subsidiaries and Silicon Valley Bank incorporated by reference
              to the
              Company’s Current Report on Form 8-K filed on November 3,
              2006.10.33+
            
            First
                Amended and Restated Employment Agreement between the Company and
                L.
                Michael Cutrer dated December 21, 2006, incorporated by reference
                to the
                Company’s Current Report on Form 8-K filed on December 28,
                2006.14
            
            Code
                of Ethics incorporated by reference to Exhibit 14 to the Registrant’s Form
                10-K filed January 23, 2004.21.1*
            
            Subsidiaries
                of the Registrant.23.1*
            
            Consent
                of Singer Lewak Greenbaum & Goldstein LLP.23.2*
            
            Consent
                of PricewaterhouseCoopers LLP.31.1*
            
            Certification
                of Chief Executive Officer.31.2*
            
            Certification
                of Chief Financial Officer.32.1*
            
            Certification
                pursuant to Rule 13a-14b under the Exchange Act and 18 U.S.C
                -1350.




+  Compensation
        plan or agreement





*  Filed
      herewith





73




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


North
      American Scientific, Inc.


Chatsworth,
      California





We
      have
      audited the consolidated balance sheets of North American Scientific, Inc.
      and
      subsidiaries (collectively, the “Company”) as of October 31, 2006 and 2005, and
      the related consolidated statements of operations, stockholders’ equity and cash
      flows for each of the two years in the period ended October 31, 2006. Our audits
      also included the financial statement schedule of North American Scientific,
      Inc. listed in Item 8. These financial statements and financial statement
      schedule are the responsibility of the Company’s management. Our responsibility
      is to express an opinion on these financial statements based on our
      audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of North American Scientific,
      Inc. and subsidiaries as of October 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the two years in the period ended
      October 31, 2006, in conformity with U.S. generally accepted accounting
      principles. Also, in our opinion, the related financial statement schedule,
      when
      considered in relation to the basic consolidated financial statements taken
      as a
      whole, presents fairly in all material respects the information set forth
      therein.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of North American Scientific,
      Inc.’s and subsidiaries’ internal control over financial reporting as of October
      31, 2006, based on *“criteria
      established in Internal Control—Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO),”* and our
      report dated January 10, 2007 expressed an unqualified opinion on management’s
      assessment of the effectiveness of North American Scientific, Inc.’s internal
      control over financial reporting and an unqualified opinion on the effectiveness
      of North American Scientific, Inc.’s internal control over financial
      reporting.








/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


January 10,
      2007





74





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


North
      American Scientific, Inc.


Chatsworth,
      California





We
      have
      audited management’s assessment, included in the accompanying “Management’s
      Report on Internal Control over Financial Reporting,” included in Item 9A, that
      North American Scientific, Inc. maintained effective internal control over
      financial reporting as of October 31, 2006, based on *“criteria
      established in Internal Control—Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO).”* North
      American Scientific, Inc.’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express an opinion on management’s assessment and an opinion on the
      effectiveness of the company’s internal control over financial reporting based
      on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that North American Scientific, Inc. maintained
      effective internal control over financial reporting as of October 31, 2006
      is
      fairly stated, in all material respects, based on *“criteria
      established in Internal Control—Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO).”* Also in
      our opinion, North American Scientific, Inc. maintained, in all material
      respects, effective internal control over financial reporting as of October
      31,
      2006, based on “ *criteria
      established in Internal Control—Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO).”*





75







We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated financial statements and
      financial statement schedule of North American Scientific, Inc. and our report
      dated January 10, 2007 expressed an unqualified opinion.





/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


January 10,
      2007




76




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors


and
      Stockholders of


North
      American Scientific, Inc.





In
      our
      opinion, the consolidated statements of operations, changes in stockholders’
equity and cash flows of North American Scientific, Inc. and its
      subsidiaries (the "Company") for the year ended October 31, 2004 present fairly,
      in all material respects, the results of their operations and their cash flows
      for the year then ended in conformity with accounting principles generally
      accepted in the United States of America. In addition, in our opinion, the
      financial statement schedule listed in the index appearing under Item 15(a)(2)
      presents fairly, in all material respects, the information set forth therein
      as
      of October 31, 2004 and for the year then ended when read in conjunction with
      the related consolidated financial statements. These financial statements and
      financial statement schedule are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements and
      financial statement schedule based on our audits. We conducted our audits of
      these statements in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.








/s/
      PricewaterhouseCoopers LLP





Los
      Angeles, California


February
      25, 2005




77





**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Balance Sheets**




**October
                31,****2006**
            
            
            **2005****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            903,000
            
            $
            2,630,000Marketable
                securities, held to maturity
            
            
            8,420,000
            
            
            993,000Accounts
                receivable, net of reserves
            
            
            4,711,000
            
            
            5,521,000Inventories,
                net of reserves
            
            
            4,202,000
            
            
            3,731,000Prepaid
                expenses and other current assets
            
            
            1,085,000
            
            
            794,000Total
                current assets
            
            
            19,321,000
            
            
            13,669,000Equipment
                and leasehold improvements, net
            
            
            2,400,000
            
            
            2,836,000Goodwill
            
            
            2,564,000
            
            
            2,564,000Intangible
                assets, net
            
            
            2,532,000
            
            
            3,158,000Other
                assets
            
            
            381,000
            
            
            106,000Total
                assets
            
            $
            27,198,000
            
            $
            22,333,000**Liabilities
                and Stockholders' Equity**Current
                liabilitiesAccounts
                payable
            
            $
            2,406,000
            
            $
            2,164,000Accrued
                expenses
            
            
            3,940,000
            
            
            4,706,000Deferred
                revenue
            
            
            3,664,000
            
            
            4,662,000Total
                liabilities
            
            
            10,010,000
            
            
            11,532,000Commitments
                and contingencies (Note 16)Stockholders'
                equityPreferred
                stock, $.01 par value, 2,000,000 shares authorized; no shares
                issued
            
            
            —
            
            
            —Common
                stock, $.01 par value, 40,000,000 shares authorized; 29,447,270 (2006)
                and
                17,056,669 (2005) shares issued; and 29,336,144 (2006) and 16,948,643
                (2005) shares outstanding
            
            
            298,000
            
            
            173,000Additional
                paid-in capital
            
            
            144,543,000
            
            
            121,147,000Treasury
                stock, at cost - 111,126 (2006) and 108,026 (2005) common
                shares
            
            
            (133,000
            )
            
            (129,000
            )Accumulated
                deficit
            
            
            (127,520,000
            )
            
            (110,390,000
            )Total
                stockholders' equity
            
            
            17,188,000
            
            
            10,801,000Total
                liabilities and stockholders' equity
            
            $
            27,198,000
            
            $
            22,333,000





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





78


**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Statements of Operations**




**For
                the Years Ended October 31,****2006**
            
            **2005**
            
            **2004**RevenueProduct
            
            $
            19,667,000
            
            $
            20,780,000
            
            $
            19,486,000Service
            
            
            9,321,000
            
            
            11,444,000
            
            
            5,251,000Total
                revenue
            
            
            28,988,000
            
            
            32,224,000
            
            
            24,737,000Cost
                of revenuesProduct
            
            
            15,563,000
            
            
            15,597,000
            
            
            13,482,000Service
            
            
            3,539,000
            
            
            4,459,000
            
            
            2,336,000Total
                cost of revenue
            
            
            19,102,000
            
            
            20,056,000
            
            
            15,818,000Gross
                profit
            
            
            9,886,000
            
            
            12,168,000
            
            
            8,919,000Selling
                expenses
            
            
            8,603,000
            
            
            8,874,000
            
            
            6,709,000General
                and administrative expenses
            
            
            12,116,000
            
            
            10,442,000
            
            
            12,179,000Research
                and development
            
            
            5,785,000
            
            
            6,334,000
            
            
            3,209,000Amortization
                of intangible assets
            
            
            626,000
            
            
            2,300,000
            
            
            1,172,000Writedown
                of goodwill and intangible assets
            
            
            —
            
            
            40,214,000
            
            
            —In-process
                research and development
            
            
            —
            
            
            —
            
            
            9,200,000Merger
                and integration costs
            
            
            —
            
            
            —
            
            
            1,056,000Total
                operating expenses
            
            
            27,130,000
            
            
            68,164,000
            
            
            33,525,000Loss
                from operations
            
            
            (17,244,000
            )
            
            (55,996,000
            )
            
            (24,606,000
            )Interest
                and other (expense) income, net
            
            
            (139,000
            )
            
            121,000
            
            
            579,000Income
                (loss) before provision (benefit) for income taxes
            
            
            (17,383,000
            )
            
            (55,875,000
            )
            
            (24,027,000
            )Provision
                (benefit) for income taxes
            
            
            —
            
            
            —
            
            
            (257,000Loss
                from continuing operations
            
            
            (17,383,000
            )
            
            (55,875,000
            )
            
            (23,770,000
            )Income
                (loss) from discontinued operation (including a loss on disposal
                of
                $5,231,000 in 2004)
            
            
            253,000
            
            
            362,000
            
            
            (12,537,000
            )Net
                loss
            
            $
            (17,130,000
            )
            $
            (55,513,000
            )
            $
            (36,307,000
            )Basic
                and diluted loss per share:Continuing
                operations
            
