UNITED
STATES


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, 2008





OR





 ̈TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE
REQUIRED]




For
the transition period from _______ to _____





Commission
File Number 0-26670





NORTH
AMERICAN SCIENTIFIC, INC.


(Exact
name of Registrant as specified in its charter)





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





20200
Sunburst Street, Chatsworth, CA 91311


(Address
of principal executive offices)





(818) 734-8600


(Registrant's
telephone number, including area code)





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


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




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





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


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


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


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


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


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


The aggregate market value of voting
stock held by non-affiliates of the Registrant was approximately $6,981,000
(based upon the price at which the common stock was last sold, as of April 30,
2008, the last business day of the Registrant’s most recently completed second
fiscal quarter).


As of January 9, 2009, approximately
18,520,000shares of
the Registrant's Common Stock, $0.01 par value per share, were
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE


Portions of the Registrant's Proxy
Statement for the 2009 Annual Meeting of Stockholders to be held on or about
April 17, 2009, are incorporated by reference into Part III of this
Form 10-K.










NORTH
AMERICAN SCIENTIFIC, INC.





Table
of Contents





Form 10-K





PagePART
      IItem
      1.
                    Business
                    
                    3Item
      1A.
                    Risk
      Factors
                    
                    15Item
      1B.
                    Unresolved
      Staff Comments
                    
                    29Item
      2.
                    Properties
                    
                    29Item
      3.
                    Legal
      Proceedings
                    
                    29Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    
                    31PART
      IIItem
      5.
                    Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    
                    32Item
      6.
                    Selected
      Consolidated Financial Data
                    
                    33Item
      7.
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    35Item
      7A.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    46Item
      8.
                    Consolidated
      Financial Statements and Supplementary Data
                    
                    46Item
      9.
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    
                    46Item
      9A(T).
                    Controls
      and Procedures
                    
                    46Item
      9B.
                    Other
      Information
                    
                    47PART
      IIIItem
      10.
                    Directors,
      Executive Officers and Corporate Governance of the
    Registrant
                    
                    48Item
      11.
                    Executive
      Compensation
                    
                    48Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    48Item
      13.
                    Certain
      Relationships and Related Transactions and Director
      Independence
                    
                    48Item
      14.
                    Principal
      Accounting Fees and Services
                    
                    48PART
      IVItem
      15.
                    Exhibits,
      Financial Statement Schedules
                    
                    49Signatures
                    
                    93


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 primarily designs, develops, produces and sells
innovative products to radiation oncologists and urologists which are used for
delivering local radiation treatment to cancer patients.  These
products currently include Prospera® brachytherapy seeds and SurTRAKTM needles
and strands used primarily in the treatment of prostate cancer.





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





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





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





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





In November 2006, we announced the
introduction of ClearPathTM, our unique multicatheter breast brachytherapy device
for Accelerated Partial Breast Irradiation (“APBI”), at the American Society for
Therapeutic Radiology and Oncology (“ASTRO”) Annual Meeting in Philadelphia. The
ClearPath device is placed through a single incision and is designed to conform
to the resection cavity, allowing for more conformal therapeutic radiation dose
distribution following lumpectomy compared to other methods of
APBI.  ClearPath is designed to accommodate either high-dose,
ClearPath-HDR, or low-dose rate, ClearPath-CR, treatment methods.  We
have received 510(k) clearance from the United States Food and Drug
Administration (“FDA”) for both ClearPath-CRTM to enable a low-dose rate, or
continuous release treatment utilizing our Prospera® brachytherapy seeds, and
for ClearPath-HDRTM to enable a high-dose rate treatment. We continue to gain
clinical experience with our ClearPath-HDR and expect the general commercial
release of this product to occur in 2009.


3




BRACHYTHERAPY TREATMENT OF
CANCER





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





Prostate
Cancer





The prostate gland, found only in men,
is a small walnut-sized gland surrounding the urethra, located under the bladder
and in front of the rectum. According to the American Cancer Society, prostate
cancer is considered a slow growing cancer relative to other types of cancer.
Symptoms of prostate cancer are often not noticed until the cancer has
progressed past its early stages. Prostate cancer is the second most prevalent
form of cancer in men in the United States and is the second most common cause
of cancer death in men. The American Cancer Society estimated that approximately
190,000 new cases of prostate cancer were diagnosed in the United States in 2008
and that there were approximately 30,000 deaths of men in the United States from
this disease in 2008.





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





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





Prostate
Brachytherapy




Overview





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


4





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





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





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





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





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


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


5





Other
Prostate Cancer Treatment Modalities in addition to Brachytherapy




Radical
Prostatectomy





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





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




External Beam Radiation Therapy
(“EBRT”)





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





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




Cryosurgery





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




Other
Treatments.





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





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





Prospera®
for Ocular Melanoma





Intraocular melanoma, a tumor occurring
inside the eye, is a relatively rare malignancy. The American Cancer Society
estimates that there were 2,400 new cases of this form of melanoma in the United
States in 2008. The two most common means of treating this condition are
brachytherapy or enucleation (removal of the eye).


6


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.





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





Overview





Unlike
prostate brachytherapy treatment which is administered by the permanent
implantation of LDR sources in the prostate, breast brachytherapy is
administered by temporarily placing the radiation source in the post-lumpectomy
site using a specially designed device to permit safe and accurate placement of
the radiation source. Approximately 270,000 new cases of breast cancer are
diagnosed in the U.S. each year.  About 75% of breast cancers are
discovered in early-stages, and are therefore suitable for BCT. Therefore, we
estimate the total U.S. market for postlumpectomy brachytherapy is approximately
200,000 patients annually. With typical average selling prices of approximately
$2,700 for brachytherapy delivery products like ours,we estimate the U.S.
brachytherapy market potential at approximately $540 million, excluding the cost
of radiation sources and brachytherapy seeds, used in the treatment. Including
the revenues from radiation sources and brachytherapy seeds, we estimate the
U.S. breast brachytherapy market potential at over $700 million.





Advances
in these delivery systems have played an important role in breast brachytherapy
in recent years.  In the past, breast brachytherapy was limited to
Radiation sources delivered using a series of catheters inserted into the breast
in 10 to 15 locations.  This multi catheter interstitial procedure is
effective but is time consuming and technically difficult to
perform.  Additionally, these early  multi-catheter
interstitial systems were associated with negative cosmetic results (10-25 small
scars upon removal) .


7


Advances in breast brachytherapy
delivery systems now permit physicians to utilize either HDR or LDR sources with
a single insertion of a device into the breast cavity.  With HDR
breast brachytherapy, these devices now permit the placement of the HDR
radiation source (Iridium-192) directly into the post-lumpectomy site therebv
reducing 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 weeks after the procedure as with whole breast radiation
therapy (“WBRT”). The HDR device can be placed and removed in a physician's
office under local anesthesia.  HDR devices receive the HDR source
from an HDR afterloader for treatments in a radiation-safe shielded room twice a
day for 5 days. WBRT therapy requires the patient to visit daily the
radiation-safe shielded room for 6 weeks.  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 for patients who receive WBRT,
shortening the WBRT course of treatment.





The LDR
Breast brachytherapy devices, like the HDR devices, can be implanted at the time
of the lumpectomy or in the weeks after the procedure.  The LDR device
also can be placed and removed in a physician's office under local
anesthesia.  LDR devices differ from the HDR devices in that the low
dose rate radioactive source is placed into the LDR device and stays in place
for 4 days while the patient rests at home.  These LDR sources can be
placed into the LDR device in any treatment room.  There is no need to
be in a shielded radiation safe room for insertion, and the patient is not
required to make a daily visit to radiation-safe shielded treatment rooms in the
hospital or cancer clinic.   Clinical outcomes, including
recurrence rates, for LDR radiation therapy are similar to those obtained with
HDR devices and with the more invasive, longer treatment time,
WBRT.