            $
            (0.79
            )
            $
            (3.38
            )
            $
            (1.81
            )Discontinued
                operations
            
            
            0.01
            
            
            0.02
            
            
            (0.95
            )Net
                loss
            
            $
            (0.78
            )
            $
            (3.36
            )
            $
            (2.76
            )Weighted
                average number of common shares outstandingBasic
                and diluted
            
            
            21,956,565
            
            
            16,502,071
            
            
            13,138,721





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




79


**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Statements of Changes in Stockholders' Equity**





**Common
                  Stock**
            
            
            
            **Treasury
                  Stock****Shares**
            
            **Amount**
            
            **Additional****Paid-in****Capital**
            
            **Shares**
            
            **Amount**
            
            **Accumulated**
              **Deficit**
            
            **Total**
              **Stockholders'**
              **Equity**Balance
                at October 31, 2003
            
            
            10,298,241
            
            $
            103,000
            
            $
            74,343,000
            
            
            19,000
            
            $
            (129,000
            )
            $
            (18,571,000
            )
            $
            55,746,000Common
                stock issued upon exercise of stock options
            
            
            717,864
            
            
            7,000
            
            
            3,509,000
            
            
            —
            
            
            —
            
            
            —
            
            
            3,516,000Common
                stock issued under employee stock purchase plan
            
            
            24,285
            
            
            —
            
            
            167,000
            
            
            —
            
            
            —
            
            
            —
            
            
            167,000Modification
                of stock options issued to an employee
            
            
            —
            
            
            —
            
            
            351,000
            
            
            —
            
            
            —
            
            
            —
            
            
            351,000Shares
                issued for NOMOS acquisition
            
            
            5,268,097
            
            
            53,000
            
            
            37,257,000
            
            
            —
            
            
            —
            
            
            —
            
            
            37,310,000Shares
                returned relating to NOMOS acquisition
            
            
            —
            
            
            —
            
            
            —
            
            
            89,026
            
            
            —
            
            
            —
            
            
            —Options
                assumed upon acquisition
            
            
            —
            
            
            —
            
            
            4,593,000
            
            
            —
            
            
            
            
            
            
            
            
            4,593,000Net
                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
            )
            
            65,377,000Common
                stock issued upon exercise of stock options
            
            
            687,013
            
            
            9,000
            
            
            755,000
            
            
            —
            
            
            —
            
            
            —
            
            
            764,000Common
                stock issued under employee stock purchase plan
            
            
            59,742
            
            
            1,000
            
            
            172,000
            
            
            —
            
            
            —
            
            
            —
            
            
            173,000Shares
                issued for NOMOS acquisition
            
            
            1,427
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (55,513,000
            )
            
            (55,513,000
            )Balance
                at October 31, 2005
            
            
            17,056,669
            
            
            173,000
            
            
            121,147,000
            
            
            108,026
            
            
            (129,000
            )
            
            (110,390,000
            )
            
            10,801,000Common
                stock issued upon exercise of stock options
            
            
            2,186
            
            
            —
            
            
            2,000
            
            
            —
            
            
            —
            
            
            —
            
            
            2,000Common
                stock issued under employee stock purchase plan
            
            
            96,481
            
            
            2,000
            
            
            161,000
            
            
            —
            
            
            —
            
            
            —
            
            
            163,000Common
                stock issued in private placement
            
            
            12,291,934
            
            
            123,000
            
            
            21,811,000
            
            
            —
            
            
            —
            
            
            —
            
            
            21,934,000Purchase
                of treasury stock
            
            
            —
            
            
            —
            
            
            —
            
            
            3,100
            
            
            (4,000
            )
            
            —
            
            
            (4,000
            )Issuance
                of warrants
            
            
            —
            
            
            —
            
            
            526,000
            
            
            —
            
            
            —
            
            
            —
            
            
            526,000Stock
                compensation expense
            
            
            —
            
            
            —
            
            
            896,000
            
            
            —
            
            
            —
            
            
            —
            
            
            896,000Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (17,130,000
            )
            
            (17,130,000
            )Balance
                at October 31, 2006
            
            
            29,447,270
            
            $
            298,000
            
            $
            144,543,000
            
            
            111,126
            
            $
            (133,000
            )
            $
            (127,520,000
            )
            $
            17,188,000





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




80


**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Consolidated
      Statements of Cash Flows**




**For
                the Years Ended October 31,****2006**
            
            
            **2005**
            
            
            **2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (17,130,000
            )
            $
            (55,513,000
            )
            $
            (36,307,000
            )Loss
                (gain) from discontinued operations
            
            
            (253,000
            )
            
            (362,000
            )
            
            12,537,000Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Write-off
                intangibles
            
            
            —
            
            
            40,214,000
            
            
            —Write-off
                in-process research and development
            
            
            —
            
            
            —
            
            
            9,200,000Depreciation
                and amortization
            
            
            1,535,000
            
            
            3,371,000
            
            
            2,139,000Amortization
                of warrants
            
            
            237,000
            
            
            —
            
            
            —Provision
                for doubtful accounts
            
            
            (230,000
            )
            
            709,000
            
            
            522,000Provision
                for inventory reserve
            
            
            (332,000
            )
            
            767,000
            
            
            —Share-based
                compensation expense
            
            
            896,000
            
            
            —
            
            
            351,000Changes
                in assets and liabilities, net of acquisitions and discontinued
                operations:Accounts
                receivable
            
            
            1,040,000
            
            
            903,000
            
            
            (2,579,000
            )Inventories
            
            
            (139,000
            )
            
            373,000
            
            
            414,000Income
                taxes
            
            
            —
            
            
            —
            
            
            496,000Prepaid
                expenses and other assets
            
            
            (275,000
            )
            
            110,000
            
            
            2,081,000Accounts
                payable
            
            
            242,000
            
            
            148,000
            
            
            (1,310,000
            )Accrued
                expenses
            
            
            (421,000
            )
            
            (470,000
            )
            
            (3,965,000
            )Deferred
                revenue
            
            
            (998,000
            )
            
            (1,631,000
            )
            
            1,552,000Net
                cash used in continuing operations
            
            
            (15,828,000
            )
            
            (11,381,000
            )
            
            (14,869,000
            )Net
                cash used in discontinued operations
            
            
            (93,000
            )
            
            (578,000
            )
            
            (8,214,000
            )Net
                cash used in operating activities
            
            
            (15,921,000
            )
            
            (11,959,000
            )
            
            (23,083,000
            )Cash
                flows from investing activities:Proceeds
                from sale of marketable securities
            
            
            2,573,000
            
            
            11,653,000
            
            
            52,108,000Purchases
                of marketable securities
            
            
            (10,000,000
            )
            
            —
            
            
            (17,400,000
            )Acquisitions,
                net of cash acquired
            
            
            —
            
            
            —
            
            
            (13,248,000
            )Capital
                expenditures
            
            
            (474,000
            )
            
            (335,000
            )
            
            (1,308,000
            )Net
                cash provided by (used in) continuing operations
            
            
            (7,901,000
            )
            
            11,318,000
            
            
            20,152,000Net
                cash used in discontinued operations
            
            
            —
            
            
            —
            
            
            (179,000
            )Net
                cash provided by (used in) investing activities
            
            
            (7,901,000
            )
            
            11,318,000
            
            
            19,973,000Cash
                flows from financing activities:Net
                proceeds from stock options and stock purchase plan
            
            
            165,000
            
            
            937,000
            
            
            3,683,000Net
                proceeds from sale of common stock
            
            
            21,934,000
            
            
            —
            
            
            —Purchase
                of common stock as treasury stock
            
            
            (4,000
            )
            
            —
            
            
            —Net
                cash provided by financing activities
            
            
            22,095,000
            
            
            937,000
            
            
            3,683,000Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,727,000
            )
            
            296,000
            
            
            573,000Cash
                and cash equivalents at beginning of period
            
            
            2,630,000
            
            
            2,334,000
            
            
            1,761,000Cash
                and cash equivalents at end of period
            
            $
            903,000
            
            $
            2,630,000
            
            $
            2,334,000





81





Supplemental
      disclosure:


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





In
      the
      fiscal year ended October 31, 2006, there were no cash flows from investing
      activities from discontinued operations.





In
      the
      fiscal year ended October 31, 2006, the Company recorded interest expense of
      $105,000. In the fiscal years ended October 31, 2005 and 2004, the Company
      recorded interest income of $110,000 and $629,000, respectively.