Current
products on the market are either balloon HDR delivery devices or multicatheter
HDR delivery devices.  There are no LDR devices on the market at this
time.  We anticipate that the first LDR device to market will be the
ClearPath multicatheter LDR device.  Balloon HDR devices require
inflation of the balloon in the lumpectomy cavity and also require a significant
balloon to cavity wall interaction with minimal air or fluid pockets which can
interfere with effective radiation treatment dosing.  Multicatheter
HDR devices allow for more flexibility in cavity design and require less concern
about fluid or air in the cavity.   Multicatheter devices are
designed to have the benefits of customized dosing control due to the presence
of many treatment lumens, similar to the multicatheter interstitial procedure,
with the added benefit of a single insertion into the lumpectomy cavity,
eliminating the need for many individual catheter insertions typical of the
multicatheter interstitial procedure.





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.





Our Breast Brachytherapy Products –
the ClearPathTMline of
delivery devices.





In
November 2006, we announced the introduction of ClearPath, our unique
multicatheter breast brachytherapy devices for APBI, at the ASTRO Annual Meeting
in Philadelphia. The ClearPath devices 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.  Our ClearPath line of delivery devices are designed
to accommodate either high-dose, ClearPath-HDR, or low-dose rate, ClearPath-CR,
treatment methods.





We
received 510(k) clearance from the United States Food and Drug Administration
for a low-dose rate, or continuous release, treatment utilizing our Prospera®
brachytherapy seeds in April 2006 and approval for the high-dose rate treatment
in November 2006. We continue to gain clinical experience with our ClearPath-HDR
and expect the general commercial release of this product to occur in 2009, to
be followed by release of our ClearPath-CR delivery devices.





The
unique design of our ClearPath delivery devices offers new treatment
alternatives to women electing APBI as part of their BCT.  ClearPath
devices offer 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 delivery devices 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.


8





The ClearPath-HDR delivery device
consists of 12 adjustable catheters, 6 outer catheters deployed
to  maintain the shape of the post lumpectomy cavity and 6 inner
catheters deployed to optimize the radiation  therapy to be delivered
while minimizing the risk to surrounding tissues and organs.  The
optimized deployment of the inner treatment catheters 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, nipple or chest wall.  The
unique ability of ClearPath delivery device to contour the radiation dose
delivery by varying dose in its 6 inner treatment catheters could negate this
proximity problem.  The optimally deployed inner treatment catheters
in the ClearPath delivery device are unlike a balloon and unlike multicath
devices that treat on the cavity wall in that they are more conformal, neither
compressing nor altering the shape of the surrounding tissue. This unique
treatment design of the ClearPath HDR Product provides for a variety of delivery
locations from within the center of the lumpectomy cavity, allowing optimized
dose contouring and protection of tissue.





The ClearPath delivery device
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 product 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.  The 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





We utilized our expertise in the
design, development and manufacturing of radioisotopic products to develop or
jointly develop additional products, which include radiation sources and
standards used in a variety of areas for calibration, measurement and
control.  In September 2008, we sold this non-therapeutic product line
to Eckert & Ziegler Isotope Products, Inc (“EZIP”) for an amount up to $6.0
million in order for us to concentrate on therapeutic opportunities with
brachytherapy products and to provide us with necessary working capital. We
received $3.0 million at the time of the sale and we expect to receive $2.0
million in January 2009. (See NOTE 2 – DISCONTINUED OPERATIONS in the Notes to
the Consolidated Financial Statements)





INTELLECTUAL
PROPERTY





Patents




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


9





Name
      with Patent Number
                      
                      
                      Subject
                      
                      Date
      of Issuance and
                        Expiration
      DateExpandable
      brachytherapy device with constant spacing (7,357,770)
                      
                      
                      A
      brachytherapy device may include an expandable outer cage, an expandable
      inner cage positioned within the outer cage and configured to receive
      radioactive material at its perimeter, and a movable actuator configured
      to cause the outer and inner cages to expand simultaneously in response to
      movement of the actuator between certain positions while maintaining a
      substantially constant separation distance between the outer and inner
      cages.
                      
                      April
      15,2008 until
                        April
      18, 2027Stepper
      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
                        December
      6, 2020Radioactive
      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, 2019Apparatus
      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, 2021




10




Radioactive
      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
              August
      1, 2017Radioactive
      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
              August
      1, 2017Apparatus
      and Method for Loading a Brachytherapy Seed Cartridge
      (6,755,775)
            
            
            An
      apparatus and method for loading radioactive brachytherapy seeds into a
      seed cartridge for use with an applicator.
            
            June
      29, 2004 until
              August
      30, 2021





In
addition, as of October 15, 2008, we had 14 additional United States pending
patent applications.  We have also been issued 6 foreign patents and
have 9 (including 3 Patent Co-operation Treaty applications) foreign patent
applications still pending.




Third-Party
License Agreements




We license from third parties some of
the technologies used in our core products.





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


11





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





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





Our new ClearPath-HDR device for
treatment of breast cancer is, like its competitors, designed to connect to a
source of high-dose-rate (HDR) radiation, which is administered in a specially
shielded room in a hospital. It faces competition from Hologic, Inc., SenoRx,
Inc. and Cianna Medical. The MammoSite RTS device from Hologic, Inc., currently
the market leader, uses a balloon and catheter system to place the radiation
source directly into the post-lumpectomy cavity. The Contura MLB device
developed by SenoRx, Inc. also uses a balloon and catheter system to deliver the
radiation dose.   The SAVI device manufactured by Cianna Medical
does not use a balloon and is comprised of an expandable bundle of 6, 8 or 10
catheters.





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




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.





Almost all of the companies 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.
At the end of fiscal year 2008, the domestic sales staff consisted of 7 sales
representatives, one business development manager, a Marketing Director and 5
customer service representatives.  We also have a Senior Vice
President of Sales, and a Vice President of Marketing.


12





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.    Less than 1%, of our total revenues in fiscal
year 2008 were attributable to international markets.  One customer,
Core Oncology, Inc., accounted for over 10% of our total revenue in fiscal year
2008.





GOVERNMENT
REGULATION





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





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





United
States Regulatory Process





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





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





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




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




Each of
our products has its own individual indication for use statement that has been
cleared by the FDA. Each of these indications specifies 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 GMP. 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.


13





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




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




Additionally, we operate under licenses
issued by the California Department of Health which allow us to manufacture and
process radioactive materials. These licenses are renewable every eight
years.  We received a renewal of our licenses for our Chatsworth and
North Hollywood facilities in 2007.  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.





As part of the sale of our
Non-Therapeutic Product Line in September 2008, we have closed our North
Hollywood facility and have agreed to decommission the site at our
expense.  We expect that this process will be completed in or around
March 2009.





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.





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





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





MANUFACTURING





We manufacture all of our brachytherapy
seed products and accessory products, including steppers and stabilizers, at our
Chatsworth, California facility. The equipment used to manufacture our products
is purchased from a variety of suppliers. Additionally, we have developed an
in-house capability to both build and repair certain equipment used in the
manufacturing of our products. We consider our manufacturing equipment to be in
good condition.