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





82




**NORTH
      AMERICAN SCIENTIFIC, INC.**


**Notes
      to Consolidated Financial Statements**





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





*Business*





North
      American Scientific, Inc. (the “Company”), a Delaware corporation, designs,
      develops and manufactures and sells products for radiation therapy, including
      brachytherapy, and planning and delivery technology for intensity modulated
      radiation therapy (“IMRT”) and image guided radiation therapy
      (“IGRT”) .
      In May
      2004, the Company acquired NOMOS Corporation (“NOMOS”), which develops and
      markets products used during external beam radiation therapy for the treatment
      of cancer (See Note 4).  The Radiation Sources segment develops and markets
      radioisotopic products including brachytherapy seeds and accessories used in
      the
      treatment of cancer and non-therapeutic products used in medical, environmental,
      research and industrial applications.  The Company’s Theseus operation had
      been developing a radiopharmaceutical imaging agent for various medical
      diagnostic and monitoring functions, 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 been prepared on a going concern basis,
      which contemplates the realization of assets and liquidation of liabilities
      in
      the normal course of business.  We have incurred net losses of $17.1
      million, $55.5 million and $36.3 million for the years ended October 31, 2006,
      2005 and 2004, respectively and have used cash in operations of $15.9 million,
      $11.9 million and $23.1 million for the years ended October 31, 2006, 2005
      and
      2004, respectively.  As of October 31, 2006, we had an accumulated deficit
      of $127.5 million, cash, cash equivalents and marketable securities of $9.3
      million, and no debt.





Based
      on
      the Company’s current operating plans, management believes existing cash
      resources and cash forecasted by management to be generated by operations,
      as
      well as the Company’s available lines of credit, will be sufficient to meet
      working capital and capital requirements through at least the next twelve
      months. Also, management’s plans to attain profitability and generate additional
      cash flows include increasing revenues from existing and new products and
      services and a focus on cost control.  However, there is no assurance that
      management will be successful with these plans.  If events and
      circumstances occur such that the Company does not meet its current operating
      plans as expected, and the Company is unable to raise additional debt or equity
      financing, the Company may be required to further reduce expenses or take other
      steps which could have a material adverse effect on our future performance,
      including but not limited to, the premature sale of some or all of our assets
      or
      product lines on undesirable terms, merger with or acquisition by another
      company on unsatisfactory terms, or the cessation of operations.





*Principles
      of Consolidation*





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





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




83




*Use
      of Estimates*





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





*Cash
      and Cash Equivalents*





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





*Inventories*





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





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





*Fair
      Value of Financial Instruments*





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





*Marketable
      Securities*





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





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





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





*Accounts
      Receivable and Allowance for Doubtful Accounts*




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




84




*Equipment
      and Leasehold Improvements*





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





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





*Goodwill*





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





*Intangible
      Assets*





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





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





*Revenue
      Recognition*





The
      Company sells products for radiation therapy treatment, including brachytherapy
      seeds used in the treatment of cancer, IMRT and IGRT products and
      services.  Product revenue consists of brachytherapy, non-therapeutic
      sources, and certain IMRT hardware devices, including our MiMIC and Crane
      products. Software revenues consist of IMRT treatment planning software Corvus,
      Peregrine and Peacock and our IGRT product. Service revenue consists of warranty
      revenue and maintenance service agreements.








Product
      revenue




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





85




Software
      revenue




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




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




The
      Company’s software sales are generally multiple element arrangements, which
      could include the product, first year annual maintenance and support, and
      training and installation.  Revenues from the multiple element arrangements
      are allocated to each element based on the relative fair value of the
      elements.  If the fair value of the element exists, the determination is
      based on vendor specific objective evidence.  If such 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 of fair value of each
      element does exist or until all elements of the arrangement are delivered. 
If in a multiple element arrangement, fair value does not exist for one or
      more
      of the undelivered elements, the residual method of accounting is applied. 
Under the residual method, the fair value of the undelivered elements is
      deferred, and the remaining portion of the arrangement fee is recognized as
      revenue.




Service
      revenue





Services
      revenues are derived mainly from maintenance and support contracts and are
      recognized on a straight-line basis over the term of the contract. Payments
      for
      maintenance revenues 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 in performing R&D activities: salaries and benefits,
      allocated overhead, occupancy costs, clinical trial and related clinical
      manufacturing costs, contract services and other outside costs, and costs to
      acquire in-process research and development projects and technologies which
      have
      no alternative future use. Research and development costs are expensed as
      incurred.





*Stock-based
      Compensation*





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




86




The
      Company adopted SFAS 123(R) using the modified prospective transition method
      as
      of and for the fiscal year ended October 31, 2006. In accordance with the
      modified prospective transition method, the Company’s financial statements for
      prior periods have not been restated to reflect, and do not include, the impact
      of SFAS 123(R). Share-based compensation expense recognized is based on the
      value of the portion of share-based payment awards that is ultimately expected
      to vest. Share-based compensation expense recognized in the Company’s Condensed
      Consolidated Statement of Operations during the fiscal year ended October 31,
      2006 includes compensation expense for share-based payment awards granted prior
      to, but not yet vested as of, October 31, 2005 based on the grant date fair
      value estimated in accordance with the pro forma provisions of SFAS 123 and
      new
      stock option grants made during the fiscal year ended October 31, 2006. A total
      of 1,303,000 stock option grants were awarded to employees on March 16, 2006
      and
      a total of 150,000 stock option grants were awarded to directors on May 3,
      2006
      and June 14, 2006.





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





During
      the fiscal year ended October 31, 2005 and 2004, there was no share-based
      compensation expense related to stock options and employee stock purchases
      recognized under the intrinsic value method in accordance with APB 25. Had
      compensation cost for the Company’s stock options been recognized based upon the
      estimated fair value on the grant date under the fair value methodology
      prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net loss
      and loss per share would have been as follows:




87




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





(1)
      As
      determined under the fair value method.





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





*Net
      Loss per Share*





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





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




**Year
                Ended October 31,****2006**
            
            
            **2005**
            
            
            **2004**Net
                loss, as reported
            
            $
            (17,130,000
            )
            $
            (55,513,000
            )
            $
            (36,307,000
            )Weighted
                average shares outstanding—Basic
            
            
            21,956,565
            
            
            16,502,071
            
            
            13,138,721Dilutive
                effect of stock options and warrants
            
            
            150,000
            
            
            —
            
            
            —Weighted
                average shares outstanding—Diluted
            
            
            22,106,565
            
            
            16,502,071
            
            
            13,138,721Basic
                loss per share
            
            $
            (0.78
            )
            $
            (3.36
            )
            $
            (2.76
            )Diluted
                loss per share
            
            $
            (0.77
            )
            $
            (3.36
            )
            $
            (2.76
            )




88




Stock
      options and warrants to purchase 3,073,788, 2,862,849 and 3,673,210 common
      shares for the years ended October 31, 2006, 2005 and 2004, respectively,
      were not included in the computation of diluted loss per share for those years
      because their effect would have been anti-dilutive.





*Income
      Taxes*





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





*Diversification
      of Credit Risk*





The
      Company's financial instruments that are subject to concentrations of credit
      risk consist primarily of cash equivalents, marketable securities, and accounts
      receivable, which are not collateralized. The Company's policy is to invest
      its
      cash with highly rated financial institutions in order to limit the amount
      of
      credit exposure. As of October 31, 2006, $1.1 million of the Company’s cash
      balance was in excess of the federally insured limit.





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





*Significant
      Concentrations*





As
      of
      October 31, 2006 and 2005, there were no customers that made up more than 10%
      of
      the accounts receivable or generated more than 10% of sales for the years ended
      October 31, 2006 and 2005.





The
      Company relies on certain companies as the sole source of various materials
      in
      its manufacturing process. Any extended interruption in the supply of these
      materials could result in the failure to meet customer demand and materially
      impact future operating results. As of October 31, 2006, the purchasees from
      one
      of the Company’s vendors represented 11% of total purchases, and the balance
      owed to that vendor at October 31, 2006 represented 10% of total accounts
      payable.





*Recent
      Accounting Pronouncements*





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




89




In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which
      amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
      Activities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS
      140).  SFAS 155 amends SFAS 133 to narrow the scope exception for
      interest-only and principal-only strips on debt instruments to include only
      such
      strips representing rights to receive a specified portion of the contractual
      interest or principle cash flows.  SFAS 155 also amends SFAS 140 to allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      instrument.  SFAS No. 155 is effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. The
      Company does not believe that SFAS No. 155 will have a material impact on the
      Company’s financial position, results of operations or cash flows.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to
      obtain hedge-like (offset) accounting. This Statement amends FASB Statement
      No.
      140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities”, with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. The Statement (1)
      requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract in certain situations; (2) requires that a separately
      recognized servicing asset or servicing liability be initially measured at
      fair
      value, if practicable; (3) permits an entity to choose either the amortization
      method or the fair value method for subsequent measurement for each class of
      separately recognized servicing assets or servicing liabilities; (4) permits
      at
      initial adoption a one-time reclassification of available-for-sale securities
      to
      trading securities by an entity with recognized servicing rights, provided
      the
      securities reclassified offset the entity’s exposure to changes in the fair
      value of the servicing assets or liabilities; and (5) requires separate
      presentation of servicing assets and servicing liabilities subsequently measured
      at fair value in the balance sheet and additional disclosures for all separately
      recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
      for all separately recognized servicing assets and liabilities as of the
      beginning of an entity’s fiscal year that begins after September 15, 2006, with
      earlier adoption permitted in certain circumstances. The Statement also
      describes the manner in which it should be initially applied. The Company does
      not believe that SFAS No. 156 will have a material impact on its financial
      position, results of operations or cash flows.





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





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




90




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”), to address diversity in practice in quantifying financial statement
      misstatements. SAB 108 requires the quantification of misstatements based on
      their impact on both the balance sheet and the income statement to determine
      materiality. The guidance provides for a one-time cumulative effect adjustment
      to correct for misstatements that were not deemed material under a company’s
      prior approach but are material under the SAB 108 approach. SAB 108 is effective
      for fiscal years ending after November 15, 2006. The Company is assessing the
      potential impact that SAB 108 may have on our consolidated financial position,
      results of operations or cash flows.




**NOTE
      2 - SEGMENT INFORMATION**




The
      Company’s operations are divided into segments based upon a combination of
      factors including: product produced, manufacturing process and management
      oversight.  The Company’s two segments are: IMRT/IGRT and Radiation
      Sources. IMRT/IGRT develops and markets products used during external beam
      radiation therapy for the treatment of cancer.  Radiation Sources develops
      and markets radioisotopic products including brachytherapy seeds and accessories
      used in the treatment of cancer and non-therapeutic products used in medical,
      environmental, research and industrial applications.





The
      Company evaluates performance and allocates resources based on operating results
      and development milestones.  The accounting polices of the reportable
      segments are the same as those described in Note 1 in the summary of significant
      accounting policies.  There are no inter-company sales or
      profits.




The
      Company’s segments are business units that either offer different products or
      are managed separately because they operate with distinct manufacturing and
      development processes.




**Year
                Ended October 31,****2006**
            
            **2005**
            
            **2004****Net
                sales**IMRT/IGRT
            
            $
            16,394,000
            
            $
            20,192,000
            
            $
            11,759,000Radiation
                Sources
            
            
            12,594,000
            
            
            12,032,000
            
            
            12,978,000$
            28,988,000
            
            $
            32,224,000
            
            $
            24,737,000**Income
                (loss) from operations**IMRT/IGRT
            
            $
            (10,081,000
            )
            $
            (51,271,000
            )
            $
            (17,766,000
            )Radiation
                Sources
            
            
            (7,163,000
            )
            
            (4,725,000
            )
            
            (6,840,000
            )$
            (17,244,000
            )
            $
            (55,996,000
            )
            $
            (24,606,000
            )




91




**Year
                Ended October 31,****2006**
            
            **2005**
            
            **2004****Depreciation
                and amortization**IMRT/IGRT
            
            $
            907,000
            
            $
            2,561,000
            
            $
            1,281,000Radiation
                Sources
            
            
            628,000
            
            
            810,000
            
            
            858,000$
            1,535,000
            
            $
            3,371,000
            
            $
            2,139,000**Interest
                Income (Expense)**IMRT/IGRT
            
            $
            (58,000
            )
            $
            73,000
            
            $
            384,000Radiation
                Sources
            
            
            (47,000
            )
            
            37,000
            
            
            245,000$
            (105,000
            )
            $
            110,000
            
            $
            629,000






**October
                31,****2006**
            
            
            **2005****Goodwill**IMRT/IGRT
            
            $
            2,564,000
            
            $
            2,564,000Total
                goodwill
            
            $
            2,564,000
            
            $
            2,564,000**Total
                assets**IMRT/IGRT
            
            $
            15,789,000
            
            $
            14,899,000Radiation
                Sources
            
            
            11,409,000
            
            
            7,418,000Discontinued
                operation
            
            
            —
            
            
            16,000Total
                assets
            
            $
            27,198,000
            
            $
            22,333,000








**NOTE
      3 - DISCONTINUED OPERATION**





In
      September 2004, the Company discontinued its Theseus Operation which had been
      engaged in the research and development of a proprietary radiopharmaceutical
      agent (referred to as “Hynic-Annexin V”) since its acquisition in October 2000.
      The Company believed that successful completion of development and receipt
      of
      regulatory approvals allowing the marketing of Hynic-Annexin V would not occur
      earlier than 2007 and the additional costs would be substantial. During the
      third quarter of fiscal 2004, the Company determined that it needed to review
      the carrying value of Theseus assets for possible impairment due to ongoing
      discussions with various third parties concerning strategic alternatives for
      the
      Hynic-Annexin V product development program. The Company determined that the
      carrying value of the Theseus assets at July 31, 2004 exceeded their fair value,
      as determined by estimated future cash flows, and therefore, recorded a $4.7
      million charge for the impairment of goodwill and long-lived assets. Discussions
      with the various potential financial and strategic partners ceased in August
      2004, which resulted in the Company’s decision to shut-down the Theseus
      operation in September 2004. The Company recorded additional costs of $0.7
      million for severance, license termination fees and facility shut down costs,
      offset by $0.2 in proceeds from the sale of long-lived assets and research
      materials during the quarter ended October 31, 2004. As of October 31, 2005,
      the
      Company revised downward its estimate of the costs of the shut-down of its
      Theseus operation, resulting in a gain of $0.4 million related to that
      discontinued operation in the year ended October 31, 2005. As of October 31,
      2006, the Company wrote off the remaining accounts of the Theseus operation,
      resulting in a gain of $0.3 million related to that discontinued operation
      in
      the year ended October 31, 2006.




92




As
      a
      result of the shut-down in September 2004, the Company has presented the Theseus
      operation as a discontinued operation in the accompanying financial statements.





The
      Company had no net revenue from the discontinued operations during the fiscal
      years ended October 31, 2006, 2005 and 2004 and the gain (loss) from the
      discontinued operation was as follows:




**For
                the Years Ended October 31,****2006**
            
            
            **2005**
            
            
            **2004**Loss
                from discontinued operation
            
            $
            —
            
            $
            —
            
            $
            $(7,306,000
            )Gain
                (loss) on disposal of discontinued operation
            
            
            253,000
            
            
            362,000
            
            
            (5,231,000
            )Gain
                (loss) from discontinued operation
            
            $
            253,000
            
            $
            362,000
            
            $
            (12,537,000
            )





The
      Company had $0.3 million of accrued expenses remaining on its Balance Sheet
      at
      October 31, 2005, and no net assets or liabilities remain on the Company’s
      balance sheet at October 31, 2006.





**NOTE
      4—ACQUISITIONS**





*NOMOS*


On
      May 4,
      2004, the Company acquired NOMOS.  The results of NOMOS have been included
      in the consolidated financial statements from the date of acquisition as the
      Company’s IMRT/IGRT business segment. NOMOS develops, markets and sells medical
      devices used in external beam radiation. As a result of the acquisition, the
      Company has expanded its product line, which should allow it to compete more
      effectively in the radiation oncology market.




The
      purchase price of approximately $58 million consisted of $11.5 million in cash,
      the issuance of 5.2 million shares of the Company’s common stock with a fair
      value of approximately $37.3 million, the assumption of 1.4 million of stock
      options and warrants with a fair value of $4.6 million, direct transaction
      costs
      of $3.0 million and the assumption of acquisition related liabilities of $1.6
      million.  The fair value of the common stock used in determining the
      purchase price was $7.21 per share based on the average of the closing 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, which
      fully vested at the acquisition date, were valued using a Black-Scholes
      valuation model with the following assumptions: risk-free interest rate of
      4.5%,
      volatility factor of 60%, expected term of 1.5 years for stock options,
      contractual term of 0.5 years for warrants and no dividend yield. The
      acquisition was accomplished through a reverse triangular merger into a wholly
      owned subsidiary of the Company, and is reflected in the Company’s financial
      statements, including the footnotes thereto, as the IMRT/IGRT operating
      segment.




Pursuant
      to the purchase agreement, approximately 15.8% of the shares of common stock
      and
      cash otherwise payable to the NOMOS shareholders were deposited into two
      separate escrow funds.  With respect to the first escrow fund, 526,810
      shares of the Company’s common stock and $1.2 million of cash were held for a
      period of two years following the acquisition date, as a source of reimbursement
      for losses arising from any breach by NOMOS of its representations or
      obligations under the purchase agreement. On May 2, 2006, in accordance
      with the indemnification provisions of the purchase agreement under which we
      acquired NOMOS on May 4, 2004, and the related indemnity escrow agreement,
      the
      Company made a claim for indemnification against the escrow to preserve its
      right of indemnity. Under these provisions, an indemnifying party will not
      have
      any indemnification obligations until such time as the aggregate indemnified
      losses for which we are entitled to indemnification equals or exceeds $400,000,
      at which point, the indemnifying party will be liable for the full amount of
      all
      such indemnified losses without regard to the $400,000 basket (see Legal
      Proceedings).




93




With
      respect to the second escrow fund, 307,617 shares of the Company’s common stock
      and $0.7 million of cash were held in escrow as a source of reimbursement for
      any losses incurred in connection with the demand made against NOMOS by
      Parker/Hunter Incorporated (“Parker/Hunter”). The escrowed funds were deemed
      contingently returnable for accounting purposes until the Parker/Hunter matter
      was settled in August 2004 for $1.1 million.





The
      purchase price has been allocated based on the estimated fair values of the
      assets acquired and liabilities assumed as of the date of acquisition as
      follows:





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




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




94




The
      value
      assigned to IPR&D was comprised of the following projects: BAT® with optical
      tracking, which was released in the year ended October 31, 2004
      ($7.8 million), development of a significantly enhanced treatment planning
      system which was released in fiscal 2005 ($1.1 million), and a treatment
      planning product, which is expected to incorporate enhanced technology with
      Monte Carlo based simulation capabilities which is expected to be released
      in
      fiscal 2006 ($0.3 million). Each product development has a risk of failure
      or delay in introduction that could result in diminished overall cash flows
      should the product not be introduced to the market as currently anticipated.
      Continued product innovation and timely release of IPR&D projects, once
      integrated and redefined as necessary, are believed to be fundamental to the
      success of the combined company.