14





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 $3.8 million, $1.8 million and $1.2
million during the years ended October 31, 2008, 2007 and 2006,
respectively,  primarily due to the development costs of ClearPath.
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, 2008, we had a
total of 84 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.





Item
1A. Risk Factors





We
have experienced significant losses and expect to incur losses in the future. As
a result, the amount of our cash and cash equivalents has materially declined.
If we continue to incur significant losses and are unable to access sufficient
working capital from our operations, our currently available credit facilities,
or through additional equity financings, we will be unable to fund future
operations and operate as a going concern.  Our independent registered
public accounting firm has issued us a going concern qualification for fiscal
2008 as a result of these conditions.





We have
incurred substantial net losses in recent years. As reflected in our financial
statements, we have experienced net losses of $10.9 million, $21.0 million and
$17.1 million in our fiscal years ended October 31, 2008, 2007 and 2006,
respectively. In addition, we have used cash in operations of $12.0 million,
$12.3 million and $15.9 million for our fiscal years ended October 31, 2008,
2007 and 2006, respectively.  As of October 31, 2008, we had an accumulated
deficit of $158.9 million; cash and cash equivalents of $2.3 million, working
capital of $2.8 million, and long-term liabilities of $1.6
million.


15


To
supplement our available cash, on May 28, 2008, we entered into a Ninth
Amendment to our previously expired borrowing arrangement with Silicon Valley
Bank. We also entered into an Eleventh Amendment to the same borrowing
arrangement on October 10, 2008 to modify the timing of disbursements and
repayments of the funds.  These amendments provide us with up to $6.0
million in borrowing capacity subject to certain conditions as described
below.  As of October 31, 2008, we have borrowed $1.5 million on these
facilities. We believe that our current cash balances combined with borrowing
available under our credit facility will allow us to continue operations through
March 2009, at which time we will need to either raise additional financing or
cease operations.  The $6.0 million in borrowing capacity consists
of:





§
            a
      $3.0 million Growth Capital term loan, to be funded one half in June 2008
      and one half no later than March 31, 2009, subject to certain conditions.
      Interest accrues at the Bank prime rate plus 2.25% and is payable on the
      outstanding principal balance monthly from the date of the first
      borrowing. The principal balance of the Growth Capital loan is repayable
      in equal installments over thirty-three (33) months beginning January 1,
      2009; and§
            a
      $3.0 million revolving credit facility based upon eligible receivables
      balance as defined by the Eleventh Amendment, which is payable monthly.
      Interest on the revolving credit facility is payable monthly at Bank prime
      plus 0.50% per annum, and may increase to Bank prime plus 1.5% if we fail
      to meet the Quick Ratio Test as defined in the Ninth Amendment. The
      revolving line of credit matures in twenty-four (24) months from the date
      of signing. The revolving line of credit is subject to certain financial
      covenants, which cross over to the Growth Capital Loan in the event that
      both facilities have an outstanding balance on any given
      month.





In
September 2008, we sold our non-therapeutic product line, which resulted in
immediate cash proceeds of $3.0 million, a note receivable of $2.0 million due
in January 2009 and an additional $1.0 million to be paid to the Company in
September 2009 if certain milestones are achieved. We will no longer generate
revenue from the sales of our non-therapeutic products and our revenue will be
entirely based on sales of our therapeutic products.





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





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





§
            Our
      ability to successfully develop, market and sell our products, including
      the successful further development and launch of our new ClearPath device
      for treatment of breast cancer;§
            Continued
      scientific progress in our discovery and research
  programs;§
            Levels
      of selling and marketing expenditures that will be required to launch
      future products and achieve and maintain a competitive position in the
      marketplace for both existing and new products;§
            Structuring
      our businesses in alignment with their revenues to reduce operating
      losses;§
            Levels
      of inventory and accounts receivable that we maintain;§
            Level
      of capital expenditures;§
            Acquisition
      or development of other businesses, technologies or
    products;§
            The
      time and costs involved in obtaining regulatory
  approvals;§
            The
      costs involved in preparing, filing, prosecuting, maintaining, defending
      and enforcing patent claims; and§
            The
      potential need to develop, acquire or license new technologies and
      products.


16


We also
may be required to curtail our expenses or to take steps that could hurt our
future performance, including but not limited to, the termination of major
portions of our research and development activities, the premature sale of some
or all of our assets or product lines on undesirable terms, merger with or
acquisition by another company on unsatisfactory terms or the cessation of
operations. We cannot assure you that we will be successful in these efforts or
that any or some of the above factors will not negatively impact
us.




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





In
January 2008, we completed a private placement of 12,601,628 shares of our
common stock that also included 630,081 shares of common stock issuable upon
exercise of warrants. This financing resulted in significant dilution of our
current stockholders, such that the three participants in the private placement
transaction now control in excess of 70% of our outstanding common stock. If we
raise additional equity financing in the future, the percentage ownership held
by existing stockholders would be further reduced, and existing stockholders may
experience further significant dilution. In addition, new investors may demand
rights, preferences or privileges that differ from, or are senior to, those of
our existing shareholders, such as warrants in addition to the securities
purchased and other protections against future dilutive
transactions.





Recent
turmoil in the credit markets and the financial services industry may negatively
impact our business, results of operations, financial condition or
liquidity.





Recently,
the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented
level of intervention from the United States federal government. These
conditions not only limit our access to capital but also make it extremely
difficult for our customers, our vendors and us to accurately forecast and plan
future business activities, and they could cause U.S. and foreign
businesses to slow spending on our products and services, which would delay and
lengthen sales cycles.  Furthermore, during challenging economic times
our customers may face issues gaining timely access to sufficient credit, which
could result in an impairment of their ability to make timely payments to
us.  In addition, the recent economic crisis could also adversely
impact our suppliers’ ability to provide us with materials and components,
either of which may negatively impact our business, financial condition and
results of operations.





Although
we maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments and such losses have
historically been within our expectations and the provisions established, we may
not continue to experience the same loss rates that we have in the past,
especially given the current turmoil of the worldwide economy.





Our
common stock is subject to continued listing requirements of the NASDAQ Capital
Market, including a minimum bid price requirement. Our ability to publicly or
privately sell equity securities and the liquidity of our common stock could be
adversely affected if we are delisted from the NASDAQ Capital Market or if we
are unable to transfer our listing to another stock market.





Currently
and at points during the past 52 weeks, the minimum bid price for our common
stock listed on the NASDAQ Capital Market has closed below the $1.00
minimum.





On August
20, 2008, we received notice from NASDAQ indicating that for the last 30
consecutive business days, the bid price of our common stock closed below the
minimum $1.00 per share requirement for continued inclusion under Marketplace
Rule 4450(a)(5) (the “Rule”). We had 180 calendar days, or until February 17,
2009, to regain compliance with the minimum bid price level.





However,
given the current extraordinary market conditions, NASDAQ suspended the bid
price and market value of publicly held shares requirements through Monday,
April 20, 2009.  On October 16, 2008, NASDAQ filed an immediately
effective rule change with the SEC, and this rule change was extended in
December 2008, such that companies will not be cited for any new concerns
related to bid price or market value of publicly held shares
deficiencies.  We are currently in a bid price compliance period and
as a result of this rule suspension and extension, we will have until August 28,
2009 to regain compliance by achieving a $1.00 closing bid price for a minimum
of 10 consecutive trading days.