The
      amounts allocated to IPR&D, and other intangible assets for financial
      reporting purposes did not result in future income tax deductions since the
      acquisition was a nontaxable transaction.
      The deferred tax liabilities related to such temporary differences were offset
      by deferred tax assets (primarily net operating loss carryforwards subject
      to
      change in ownership provisions of Internal Revenue Service Code Section 382)
      in
      the purchase price allocation. The Company provided a full valuation allowance
      against the remaining net deferred tax assets since realization cannot be
      sufficiently assured. The Company has filed consolidated and combined federal
      and state income tax returns with NOMOS. Goodwill is not deductible for income
      tax purposes. Accordingly, no provision or benefit for income taxes was
      recognized in the accompanying pro forma results of operations.




The
      acquired identifiable intangible assets have been amortized over their useful
      lives as follows:




**Amount**
            
            **Useful
                Lives (in years)**Purchased
                technology
            
            $
            24,000,000
            
            
            14
                - no residual valueExisting
                customer relationships
            
            
            1,900,000
            
            
            10
                - no residual valueTrademark
            
            
            4,400,000
            
            
            14
                - no residual valueTotal
            
            $
            30,300,000




The
      Company incurred $1.1 million in merger and integration costs consisting
      primarily of severance costs and information technology consulting
      costs.





The
      following table presents unaudited pro forma revenue, net loss and loss per
      share giving the effect of NOMOS acquisition as if it had been completed at
      the
      beginning of the fiscal year ended October 31, 2004:




**Fiscal
                year ended**
              **October
                31, 2004**Revenue
            
            $
            38,976,000Loss
                before cumulative effect of accounting change (1)
            
            
            (31,988,000
            )Net
                loss (1)
            
            
            (31,988,000
            )Net
                loss per share, basic and diluted
            
            
            (2.02
            )





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




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




95




The
      impact of the changes in revenue recognition of the BAT product on revenue
      and
      on net loss was an increase of $1.8 million in revenue, and a decrease of $1.0
      million in the net loss for the year ended October 31, 2004.





**NOTE
      5—VARIABLE INTEREST ENTITY**





In
      October 2003, the Company entered into a Secured Loan Agreement with Prostate
      Centers of America (“PCA”).  Under the agreement, the Company was obligated
      to make periodic advances subject to PCA achieving certain milestones.  On
      January 20, 2006, the Company received notice from PCA that it had filed for
      protection under the bankruptcy laws. As of October 31, 2006, the Company’s
      advances to PCA under the secured note totaling $950,000 have been written
      off.
      The Company has no equity interest in PCA.




TC2B,
      LLC, a distributor who has agreed to procure all of its brachytherapy seeds
      exclusively from the Company through October 2008, has a majority interest
      in
      PCA. As of October 31, 2006, total trade receivables due from TC2B of $1.1
      million had been written off to the allowance for doubtful accounts and no
      sales
      to TC2B during the year ended October 31, 2006 had been recognized. Based on
      the
      terms of the lending and supply agreements with the above entities, the Company
      previously determined that PCA is a variable interest entity (“VIE”) and the
      Company is the primary beneficiary under FIN No. 46 because PCA does not
      have sufficient equity at risk for the entity to finance its activities.





FIN
      46
      requires that an enterprise consolidate a VIE if that enterprise has a variable
      interest that will absorb a majority of the entity’s expected losses if they
      occur. Accordingly, the Company adopted FIN No. 46 in October 2003 and
      consolidated PCA as a VIE, regardless of the Company not having an equity
      interest in PCA and its creditors having no recourse against the Company. In
      the
      fiscal year ended October 31, 2005, the Company determined that PCA was no
      longer a VIE, because: (i) during the fiscal year ended October 31, 2005, other
      outside parties provided additional funding to PCA, which resulted in the
      Company no longer being the holder of the variable interest that would hold
      the
      majority of the entity’s losses, (ii) PCA’s other creditors have no recourse
      against the Company, (iii) the Company has no equity interest in PCA, and (iv)
      PCA had informed the Company that it likely will cease operations in 2006.
      As a
      result, the Company did not consolidate PCA as a VIE, and, accordingly no
      amounts related to PCA were included in the Company’s consolidated balance
      sheets and results of operations at October 31, 2006, and 2005 and for the
      fiscal years then ended. For the fiscal year ended October 31, 2004, the Company
      included $180,000 net sales and $932,000 loss from operations as part of its
      results of operations relating to the activities of PCA.




On
      August
      28, 2006, a hearing was held in California federal court on the Company’s
      Application for Default Judgment against Randy Tibbits, who has personally
      guaranteed the obligations of PCA and TC2B. The court awarded the Company a
      judgment of $2.4 million. The Company has not recorded the judgement award
      in
      its financial statements as of October 31, 2006.





96





**NOTE
      6—MARKETABLE SECURITIES**





Marketable
      securities consist of the following:




**October 31,****2006**
            
            
            **2005**Securities
                held to maturity:Corporate
                and government bonds
            
            $
            4,886,000
            
            $
            993,000Commercial
                paper
            
            
            2,947,000
            
            
            —Certificate
                of deposits and other
            
            
            587,000
            
            
            —8,420,000
            
            
            993,000Less:
                current portion
            
            
            (8,420,000
            )
            
            (993,000
            )Non-current
                portion
            
            $
            —
            
            $
            —





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





**NOTE
      7—ACCOUNTS RECEIVABLE**





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





Accounts
      receivable consist of the following:




**October 31,****2006**
            
            
            **2005**Accounts
                receivable - trade
            
            $
            5,815,000
            
            $
            6,854,000Less:
                allowance for doubtful accounts
            
            
            (1,104,000
            )
            
            (1,333,000
            )$
            4,711,000
            
            $
            5,521,000





The
      provision for doubtful accounts was $0.2 million, $0.7 million, and $0.5 million
      for the fiscal years ended October 31, 2006, 2005 and 2004,
      respectively.




**NOTE
      8—INVENTORIES**





Inventories
      consist of the following:




97




**October 31,****2006**
            
            
            **2005**Raw
                materials
            
            $
            4,691,000
            
            $
            4,423,000Work
                in process
            
            
            174,000
            
            
            45,000Finished
                goods
            
            
            1,959,000
            
            
            2,218,000Reserve
                for excess inventory
            
            
            (2,622,000
            )
            
            (2,955,000
            )$
            4,202,000
            
            $
            3,731,000





The
      Company recorded a $0.4 million charge in the IMRT/IGRT segment for excess
      inventory in the fiscal year ended October 31, 2005, and a $0.3 million and
      $0.2
      million charge for excess warranty replacement parts for the fiscal years ended
      October 31, 2006 and 2005, respectively. The Company did not record a charge
      for
      excess inventory in the fiscal year ended October 31, 2006.





**NOTE
      9—EQUIPMENT AND LEASEHOLD IMPROVEMENTS**





Equipment
      and leasehold improvements consist of the following:




**October 31,****2006**
            
            
            **2005**Furniture,
                fixtures and equipment
            
            $
            6,528,000
            
            $
            6,185,000Leasehold
                improvements
            
            
            2,312,000
            
            
            2,173,0008,840,000
            
            
            8,358,000Less:
                accumulated depreciation
            
            
            (6,440,000
            )
            
            (5,522,000
            )$
            2,400,000
            
            $
            2,836,000





Depreciation
      expense was $0.9 million, $1.1 million, and $1.0 million for the fiscal years
      ended October 31, 2006, 2005 and 2004, respectively.





**NOTE
      10—GOODWILL AND INTANGIBLE ASSETS**




The
      Company performed an analysis, with the assistance of an appraisal firm, of
      the
      goodwill and intangible assets acquired from NOMOS Corporation on May 4, 2004
      under SFAS 142 and SFAS 144 as of the Company's annual test date of September
      30, 2005 to determine the fair value thereof under the applicable standards.
      According to SFAS 142 and SFAS 144 an impairment test consists of a comparison
      of the fair value of the goodwill and intangible assets with its carrying
      amount. Impairment exists when the carrying amount of goodwill and intangible
      assets exceeds its implied fair value. Testing for impairment is a two-step
      process. The first step is to determine the fair value of the reporting unit.
      The fair value of our reporting unit was less than its carrying amount (i.e.
      net
      assets) which required progress to step two. The second step is a process
      whereby the Company assumed the reporting unit is being acquired as of the
      goodwill testing date in a purchase business combination, in this case an asset
      sale excluding transferring the associated liabilities at the reporting unit.
      This process also assumes the reporting unit’s fair value is a surrogate for the
      reporting unit’s purchase price. Goodwill that emerges from this process is the
      implied fair value of goodwill. As the implied fair value of goodwill was less
      than the carrying value of goodwill, an impairment loss of NOMOS and RTP
      goodwill in the amount of $16,168,000 was recognized as a write-down of goodwill
      and intangible assets in the Consolidated Statements of Operations for the
      year
      ended October 31, 2005.