17





Beyond
the risk of delisting arising from the $1.00 minimum closing bid price
requirement, our common stock is subject to a number of other requirements under
Maintenance Standards for continued listing on the NASDAQ Capital Market,
including but not limited to, a $2.5 million minimum stockholders’ equity under
Maintenance Standard 1, as set forth in Marketplace Rule
4310(c)(3).





On
September 22, 2008, we received a notice from NASDAQ indicating that we do not
comply with the minimum $2.5 million stockholders’ equity requirement for
continued listing on the NASDAQ Capital Market as set forth in Marketplace Rule
4310(c)(3).  In addition, we do not comply with the minimum $35.0
million market value of listed securities or $500,000 of net income from
continuing operations for the most recently completed fiscal year or two of the
three most recently completed fiscal years for continued
listing.  However, after including the results of the
September 2008 sale of certain assets from our non therapeutic product line, we
did have sufficient stockholders' equity to satisfy Maintenance Standard
1.  On October 24, 2008, we received a letter from NASDAQ indicating
we were once again in compliance with the minimum $2.5 million stockholders’
equity requirement for continued listing.





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, delisting from NASDAQ could adversely affect our ability to raise
additional financing through the public or private sale of equity securities. We
will need to raise additional financing in fiscal 2009 to fund our continuing
operations, support the launch and further development of ClearPath, and other
activities. Delisting from NASDAQ also would make trading our common stock more
difficult for investors, potentially leading to further declines in our share
price. It would also make it more difficult for us to raise additional capital.





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





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





§
            The
      successful further development of a commercially marketable
      device;§
            The
      successful launch of a marketing and sales program for this
      device;§
            Our
      ability to protect our intellectual property through patents and licenses
      and avoid infringement of intellectual property of
  others;§
            The
      successful completion of technical improvements to the
    device;§
            Our
      ability to successfully manufacture production quantities of the
      device;§
            The
      acceptance of the device by physicians and health professionals as an
      alternative to other approaches to delivering radiation to a cancer
      patient’s breast tissue or to other products using a similar approach but
      employing different competitive technologies; and§
            Our
      ability to hire and train a direct sales force to sell the
      device.





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




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


18





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




• failure
to prove feasibility;


• time
required from proof of feasibility to routine production;


• timing
and cost of regulatory approvals and clearances;


•
competitors' responses to new product developments;


•
manufacturing cost overruns;


• failure
to obtain customer acceptance and payment; and


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




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




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




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





Because
we are a small company with limited resources, 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.


19





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





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




As a
result of our relatively small sales force the need to hire and train additional
sales representatives to sell our ClearPath device, and the intense competition
for skilled sales and marketing employees, our direct sales and marketing
efforts may not be successful. If we are not successful in our direct sales and
marketing, our sales revenue and results of operations are likely to be
materially adversely affected.




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




Our 2005
agreement with Oncura, Inc. and our 2007 agreement with Core Oncology, Inc. for
distribution of our Palladium-103 brachytherapy seeds are important components
of that business.  If we are not able to maintain our existing
relationships with our agents and distributors for the sale of our Palladium-103
brachytherapy seeds or these third parties do not successfully distribute our
products, our revenues will be adversely impacted.





We
depend partially on our relationship with a large customer that comprises more
than 10% of our revenue. If this relationship is discontinued or if we are
unable to develop new relationships, our revenues could decline.




Our sales
to Core Oncology, Inc. comprised more than 10% of our revenue for fiscal
2008  We cannot assure you that we will be able to maintain our
existing relationships with our large customers for the sale of our
Palladium-103 brachytherapy seeds.





The
cost of defending lawsuits for product-related liabilities could be prohibitive
to us.





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





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




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


20





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.





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




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




Our
success is materially dependent on a limited number of key employees, and, in
particular, the continued services of John B. Rush, our President and Chief
Executive Officer and Brett L. Scott, our Senior Vice President and Chief
Financial Officer. Our future business and financial results could be adversely
affected if the services of Messrs. Rush, Scott or other key employees cease to
be available. To our knowledge, none of our key employees have any plans to
retire or leave in the near future.




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





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





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




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




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.


21





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





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




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




If
a competitor infringes upon our patent or other intellectual property rights,
enforcing those rights could be difficult, expensive and time-consuming, making
the outcome uncertain. Competitors could also bring actions or counterclaims
attempting to invalidate our patents. Even if we are successful, litigation to
enforce our intellectual property rights or to defend our patents against
challenge could be costly and could divert our management's attention. Due to
our limited resources, the costs of such litigation may exceed our ability to
pay and we may not be able to adequately enforce our intellectual property
rights or defend our patents.




In
2006, we licensed intellectual property which was later the subject of
litigation brought by WorldWide Medical Technologies in U.S. District Court
against both us and our former employee, Richard Terwilliger, who was previously
our Vice-President of New Product Development. This intellectual property
relates to our brachytherapy business, specifically, certain needle-loading and
stranding technologies. While we do not believe that we have any liability in
this matter, and are vigorously defending ourselves 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
licenses for our North Hollywood and Chatsworth facilities in 2007. California
is one of the "Agreement States," which are so named because the Nuclear
Regulatory Commission, or NRC, has granted such states regulatory authority over
radioactive materials, provided such states have regulatory standards meeting or
exceeding the standards imposed by the NRC. Most users of our products must
obtain licenses issued by the state in which they reside (if they are Agreement
States) or the NRC. Use licenses are also required by some of the foreign
jurisdictions in which we may seek to market our products.




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


22





As part
of the sale of our Non-Therapeutic Product Line  in September 2008, we
closed  our North Hollywood facility and have agreed
to decommission the site at our expense . While we
believe that our current reserves for decommissioning costs are
adequate, the actual costs may exceed such estimate. We expect that the
decommissioning process will be completed in approximately March
2009.




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




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





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




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





Medicare
reimbursement amounts for seeding are currently significantly less than for 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 may not obtain third-party reimbursement
with respect to treatments using our products under any foreign reimbursement
system.


23





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




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




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


24





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




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





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




• fines,
injunctions and civil penalties;


• the
recall or seizure of our products;


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


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


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


•
criminal prosecution.




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


25





Our
future growth depends, in part, on our ability to penetrate foreign markets,
particularly in Asia and Europe. However, we have had limited success 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 fiscal 2007
and  2008, less than 2% of our  revenues were derived from
sales to customers outside the United States and Canada. Our foreign operations
subject us to additional risks and uncertainties, including:





§
            our
      customers' ability to obtain reimbursement for procedures using our
      products in foreign markets;§
            the
      burden of complying with complex and changing foreign regulatory
      requirements;§
            language
      barriers and other difficulties in providing long-range customer support
      and service;§
            longer
      accounts receivable collection times;§
            significant
      currency fluctuations, which could cause our distributors to reduce the
      number of products they purchase from us because the cost of our products
      to them could fluctuate relative to the price they can charge their
      customers;§
            reduced
      protection of intellectual property rights in some foreign countries; and§
            the
      interpretation of contractual provisions governed by foreign laws in the
      event of a contract
dispute.





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 necessary to achieve
      profitability and, in particular periods, may decline;§
            Our
      future sales growth is highly dependent on the successful introduction of
      our ClearPath device;


26





§
            Our
      brachytherapy product lines may experience some variability in revenue due
      to seasonality. This is primarily due to three major holidays occurring in
      our first fiscal quarter and the apparent reduction in the number of
      procedures performed during summer months, which could affect our third
      fiscal quarter results;§
            Estimates
      with respect to the useful life and ultimate recoverability of our
      carrying basis of assets, including goodwill and purchased intangible
      assets, could change as a result of such assessments and
      decisions;§
            As
      a result of our growth in past periods, our fixed costs have increased.
      With increased levels of spending and the impact of long-term commitments,
      we may not be able to quickly reduce these fixed expenses in response to
      short-term business changes;§
            Acquisitions
      that result in in-process research and development expenses may be charged
      fully in an individual quarter;§
            Changes
      or anticipated change in third-party reimbursement amounts or policies
      applicable to treatments using our products;§
            Timing
      of the announcement, introduction and delivery of new products or product
      enhancements by us and by our competitors;§
            The
      possibility that unexpected levels of cancellations of orders or backlog
      may affect certain assumptions upon which we base our forecasts and
      predictions of future performance;§
            Changes
      in the general economic conditions in the regions in which we do
      business;§
            Unfavorable
      outcome of any litigation; and§
            Accounting
      adjustments such as those relating to reserves for product recalls, stock
      option expensing as required under SFAS No. 123R and changes in
      interpretation of accounting
pronouncements





Being
a public company significantly increases our administrative costs.





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




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




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





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





The
market price of our common stock has historically been, and we expect it to
continue to be, volatile. The price of our common stock has ranged between $0.05
and $3.75 per share in the fifty-two week period ended October 31, 2008. 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.


27





In
addition, sales of a substantial number of shares of our common stock by
stockholders could adversely affect the market price of our shares. In
connection with our January 2008 sale of common stock and accompanying warrants,
we have filed resale registration statements covering an aggregate of up
to 12,601,628 shares of common stock and 630,081 shares of common
stock issuable upon exercise of warrants for the benefit of the selling security
holders. The actual or anticipated resale by such investors under these
registration statements may depress the market price of our common stock. Bulk
sales of shares of our common stock in a short period of time could also cause
the market price for our shares to decline.





Trading
volume in our stock has been limited, so investors may not be able to sell as
much stock as they want at prevailing prices.





The
average daily trading volume in our common stock for fiscal year 2008 was
approximately 16,000 shares and the average daily number of transactions was
approximately 40 for the same period. If limited trading in our stock continues,
it may be difficult for investors to sell their shares in the public market at
any given time at prevailing prices. Moreover, the market price for shares of
our common stock is made more volatile because of the relatively low volume of
trading in our common stock. When trading volume is low, significant price
movement can be caused by the trading in a relatively small number of shares.
Volatility in our common stock could cause stockholders to incur substantial
losses.





Our directors, officers and principal
stockholders have significant voting power and may take actions that may not be
in the best interests of our other stockholders.





As of
December 31, 2008, our officers, directors and principal stockholders,
collectively beneficially own approximately 79% of our common stock in the
aggregate. As a result, these stockholders, if they act together, will be able
to control the management and affairs of our company and most matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control and might adversely affect
the market price of our common stock.





Some
provisions of our charter documents may make takeover attempts difficult, which
could depress the price of our stock and inhibit your ability to receive a
premium price for your shares.





Provisions
of our amended and restated certificate of incorporation could make it more
difficult for a third party to acquire control of our business, even if such
change in control would be beneficial to our stockholders. Our amended and
restated certificate of incorporation allows our board of directors to issue
shares of preferred stock and to fix the rights and preferences of such shares
without stockholder approval. Any such issuance could make it more difficult for
a third party to acquire our business and may adversely affect the rights of our
stockholders. These provisions may delay, deter or prevent a change in control
of us, adversely affecting the market price of our common stock.





We
do not anticipate declaring any cash dividends on our common stock.





We have
never declared or paid cash dividends on our common stock and do not plan to pay
any cash dividends in the near future. Our current policy is to retain all funds
and any earnings for use in the operation and expansion of our business. The
payment of cash dividends by us is restricted by our credit facility with
Silicon Valley Bank. If we do not pay dividends, our stock may be less valuable
to you because a return on your investment will only occur if our stock price
appreciates.


28





Item
1B. UNRESOLVED STAFF COMMENTS





None.





Item
2.  PROPERTIES





We do not own real property. Our
principal executive office is located at 20200 Sunburst Street, Chatsworth,
California 91311, where we lease approximately 24,000 square
feet.  We also lease approximately 3,200 square feet in Irvine which
is used for research and development.  Both of these leases expire in
mid 2009 with renewal options.  Our North Hollywood facility is
expected to be vacated in March 2009 as a result of the sale of our
non-therapeutic product line.





We
believe that our facilities are adequate, suitable and of sufficient capacity to
support our current operations.





Item
3.  LEGAL PROCEEDINGS





NASDAQ
Listing





We
received a NASDAQ Stock Market (“NASDAQ”) Staff Deficiency Letter dated
September 21, 2007 indicating that, based on the Quarterly Report on Form 10-Q
for the period ended July 31, 2007, NASDAQ had determined that we were was not
in compliance with the minimum $10 million stockholders’ equity requirement for
continued listing on the NASDAQ Global Market set forth in Marketplace Rule
4450(a)(3). On December 11, 2007, we received formal notice that a NASDAQ
Listing Qualifications Panel (the “Panel”) had granted our request for a
transfer from the NASDAQ Global Market to the NASDAQ Capital Market, and
continued listing on the NASDAQ Capital Market, subject to the following
exception:





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





§
            On
      or before January 31, 2008, we were required to file our Annual Report on
      Form 10-K for the fiscal year ended October 31, 2007, which shall
      demonstrate proforma stockeholder’s equity of $2.5 million or greater.
      We  filed our Annual Report on Form 10-K on January 29,
      2008.





Further,
on October 5, 2007, we received a notice from NASDAQ, dated October 5, 2007
indicating that for the last 30 consecutive business days, the bid price of our
common stock had closed below the minimum $1.00 per share requirement for
continued inclusion under Marketplace Rule 4450(a)(5) (the “Rule”). Therefore,
in accordance with Marketplace Rule 4450(e)(2), we had 180 calendar days, or
until April 2, 2008, to regain compliance. We did not regain compliance with the
Rule by April 2, 2008, and on April 4, 2008, NASDAQ notified us that our common
stock would be delisted on April 15, 2008. On April 10, 2008, we appealed the
delisting decision pursuant to the procedures set forth in the NASDAQ
Marketplace Rule 4800 Series, and were granted a hearing with a NASDAQ Listing
Panel on May 22, 2008.  Our common stock continued to trade on the
NASDAQ Capital Market pending the outcome of such hearing.


29


On
February 5, 2008, we received a letter from NASDAQ dated February 4, 2008
providing notice that we has demonstrated compliance with NASDAQ Marketplace
Rules, and that the NASDAQ Listing Qualifications Panel has determined to
continue the listing of our securities on NASDAQ. In addition, the Staff has
approved our application to list its common stock on The NASDAQ Capital Market.
Our common stock was transferred from The NASDAQ Global Market to The NASDAQ
Capital Market effective February 6, 2008.





On April
29, 2008, our stockholders approved a 1 share for 5 share reverse split to
regain compliance with the minimum bid price rule. The reverse split became
effective on May 1, 2008. Our common stock traded at or above the $1.00 minimum
bid price for the period May 1, 2008 through May 14, 2008, which marked 10
consecutive trading days in which the closing bid price exceeded the $1.00
minimum. On May 15, 2008, we were notified by NASDAQ that we had regained
compliance with the minimum bid price requirements and no further action was
required.