98




The
      allocation of the fair value of the intangible assets was determined by
      estimating the sum of the undiscounted cash flows associated with each
      intangible asset over its useful life. The estimated fair value of each asset
      then was compared to the carrying value of that asset. As the carrying value
      of
      each asset exceeded the fair value of each asset, an impairment loss of NOMOS
      and RTP intangible assets in the amount of $24,045,000 was recognized as a
      write-down of goodwill and intangible assets in the Consolidated Statements
      of
      Operations for the year ended October 31, 2005.




In
      addition, the Company performed an internal analysis under SFAS 142 and SFAS
      144
      as of the Company's annual test date of September 30, 2005 of the goodwill
      and
      intangible assets acquired from Radiation Therapy Products (RTP) in August,
      2003. The Company concluded that the goodwill and intangible assets acquired
      from RTP were impaired due to negative operating performance indicators,
      including the RTP products lower sales and net operating losses. As a result,
      the Company wrote down the RTP goodwill by $207,000 and the RTP intangible
      assets by $122,000 to their estimated fair value for the year ended October
      31,
      2005.




The
      changes to carrying value of goodwill consist of the
      following:




**IMRT/IGRT**
            
            
            **Radiation****Sources**
            
            
            **Theseus**
            
            
            **Total**Balance
                at October 31, 2002
            
            $
            —
            
            $
            —
            
            $
            3,659,000
            
            $
            3,659,000Addition
                due to acquisition of RTP
            
            
            —
            
            
            207,000
            
            
            —
            
            
            207,000Balance
                at October 31, 2003
            
            
            —
            
            
            207,000
            
            
            3,659,000
            
            
            3,866,000Addition
                due to acquisition of NOMOS (See Note 4)
            
            
            18,525,000
            
            
            —
            
            
            
            
            
            18,525,000Impairment
                due to discontinued operation (See Note 3)
            
            
            —
            
            
            —
            
            
            (3,659,000
            )
            
            (3,659,000
            )Balance
                at October 31, 2004
            
            
            18,525,000
            
            
            207,000
            
            
            —
            
            
            18,732,000Impairment
                charge
            
            
            (15,961,000
            )
            
            (207,000
            )
            
            
            
            
            (16,168,000
            )Balance
                at October 31, 2005
            
            $
            2,564,000
            
            $
            —
            
            $
            —
            
            $
            2,564,000Balance
                at October 31, 2006
            
            $
            2,564,000
            
            $
            —
            
            $
            —
            
            $
            2,564,000





The
      Company performed an analysis, with the assistance of an appraisal firm, of
      the
      goodwill and intangible assets acquired from NOMOS Corporation on May 4, 2004
      under SFAS 142 and SFAS 144 as of the Company's annual test date of September
      30, 2006 to determine the fair value thereof under the applicable standards.
      As
      a result of this analysis, the Company determined there was no impairment of
      its
      goodwill and intangible asssets in fiscal year 2006.





99




**NOTE
      11—INTANGIBLE ASSETS**




**October
                31, 2006**
            
            
            **October
                31, 2005**Amortizable
                intangible assetsPurchased
                technology
            
            $
            3,129,000
            
            $
            24,232,000Existing
                customer relationships
            
            
            1,770,000
            
            
            1,952,000Trademark
            
            
            1,666,000
            
            
            4,426,000Patents
                and licenses
            
            
            98,000
            
            
            98,0006,663,000
            
            
            30,708,000Less:
                accumulated amortization
            
            
            (4,131,000
            )
            
            (3,505,000
            )Less:
                write-down of intangible assetsPurchased
                technology
            
            
            —
            
            
            (21,103,000
            )Existing
                customer relationships
            
            
            —
            
            
            (182,000
            )Trademark
            
            
            —
            
            
            (2,760,000
            )Patents
                and licenses
            
            
            —
            
            
            —4,131,000
            
            
            (24,045,000
            )$
            2,532,000
            
            $
            3,158,000





Amortization
      expense was $626,000, $2,300,000 and $1,172,000, for the fiscal years ended
      October 31, 2006, 2005 and 2004, respectively.





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





**For
                the Years Ended October 31,**2007
            
            $
            633,0002008
            
            
            633,0002009
            
            
            633,0002010
            
            
            633,000$
            2,532,000





**NOTE
      12 - Borrowings**





*LINE
      OF CREDIT*





On
      October 5, 2005, the Company entered into a Loan and Security Agreement (the
      “Loan Agreement”) **** with
      Silicon Valley Bank (the “Bank”), for a secured, revolving line of credit of up
      to $5,000,000. The line of credit has a term of one year and includes a letter
      of credit sub-facility. Borrowings under the line of credit are subject to
      a
      borrowing base formula. The Company will pay interest on the borrowings under
      the line of credit at the Bank’s prime rate, which was 8.25% on October 31,
      2006, or, if certain financial tests are not satisfied, at the Bank’s prime rate
      plus 1.5%. The line of credit is secured by all of the assets of the Company
      and
      is subject to customary financial and other covenants, including reporting
      requirements.




100




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





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





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





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





*Long-Term
      Debt*





On
      March
      28, 2006, the Company entered into a Loan and Security Agreement (the “Loan
      Agreement”) **** with
      Partners for Growth, LLC (the “Debt Provider”), for a secured, revolving line of
      credit of up to $4,000,000, which will supplement an existing line of credit
      provided by Silicon Valley Bank. The line of credit has a term of eighteen
      months. Borrowings under the line of credit are subject to a borrowing base
      formula. The Company has paid interest on the borrowings under the line of
      credit at prime rate as quoted in the *Wall
      Street Journal,* which on
      October 31, 2006 was 8.25%. Amounts owing under the line of credit are secured
      by all of the assets of the Company and are subordinated to amounts owing under
      the line of credit with Silicon Valley Bank. The line of credit does not contain
      financial covenants; however the Company is subject to other customary
      covenants, including reporting requirements, and events of default. In
      connection with the Loan Agreement, the Company also granted the Debt Provider
      a
      warrant to purchase 395,000 shares of the Company’s common stock at an exercise
      price of $1.89 per share. As a result of the private placement of the Company’s
      common stock completed on June 7, 2006 (see Note 13), and pursuant to the
      anti-dilution terms of the warrant issued to the Debt Provider, the warrant
      was
      amended to increase the number of shares of the Company’s common stock that the
      Debt Provider can purchase from 395,000 shares to 555,039 shares, and the
      exercise price was decreased from $1.89 per share to $1.35 per share. The
      warrant will expire in five years unless previously exercised. The
      Company calculated the fair value of the warrant on the date of grant to be
      $475,000 using the Black-Scholes model incorporating the following
      assumptions:




101




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





The
      issuance of the warrant has been accounted for as a loan origination fee. As
      such, the value of the warrant has been deferred and is being amortized over
      the
      life of the loan at $26,500 per month and is included in Interest and Other
      Expense on the Income Statement. No
      borrowings were outstanding against the Line of Credit as of October 31,
      2006.








**NOTE
      13—STOCKHOLDERS' EQUITY**





*Preferred
      Stock*





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





*Sale
      of Common Stock and Warrants*





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





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




102




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





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





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





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




103




*Stock
      Options*





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





On
      May 3,
      2006, the Company’s shareholders approved the North American Scientific, Inc.
      2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
      1,700,000 shares, plus any shares from the 1996 Plan that are subsequently
      terminated, expire unexercised or forfeited, to employees of the Company through
      incentive stock options, non-qualified options, stock appreciation rights,
      restricted stock and restricted stock units. The exercise price of an option
      is
      equal to the fair market value of the Company’s stock on the date of the
      grant. At October 31, 2006, no equity awards have been granted under the
      2006 Plan.





In
      March 2003, the Company's shareholders approved the 2003 Non-Employee
      Directors' Equity Compensation Plan ("Directors' Plan"). The Directors' Plan
      supersedes prior provisions for grants of stock options to non-employee
      directors contained in the 1996 Plan. Under the Directors' Plan, the Company
      may
      issue up to 500,000 shares to non-employee directors of the Company through
      non-qualified options or restricted stock. The exercise price of an option
      is
      equal to the fair market value of the Company's stock on the date of grant.
      Options and restricted stock vest equally over a three-year period. The options
      expire ten years from the date of grant. In the fiscal year ended October 31,
      2006 stock options for 150,000 shares were granted to non-employee directors
      under the Directors’ Plan. At October 31, 2006, there were 85,000 shares
      available for grant under the Directors’ Plan.