On August 20, 2008, we received another
letter from NASDAQ indicating that for the last 30 consecutive business days,
the bid price of our common stock closed below the minimum $1.00 per share
requirement for continued inclusion under the Rule. We had 180 calendar days, or
until February 17, 2009, to regain compliance with the minimum bid price level.
However, given the current extraordinary market conditions, NASDAQ has decided
to suspend the bid price and market value of publicly held shares requirements
through Monday, April 20, 2009.  On October 16, 2008, NASDAQ filed an
immediately effective rule change with the SEC, and this rule change was
extended in December 2008, such that companies will not be cited for any new
concerns related to bid price or market value of publicly held shares
deficiencies.  We are currently in a bid price compliance period and
as a result of this rule suspension and extension, we will have until August 28,
2009 to regain compliance by achieving a $1.00 closing bid price for a minimum
of 10 consecutive trading days.  If, at anytime before August 28,
2009, the bid price of our common stock closes at $1.00 per share or more for a
minimum of 10 consecutive business days, we understand that NASDAQ’s Staff will
provide written notification that we have achieved compliance with the Rule. If
the Company does not regain compliance with the Rule by August 28, 2009, we
understand that NASDAQ’s Staff will provide written notification that our common
stock will be delisted. At that time, we may appeal the Staff’s determination to
delist its common stock to a NASDAQ Listing Qualifications Panel.





Beyond
the risk of delisting arising from the $1.00 minimum closing bid price
requirement, we are subject to a number of other requirements under Maintenance
Standards for continued listing on the NASDAQ Capital Market, including but not
limited to, a $2.5 million minimum stockholders’ equity under Maintenance
Standard 1, as set forth in Marketplace Rule 4310(c)(3).  We
anticipate that we may not comply with this requirement in fiscal 2009 and in
such case be subject to delisting from NASDAQ.





Litigation





In
November 2005, we were served with a complaint filed in U.S. District Court in
Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s six
count complaint alleges breach of a confidentiality agreement, fraud, patent
infringement, wrongful interference with contractual relations, violation of the
Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
Practices Act. WWMT alleges that we fraudulently obtained WWMT’s confidential
information during negotiations to purchase WWMT in 2004 and that once we
acquired that information, we allegedly learned that Richard Terwilliger (our
former Vice President of New Product Development) owned certain patent rights
and that we began trying to inappropriately gain property rights by hiring him
away from WWMT. We were served with this matter at approximately the same time
Mr. Terwilliger was served with a lawsuit in state court and with an
application seeking a preliminary injunction declaring plaintiffs to
be the sole owners of the intellectual property at issue and preventing Mr.
Terwilliger from effectively serving as our Vice President of New Product
Development. We have agreed to defend Mr. Terwilliger. We have moved 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.  On March 12, 2007, the
Court administratively dismissed the action. On or about April 30, 2007, the
parties filed a Joint Motion to Reopen the Case after Administrative Dismissal,
which the court subsequently denied without prejudice. The parties re-filed the
Joint Motion to Reopen the Case, and the Court issued an order reopening the
case on July 3, 2008. On August 22, 2008, the Court set a scheduling order in
this matter. On September 24, 2008, plaintiffs filed a Motion for an Extension
of Time to File a Motion For Leave to Amend.  Subsequently, on
September 29, 2008, plaintiffs filed a Motion for Leave to Amend the Complaint,
seeking to add additional claims to the action and remove other
claims.  On December 5, 2008, the Court denied both of plaintiffs’
motions.  The Court ordered plaintiffs to file a request to dismiss
any claims they intend to withdraw voluntarily by December 22, 2008. On December
22, 2008, the plaintiffs filed a request to dismiss without prejudice certain
claims. On January 12, 2009, the defendants opposed that motion arguing, inter
alia, that those claims should be dismissed with prejudice. The plaintiffs have
not yet responded. We deny liability and intend to vigorously defend this
claim as it progresses.


30




In
October 2007, we were served with a demand for arbitration by AnazaoHealth
Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading services for
our Prospera brachytherapy products pursuant to a Services Agreement dated as of
June 1, 2005, as amended (the “Services Agreement”). In its demand for
arbitration, AnazaoHealth is seeking indemnification from us under the Services
Agreement for damages arising out of a litigation filed against AnazaoHealth in
the U.S. District Court for the District of Connecticut (the “Connecticut
Litigation”) by Richard Terwilliger, Gary Lamoureux, World Wide Medical
Technologies, LLC, IdeaMatrix, Inc., Advanced Care Pharmacy, LLC, Advanced Care
Pharmacy, Inc., and Advanced Care Medical, Inc. In September 2008, AnazaoHealth
filed an Amended Arbitration Demand to which we filed an
Objection.  On or about October 7, 2008, the parties agreed to toll
the issues in the Amended Arbitration Demand and the matter was taken off
calendar.  The plaintiffs in the Connecticut Litigation claim that
AnazaoHealth’s provision of services in the brachytherapy field infringes their
patent rights, and certain of the plaintiffs claim that our Prospera products
infringe their patent rights. We deny liability and intend to vigorously defend
this claim should it recommence.




In
February 2008, an individual plaintiff, Richard Hodge, filed a complaint in the
Multnomah 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. Hodge to receive excessive radiation
during the course of his IMRT treatment, as a result of a manufacturing and/or
design defect(s) in our former CORVUS and BAT products. The plaintiff dismissed
this complaint with prejudice on October 28, 2008.





In
November 2008, Denise M. Black and Lon Black, filed a complaint in the State of
New York, Supreme Court, County of Ontario against Clifton Springs Hospital
& Clinic, Charles H. Albrecht Radiation Oncology, Dana P. Hansen, M.D.,
Charles H. Albrecht, M.D., Matthew Pacella, MS, DABR, Dustin A. Gress, MS,
Upstate Medical Physics, Inc., Sandy K.S. Perry, M.D., Finger Lakes Women’s
Health LLC, NOMOS Corporation, n/k/a Best Nomos and North American Scientific,
Inc. alleging the defendants caused Mrs. Black to sustain personal injuries,
increased pain and suffering and additional medical expense due to negligence
and deviation from accepted medical practice.  We deny liability and
intend to vigorously defend this claim as it progresses.  No trial
date has yet been set.





We
are 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 our consolidated financial
position, results of operations, or cash flows.





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





No matters were submitted to a vote of
our shareholders during the quarter ended October 31, 2008.




31




PART
II




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





Price
Range of Common Stock





Our common stock is listed on the
NASDAQ Capital  Market under the ticker symbol "NASM". Prior to
February 6, 2008, our common stock was 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 applicable NASDAQ market.





High
                    
                    
                    LowFiscal
    2008First
      Quarter
                    
                    $
                    3.15
                    
                    
                    $
                    0.75Second
      Quarter
                    
                    
                    2.55
                    
                    
                    
                    1.50Third
      Quarter
                    
                    
                    3.75
                    
                    
                    
                    0.50Fourth
      Quarter
                    
                    
                    0.84
                    
                    
                    
                    0.05Fiscal
    2007First
      Quarter
                    
                    
                    6.25
                    
                    
                    
                    4.25Second
      Quarter
                    
                    
                    6.45
                    
                    
                    
                    4.40Third
      Quarter
                    
                    
                    8.75
                    
                    
                    
                    4.60Fourth
      Quarter
                    
                    $
                    5.65
                    
                    
                    $
                    1.40





As of
December 31, 2008, we had approximately 415 shareholders of record.





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




32




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. All amounts are in thousands, except for share and per share
amounts.