At
      October 31, 2006, a total of 5,223,305 shares of the Company’s common stock were
      reserved for issuance. The following table summarizes stock option activity
      for
      both plans:




**Options
                Outstanding****Options**
              **Available**
              **for
                Grant**
            
            **Number**
              **Outstanding**
            
            **Exercise
                Price**Balance
                at October 31, 2003
            
            549,188
            
            2,678,954
            
            $0.03
                - $24.54Granted
            
            (306,000
            )
            306,000
            
            $7.49
                - $10.01Replacement
                options
            
            (1,362,589
            )
            1,362,589
            
            $1.10
                - $4.42Forfeited
                and expired
            
            375,858
            
            (375,858
            )
            $1.11
                - $22.11Exercised
            
            —
            
            (717,864
            )
            $1.11
                - $7.94Additional
                shares reserved
            
            2,323,285
            
            —Balance
                at October 31, 2004
            
            1,579,742
            
            3,253,821
            
            $0.03
                - $24.54Granted
            (275,000
            )
            275,000
            
            $2.25
                - $3.66Forfeited
                and expired
            427,699
            
            (427,699
            )
            $1.11
                - $16.75Exercised
            —
            
            (687,013
            )
            $1.11
                - $1.96Balance
                at October 31, 2005
            1,732,441
            
            2,414,109
            
            $0.03
                - $24.54Granted
            (1,453,000
            )
            1,453,000
            
            $1.92
                - $3.35Forfeited
                and expired
            (194,441)
            
            (426,618
            )
            $1.11
                - $16.75Exercised
            —
            
            (2,186
            )
            $1.11
                - $1.12Additional
                shares reserved
            1,700,000
            
            —Balance
                at October 31, 2006
            1,785,000
            
            3,438,305
            
            $0.03
                - $24.54




104




There
      were 1,878,663, 1,873,220 and 1,591,598 options exercisable with weighted
      average exercise prices of $8.57, $8.79 and $9.31 at October 31, 2006, 2005
      and
      2004, respectively.





The
      following table summarizes options outstanding at October 31, 2006 and the
      related weighted average exercise price and remaining contractual life
      information:




**Employee
                Options Outstanding**
            
            
            **Employee
                Options Exercisable****Range
                of**
              **Exercise
                Prices**
            
            
            **Shares**
            
            
            **Weighted
                Avg.**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**
            
            
            **Shares**
            
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**$0.03
                - $2.23
            
            
            1,004,700
            
            
            5.69
            
            $
            1.82
            
            
            267,055
            
            $
            0.85$3.18
                - $3.35
            
            
            813,500
            
            
            7.77
            
            
            3.30
            
            
            68,752
            
            
            3.18$3.94
                - $7.60
            
            
            701,695
            
            
            5.26
            
            
            7.01
            
            
            676,445
            
            
            6.99$7.94
                - $12.89
            
            
            690,900
            
            
            5.23
            
            
            9.91
            
            
            638,901
            
            
            9.98$16.75
                - $24.54
            
            
            227,510
            
            
            2.79
            
            
            20.01
            
            
            227,510
            
            
            20.013,438,305
            
            
            5.81
            
            $
            6.06
            
            
            1,878,663
            
            $
            8.57





The
      average fair value for accounting purposes of options granted was $1.09, $2.47
      and $5.19 for the years ended October 31, 2006, 2005 and 2004,
      respectively.





The
      following table summarizes the weighted average price, weighted average
      remaining contractual life and intrinsic value for granted and exercisable
      options outstanding as of October 31, 2006 and 2005:




**Number
                of Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Avg.**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Intrinsic
                Value**
              **as
                of October 31, 2006***As
                of October 31, 2005:*Employee
                Options Outstanding
            
            
            2,414,109
            
            $
            8.13
            
            
            6.09
            
            $
            464,000Employee
                Options Expected to Vest
            
            
            540,889
            
            $
            5.67
            
            
            8.91
            
            $
            4,000Employee
                Options Exercisable
            
            
            1,873,220
            
            $
            8.79
            
            
            5.25
            
            $
            460,000*As
                of October 31, 2006*Employee
                Options Outstanding
            
            
            3,438,305
            
            $
            6.06
            
            
            5.81
            
            $
            56,500Employee
                Options Expected to Vest
            
            
            1,691,925
            
            $
            2.68
            
            
            7.14
            
            $
            —Employee
                Options Exercisable
            
            
            1,746,380
            
            $
            8.57
            
            
            4.52
            
            $
            56,500




105




*Modification
      of Stock Options*





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





*Fair
      Value Disclosures*





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





**Year
                Ended October 31,****2006**
            
            **2005**
            
            **2004**Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            63
            %
            
            82
            %
            
            74
            %Risk-free
                interest rate
            
            
            4.9
            %
            
            3.9
            %
            
            3.3
            %Expected
                life
            
            
            5
                years
            
            
            5
                years
            
            
            5
                years








*Stockholders'
      Rights Plan*





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





*Employee
      Stock Purchase Plan*





The
      Company has an Employee Stock Purchase Plan ("the ESPP") under which 300,000
      shares of the Company's common stock are reserved for issuance. Eligible
      employees may authorize payroll deductions of up to 15% of their salary to
      purchase shares of the Company's common stock at a discount of up to 15% of
      the
      market value at certain plan-defined dates. In fiscal 2006, 2005 and 2004,
      the
      shares issued under the ESPP were 96,489, shares 59,742 shares, and 24,285
      shares, respectively. At October 31, 2006 and 2005, 73,839 shares and
      170,328 shares were available for issuance under the ESPP,
      respectively.





*Common
      Stock Repurchase Program*





In
      October 2001, the Board of Directors authorized a stock repurchase program
      to acquire up to $10 million of the Company's common stock in the open
      market at any time. The number of shares of common stock actually acquired
      by
      the Company will depend on subsequent developments and corporate needs, and
      the
      repurchase of shares may be interrupted or discontinued at any time. As of
      October 31, 2006 and 2005, a total of 22,100 shares and 19,000 shares had
      been repurchased by the Company at a cost of $132,000 and $129,000, respectively
      and are reflected as Treasury Stock on the Balance Sheet at the respective
      dates.




106





**NOTE
      14—INCOME TAXES**





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




**Year
                Ended October 31,****2006**
            
            
            **2005**
            
            
            **2004**Current:Federal
            
            $
            —
            
            $
            —
            
            $
            (257,000
            )State
            
            
            —
            
            
            —
            
            
            ——
            
            
            —
            
            
            (257,000
            )Deferred:Federal
            
            
            —
            
            
            —
            
            
            —State
            
            
            —
            
            
            —
            
            
            ——
            
            
            —
            
            
            —$
            —
            
            $
            —
            
            $
            (257,000
            )





The
      Company did not recognize a benefit for the loss during the years ended
      October 31, 2006 and 2005. During the year ended October 31, 2004, the
      Company recorded a $0.3 million income tax benefit for a refund received.





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amount of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company's net deferred tax assets are as follows:




**October
                31,****2006**
            
            
            **2005**Deferred
                tax assets:Accrued
                liabilities
            
            $
            586,000
            
            $
            552,000Accrued
                decommissioning
            
            
            158,000
            
            
            158,000Allowance
                for doubtful accounts and write-offs from NOMOS
                acquisition
            
            
            614,000
            
            
            828,000Inventory
                reserve and capitalized inventory
            
            
            1,898,000
            
            
            2,015,000Other
            
            
            19,000
            
            
            426,000Depreciation
                and amortization
            
            
            2,091,000
            
            
            1,607,000Tax
                credits
            
            
            4,814,000
            
            
            4,814,000Theseus
                impairment
            
            
            1,850,000
            
            
            2,160,000Net
                operating loss carryforwards
            
            
            50,497,000
            
            
            43,616,00062,527,000
            
            
            56,176,000Deferred
                tax liabilities:Purchased
                intangible assets
            
            
            (2,248,000
            )
            
            (2,248,000
            )Other
            
            
            (212,000
            )
            
            (234,000
            )(2,460,000
            )
            
            (2,482,000
            )Net
                deferred tax assets
            
            
            60,067,000
            
            
            53,694,000Less:
                valuation allowance
            
            
            (60,067,000
            )
            
            (53,694,000
            )$
            —
            
            $
            —




107




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





At
      October 31, 2006, the Company had federal net operating loss carryforwards
      of approximately $124 million which begin to expire in 2013, of which $63
      million was acquired in the NOMOS acquisition. The Company has federal research
      and experimentation credits of $5 million, which begin to expire in 2008, of
      which $3 million was acquired in the NOMOS acquisition. The Company also has
      state NOL carryforwards of approximately $97 million which begin to expire
      in 2008, of which $51 million was acquired in the NOMOS acquisition. The use
      of
      net operating loss carryforwards is subject to statutory limitations.







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




**Year
                Ended October 31,****2006**
            
            
            **2005**
            
            
            **2004**Federal
                tax provision at U.S. statutory rate
            
            
            (34
            )%
            
            (34
            )%
            
            (34
            )%State
                income taxes, net of federal tax benefit
            
            
            —
            
            
            —
            
            
            —Impairment
                of Goodwill
            
            
            —
            
            
            10
            
            
            —Other
            
            
            1
            
            
            3
            
            
            (1
            )Other
                non-deductible expenses
            
            
            —
            
            
            —
            
            
            9Tax
                credits
            
            
            —
            
            
            —
            
            
            —Valuation
                allowance
            
            
            33
            
            
            21
            
            
            25—
            %
            
            —
            %
            
            (1)
            %





**NOTE
      15—RETIREMENT PLAN**





The
      Company has a 401(k) retirement plan that allows eligible employees to
      contribute up to the statutory annual limits. Under this plan, the Company
      makes
      certain contributions based upon the compensation of eligible employees and
      makes additional matching contributions for those employees who elect to
      contribute to the plan. The Company's expense for its plan totaled $0.1 million,
      $0.2 million and $0.2 million, for the years ended October 31, 2006, 2005,
      and 2004, respectively.





108





**NOTE
      16—COMMITMENTS AND CONTINGENCIES**





*Contract
      Commitments*





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




*Lease
      Commitments*





The
      Company leases facilities and equipment under non-cancelable operating lease
      agreements. Future minimum lease payments are subject to annual adjustment
      for
      increases in the Consumer Price Index. Total rent expense for the years ended
      October 31, 2006, 2005 and 2004 was $881,000, $872,000 and $1,034,000,
      respectively.





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





**For
                the Years Ended October 31,**2007
            
            $
            909,0002008
            
            
            538,0002009
            
            
            538,0002010
            
            
            538,0002011
            
            
            527,000Thereafter
            
            
            656,000$
            3,706,000





*Third
      Party License Agreements*




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




Lawrence
              Livermore National Laboratory
            
            $
            25,000Wisconsin
              Alumni Research Foundation
            
            
            15,000University
              of Texas
            
            
            50,000National
              Research Council of Canada
            
            
            30,000IdeaMatrix,
              Inc.
            
            
            125,000$
            245,000




*Employment
      Agreements*





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





*Litigation*





In
      December, 2004, an individual plaintiff, Steven Weeks, filed a complaint in
      the
      Coos County Circuit Court of the State of Oregon against Bay Area Health
      District, North American Scientific, Inc., NOMOS Corporation and Carl Jenson,
      M.D., alleging the defendants caused Mr. Weeks to receive excessive radiation
      during the course of his IMRT treatment, as a result of a manufacturing and/or
      design defect(s) in the Company’s CORVUS and BAT products. In September, 2005,
      prior to the case going to trial, the Company was party to a settlement
      agreement and the lawsuit is no longer an ongoing matter. Under the arrangement,
      the parties mutually agreed to dismiss all claims and counterclaims against
      each
      other without admitting any wrongdoing. The Company has also settled
      pre-litigation claims asserted against the same set of defendants by three
      separate plaintiffs, and believes that no other claims are forthcoming. These
      pre-litigation claims were subject to a settlement agreement whereby the parties
      agreed not to bring any claims or counterclaims against each other without
      admitting any wrongdoing.




109





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





On
      April
      20, 2006, a lawsuit captioned *J.P.
      Morgan Trust Company, N.A. v. John Alan Friede, et al.* was
      filed in the U.S. District Court for the Southern District of New York against
      John A. Friede, a current director and stockholder of the Company, Mr. Friede’s
      wife, and NOMOS Corporation, a subsidiary of the Company. The plaintiff, J.P.
      Morgan Trust Company, filed the lawsuit in its capacity as personal
      representative of the Estate of Evelyn A.J. Hall, Mr. Friede’s deceased mother.
      The complaint, as amended on August 8, 2006, asserts claims for reimbursement
      and contribution, constructive fraud, breach of contract and other related
      claims arising out of loans made by Mrs. Hall to, or for the benefit of, Mr.
      and
      Mrs. Friede and/or NOMOS, or acting as an accommodation party in additional
      loans made to Mr. and Mrs. Friede by financial institutions that were not
      subsequently repaid. During the time periods alleged in the complaint, Mr.
      Friede was the Chairman, Chief Executive Officer and the largest stockholder
      of
      NOMOS. With respect to NOMOS, the complaint seeks at least approximately
      $5,250,000 principal amount of loans allegedly made to and still outstanding
      and
      owed by NOMOS, and other related equitable remedies plus interest, costs and
      expenses.





On
      the
      basis of copies of documents that have been made available to us, we believe
      that the claims made against NOMOS in the lawsuit appear to be without merit
      and
      we intend to vigorously defend against them. However, in accordance with the
      indemnification provisions of the merger agreement under which we acquired
      NOMOS
      on May 4, 2004, and the related indemnity escrow agreement, we have made a
      claim
      for indemnification against the escrow to preserve our right of indemnity.
      Under
      these provisions, an indemnifying party will not have any indemnification
      obligations until such time as the aggregate indemnified losses for which we
      are
      entitled to indemnification equals or exceeds $400,000, at which point, the
      indemnifying party will be liable for the full amount of all such indemnified
      losses without regard to the $400,000 basket. As of the date hereof, the
      indemnity escrow account holds approximately $1,225,000 of cash and 526,810
      shares of our common stock. We also intend to review various other legal
      remedies that may be available to us.




110




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





**RELATED
      PARTIES**





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








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





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




**First**
              **Quarter**
            
            
            **Second**
              **Quarter**
            
            
            **Third**
              **Quarter**
            
            
            **Fourth**
              **Quarter****Fiscal
                2006**Net
                sales
            
            $
            7,527
            
            $
            8,057
            
            $
            7,097
            
            $
            6,307Gross
                profit
            
            
            2,851
            
            
            2,926
            
            
            2,484
            
            
            1,625Net
                loss
            
            
            (2,675
            )
            
            (3,695
            )
            
            (4,633
            )
            
            (6,127
            )Diluted
                loss per share
            
            $
            (0.16
            )
            $
            (0.22
            )
            $
            (0.19
            )
            $
            (0.21
            )**Fiscal
                2005**Net
                sales
            
            $
            8,164
            
            $
            9,141
            
            $
            8,060
            
            $
            6,859Gross
                profit
            
            
            2,930
            
            
            3,658
            
            
            3,383
            
            
            2,197Net
                loss
            
            
            (3,649
            )
            
            (3,928
            )
            
            (3,302
            )
            
            (44,635
            )Diluted
                loss per share
            
            $
            (0.22
            )
            $
            (0.24
            )
            $
            (0.20
            )
            $
            (2.70
            )





111





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors


North
      American Scientific, Inc.


Chatsworth,
      California





Our
      audit
      of the consolidated financial statements and internal control over financial
      reporting referred to in our reports dated January 10, 2007 (included elsewhere
      in this Annual Report on Form 10-K) also included the financial statement
      schedule of North American Scientific, Inc. listed in Item 15(a) of this Form
      10-K. This schedule is the responsibility of North American Scientific, Inc.’s
      management. Our responsibility is to express an opinion based on our audit
      of
      the consolidated financial statements.





In
      our
      opinion, the financial statement schedule, when considered in relation to the
      basic consolidated financial statements taken as a whole, present fairly in
      all
      material respects the information set forth therein.








/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


January 10,
      2007





112


**SCHEDULE
      II**


**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
                2006**Allowance
                for doubtful accounts
            
            $
            1,334,000
            
            $
            591,000
            
            $
            —
            
            $
            (821,000
            )
            $
            1,104,000Deferred
                tax asset valuation
              allowance
            
            $
            53,694,000
            
            $
            —
            
            $
            6,373,000
            
            $
            —
            
            $
            60,067,00**Fiscal
                2005**Allowance
                for doubtful accounts
            
            $
            625,000
            
            $
            709,000
            
            $
            —
            
            $
            —
            
            $
            1,334.000Deferred
                tax asset valuation
              allowance
            
            $
            38,203,000
            
            $
            —
            
            $
            15,491,000
            
            $
            —
            
            $
            53,694,000**Fiscal
                2004**Allowance
                for doubtful accounts and returns
            
            $
            103,000
            
            $
            522,000
            
            $
            —
            
            $
            —
            
            $
            625,000Deferred
                tax asset valuation
              allowance
            
            $
            9,587,000
            
            $
            —
            
            $
            28,616,000
            
            $
            —
            
            $
            38,203,000





113


**SIGNATURES**





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





NORTH
                AMERICAN SCIENTIFIC, INC./s/L.
                MICHAEL CUTRERJanuary
                15, 2007
            By:
            L.
                Michael Cutrer
              *President
                and Chief Executive Officer*





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





**Signature**
            
            **Title**
            
            **Date**/s/GARY
                N. WILNERDr. Gary
                N. Wilner
              
              /s/L.
                MICHAEL CUTRER
            
            Chairman
                of the Board of Directors
            
            January
                15, 2007L.
                Michael Cutrer
              
              /s/JAMES
                W. KLINGLER
            
            President,
                Chief Executive Officer and Director
              (Principal
                Executive Officer)
            
            January
                15, 2007James
                W. Klingler
            
            Senior
                Vice President and Chief Financial Officer
              (Principal
                Financial and Accounting Officer)
            
            January
                15, 2007/s/JOHN
                A. FRIEDEJohn
                A. Friede
              
              /s/JONATHON
                P. GERTLER
            
            Director
            
            January
                15, 2007Dr. Jonathan
                P. Gertler
              
              /s/WILFRED
                E. JAEGER, M.D.
              Wilfred
                E. Jaeger
              
              /s/JOHN
                M. SABIN
            
            Director
              
              
              Director
            
            January
                15, 2007
              
              
              January
                15, 2007John
                M. Sabin
              
              /s/RICHARD
                A. SANDBERG
            
            Director
            
            January
                15, 2007Richard
                A. Sandberg
              
              /s/NANCY
                W. WYSENSKI
            
            Director
            
            January
                15 2007Nancy
                W. Wysenski
              
              /s/RODERICK
                A. YOUNG
              Roderick
                A. Young
            
            Director
              
              
              Director
            
            January
                15, 2007
              
              
              January
                15, 2007




114