Year
      Ended October 31,2008(5)
                                                      
                                                      
                                                      2007(4)
      (5)
                                                      
                                                      
                                                      2006(4)
      (5)
                                                      
                                                      
                                                      2005(3)(4)
      (5)
                                                      
                                                      
                                                      
                                                      2004(1),(2),
      (4) (5)Statement
      of Operations:Net
      revenue
                                                      
                                                      $
                                                      13,927
                                                      
                                                      
                                                      $
                                                      11,428
                                                      
                                                      
                                                      $
                                                      9,251
                                                      
                                                      
                                                      $
                                                      8,833
                                                      
                                                      
                                                      $
                                                      9,357Cost
      of revenue
                                                      
                                                      
                                                      9,328
                                                      
                                                      
                                                      
                                                      8,532
                                                      
                                                      
                                                      
                                                      7,219
                                                      
                                                      
                                                      
                                                      6,246
                                                      
                                                      
                                                      
                                                      5,599Gross
      profit
                                                      
                                                      
                                                      4,599
                                                      
                                                      
                                                      
                                                      2,896
                                                      
                                                      
                                                      
                                                      2,032
                                                      
                                                      
                                                      
                                                      2,587
                                                      
                                                      
                                                      
                                                      3,758Operating
      expenses
                                                      
                                                      
                                                      19,287
                                                      
                                                      
                                                      
                                                      14,393
                                                      
                                                      
                                                      
                                                      12,842
                                                      
                                                      
                                                      
                                                      11,186
                                                      
                                                      
                                                      
                                                      16,138Loss
      from operations
                                                      
                                                      
                                                      (14,688
                                                      )
                                                      
                                                      
                                                      (11,497
                                                      )
                                                      
                                                      
                                                      (10,810
                                                      )
                                                      
                                                      
                                                      (8,599
                                                      )
                                                      
                                                      
                                                      (12,380
                                                      )Interest
      and other income (expense), net
                                                      
                                                      
                                                      (1,476
                                                      )
                                                      
                                                      
                                                      (605
                                                      )
                                                      
                                                      
                                                      (119
                                                      )
                                                      
                                                      
                                                      120
                                                      
                                                      
                                                      
                                                      580Loss
      before provision for income taxes
                                                      
                                                      
                                                      (16,164
                                                      )
                                                      
                                                      
                                                      (12,102
                                                      )
                                                      
                                                      
                                                      (10,929
                                                      )
                                                      
                                                      
                                                      (8,479
                                                      )
                                                      
                                                      
                                                      (11,800
                                                      )Provision  for
      income taxes
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      257Loss
      from continuing operations
                                                      
                                                      
                                                      (16,164
                                                      )
                                                      
                                                      
                                                      (12,102
                                                      )
                                                      
                                                      
                                                      (10,929
                                                      )
                                                      
                                                      
                                                      (8,479
                                                      )
                                                      
                                                      
                                                      (11,543
                                                      )Income
      (loss) from discontinued operations (2,
      4)
                                                      
                                                      
                                                      5,219
                                                      
                                                      
                                                      
                                                      (8,896
                                                      )
                                                      
                                                      
                                                      (6,201
                                                      )
                                                      
                                                      
                                                      (47,034
                                                      )
                                                      
                                                      
                                                      (24,764
                                                      )Net
      loss
                                                      
                                                      $
                                                      (10,945
                                                      )
                                                      
                                                      $
                                                      (20,998
                                                      )
                                                      
                                                      $
                                                      (17,130
                                                      )
                                                      
                                                      $
                                                      (55,513
                                                      )
                                                      
                                                      $
                                                      (36,307
                                                      )Basic
      and diluted earnings (loss) per share:Loss
      from continuing operations
                                                      
                                                      $
                                                      (1.02
                                                      )
                                                      
                                                      $
                                                      (2.06
                                                      )
                                                      
                                                      $
                                                      (2.49
                                                      )
                                                      
                                                      $
                                                      (2.57
                                                      )
                                                      
                                                      $
                                                      (4.39
                                                      )Income
      (loss) from discontinued operations(2,
      4)
                                                      
                                                      
                                                      0.33
                                                      
                                                      
                                                      
                                                      (1.52
                                                      )
                                                      
                                                      
                                                      (1.41
                                                      )
                                                      
                                                      
                                                      (14.25
                                                      )
                                                      
                                                      
                                                      (9.43
                                                      )Net
      loss
                                                      
                                                      $
                                                      (0.69
                                                      )
                                                      
                                                      $
                                                      (3.58
                                                      )
                                                      
                                                      $
                                                      (3.90
                                                      )
                                                      
                                                      $
                                                      (16.82
                                                      )
                                                      
                                                      $
                                                      (13.82
                                                      )Shares
      used in per share calculationBasic
                                                      
                                                      
                                                      15,779
                                                      
                                                      
                                                      
                                                      5,869
                                                      
                                                      
                                                      
                                                      4,391
                                                      
                                                      
                                                      
                                                      3,300
                                                      
                                                      
                                                      
                                                      2,628
  As of October 31,2008(5)
                            
                            
                            2007(4)(5)
                            
                            
                            2006(4)
      (5)
                            
                            
                            2005(3)(5)
                            
                            
                            
                            2004(1),(2)(5)(In
      thousands)Balance
      Sheet Data:Cash,
      cash equivalents and marketable securities
                            
                            $
                            2,256
                            
                            
                            $
                            609
                            
                            
                            $
                            903
                            
                            
                            $
                            3,623
                            
                            
                            $
                            14,980Assets
      of discontinued operations(4)
                            
                            
                            —
                            
                            
                            
                            636
                            
                            
                            
                            11,954
                            
                            
                            
                            14,567
                            
                            
                            
                            61,019Total
      assets
                            
                            
                            9,636
                            
                            
                            
                            6,176
                            
                            
                            
                            27,198
                            
                            
                            
                            8,218
                            
                            
                            
                            20,098Total
      bank debt
                            
                            
                            1,500
                            
                            
                            
                            3,323
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Total
      stockholders' equity (deficit)
                            
                            
                            2,819
                            
                            
                            
                            (2,912
                            )
                            
                            
                            17,188
                            
                            
                            
                            10,801
                            
                            
                            
                            65,377




(1)
            In
      May 2004, we acquired NOMOS Corporation, incurring a $9,200 charge for
      in-process research and development and $1,100 charge for merger and
      integration costs in connection with the purchase. These items had a
      $(3.90) impact on basic and diluted loss per share and are included in
      discontinued operations for the
period.




33




(2)
            In
      September 2004, our 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 $12,537,
      consisting primarily of research and development
  expenses.




(3)
            At
      October 31, 2005, we recorded a $40,213 impairment loss
      of  NOMOS goodwill and intangible assets as a result of our
      evaluation of the fair value of our long-lived assets under SFAS 142
      and SFAS 144. The impairment loss is included in the Loss from
      Discontinued Operations in the Consolidated Statements of Operations for
      the year ended October 31, 2005.




(4)
            In
      September 2007, we shut down the operations of our NOMOS segment and sold
      substantially all of our NOMOS assets to a third party. The Statement of
      Operations data for 2004 through 2006 have been revised to include NOMOS
      as a discontinued operation. The effects of revising these years resulted
      in a $16,394, $20,192 and $11,759 decrease in revenue, a $6,290, $8,273
      and $3,387 decrease in gross profit, and a $14,207, $56,941 and $17,331
      decrease in operating expenses for 2006, 2005 and 2004,
      respectively.  Loss from discontinued operations increased by
      $7,935, $48,666 and $13,945 million, or $0.36, $2.95 and $1.06 per share
      in 2006, 2005 and 2004, respectively as a result of this change. Assets of
      discontinued operations represent primarily all the assets of the NOMOS
      operation sold as a result of this transaction at the respective Balance
      Sheet date.





(5)
            In
      September 2008, we sold our Non Therapeutic Product Line to a third party.
      The Statement of Operations data for 2007 through 2004 have been revised
      to include the Non Therapeutic Product Line as a discontinued operation.
      The effects of revising these years resulted in a $3,889, $3,343, $3,199,
      and $3,621 decrease in revenue, a $1,731, $1,564, $1,308 and $1,773
      decrease in gross profit, and a $244, $81, $38 and $55 decrease in
      operating expenses for 2007, 2006, 2005 and 2004,
      respectively.  Loss from discontinued operations increased by
      $1,557, $1,484, $1,270 and $1,718, or $0.27,  $0.35,
      $0.38,  and $0.65 per share in 2007, 2006, 2005 and 2004,
      respectively as a result of this change. Assets of discontinued operations
      represent primarily all the assets of the Non Therapeutic Product Line as
      a result of this transaction at the respective Balance Sheet
      date.




34




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





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





Overview





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





In
November 2006, we announced the introduction of ClearPath TM , our
unique multicatheter breast brachytherapy device for Accelerated Partial Breast
Irradiation (“APBI”). APBI is a standard radiation treatment appropriate for all
women with early stage breast cancer. Typically, patients undergoing radiation
treatment for breast cancer are treated with external beam radiation (EBR). The
EBR treatments are delivered daily for a period of six weeks. Women who receive
APBI instead of EBR can be treated in just five days with the same level of
efficacy and with better control of radiation dose to surrounding tissue.
Management estimates that approximately 250,000 women in the United States are
diagnosed with breast cancer each year. With early detection on the rise, we
believe the total market for APBI devices in the United States to be as high as
$500 million per year.




Our
ClearPath systems are designed to place the radiation source directly into the
post-lumpectomy site which reduces the treatment time to approximately five days
compared to six weeks and reduces the risks associated with the external beam
radiation treatment. Our ClearPath device is placed through a single incision
and is designed to conform to the tumor resection cavity, allowing physicians to
deliver a more conformal therapeutic radiation dose distribution following
lumpectomy compared to other methods of APBI. Our ClearPath family of devices
are designed to deliver either high-dose rate treatment, (ClearPath-HDRTM) or
low-dose rate continuous treatments (ClearPath-CRTM).





We have
received 510(k) approval from the United States Food and Drug Administration for
both ClearPath-CRTM to enable a low-dose rate, or continuous release treatment
utilizing our Prospera® brachytherapy seeds, and for ClearPath-HDRTM to enable a
high-dose rate treatment. Throughout 2007 and 2008, we have been gaining
clinical experience with the first generation ClearPath-HDR , and we intend to
launch the second generation devices in 2009, to be followed by the general
commercial release of our ClearPath-CR.





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





35




On
September 5, 2008 we completed the sale of certain assets, principally our
non-therapeutic product line to EZIP for an amount valued up to $6,000. The
financial results of the non-therapeutic product line are reported as a
discontinued operation in the accompanying consolidated financial
statements.




We have
incurred substantial net losses since fiscal year 2000. We expect the losses to
continue for at least the next fiscal year as we continue to develop our
ClearPath product, and obtaining adequate financing is an important part of our
business strategy. In January 2008, we completed a financing transaction in
which we raised a net $13,769 through a private placement of our common stock
with three of our major shareholders. The inflow of cash has allowed us to meet
our operating expenses and continued development of our ClearPath
product.





Critical
Accounting Policies





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





Use
of Estimates





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





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.





Our  products
are subject to shelf-life expiration periods, which are carefully
monitored.  Provision is made for inventory items which may not be
sold because of expiring dates. We routinely review other inventories for
evidence of impairment of value and make provision as such impairments are
identified.





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 our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine 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 we believe that it is
probable the receivable will not be recovered. We do not have any
off-balance-sheet credit exposure related to our customers.




36




Fair
Value of Financial Instruments





The
carrying amounts of cash and cash equivalents, receivables, inventories,
accounts payable, and accrued expenses approximate fair value because of their
short maturities.





Equipment
and Leasehold Improvements





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





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




Intangible
Assets





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





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





Long-Lived
Assets





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




Derivative
Liabilities





We issued
warrants in connection with our borrowing activities in 2007 that included an
uncertain purchase price for a period of time. We evaluated these warrants under
SFAS No. 133 - Accounting for
Derivative Instruments and Hedging Activities and Emerging Issues Task
Force Issue 00-19 - Accounting
for Derivative Financial Indexed to, and Potentially Settled in, a Company’s Own
Stock and determined the warrants should be accounted for as derivative
liabilities at estimated fair value, and marked-to-market at subsequent
measurement dates. We used the Black-Scholes option-pricing model to determine
the fair value of the derivative liabilities at each measurement date. Key
assumptions of the Black-Scholes option-pricing model include applicable
volatility rates, risk-free interest rates and the instruments’ expected
remaining life. The fluctuations in estimated fair value are recorded as
Adjustments to Fair Value of Derivatives in Other Expenses in the Statement of
Operations. On December 12, 2007, the uncertain purchase price became certain,
and the derivative features were eliminated. See further discussion in Note 9
and Note 10 to the consolidated financial statements.




37




Income
Taxes





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. We have recorded a 100% valuation allowance against our
deferred tax assets until such time that it becomes more likely than not that we
will realize the benefits of the deferred tax assets. On November 1, 2007, we
implemented Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”.





Revenue
Recognition





We sell
products for radiation therapy treatment, primarily brachytherapy seeds used in
the treatment of cancer. 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 supersedes SAB No. 101,
“Revenue Recognition in
Financial Statements,” provides guidance on the recognition, presentation
and disclosure of revenue in financial statements.  SAB No. 104 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for the disclosure of revenue recognition policies.  In general, 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.





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.





Share-based
Compensation





We
account for our share-based payments under the guidance set forth in SFAS
No. 123(R), Share-Based
Payment, 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 our Employee
Stock Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair
values. We also apply the guidance found in SABNo. 107 (“SAB
107”) with respect to share-based payments and SFAS No. 123(R).





Under
SFAS 123(R), we attribute the value of share-based compensation to expense using
the straight-line method. We use a 10% forfeiture rate, and a 46%
forfeiture rate for the 2006 Premium Price Awards, under the straight-line
method based on historic and estimated future forfeitures.




We use
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. We use projected volatility rates, which are based primarily upon
historical volatility rates. Because our 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 our options.
For purposes of financial statement presentation, the estimated fair values of
the options are amortized over the options’ vesting periods.





38





Results
of Operations





Fiscal
2008 vs. Fiscal 2007




Net
Revenue


Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  % Change(in
      thousands)Net
      revenue
                  
                  $
                  13,927
                  
                  
                  $
                  11,428
                  
                  
                  
                  21.9
                  %




Net revenue increased 21.9% to $13,927
for the year ended October 31, 2008 from $11,428 for the year ended October 31,
2007. The increase in revenue is due to $3,421 in higher sales volume of our
brachytherapy seeds and $568 in higher SurTrak sales volume, all partially
offset by a $1,195 decline in average selling prices for our brachytherapy seeds
and a decline in average selling prices and volume of bracytheraphy accessory
products and revenue from outside pharmacy services.





Gross profit


Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  % Change(in
      thousands)Gross
      profit
                  
                  $
                  4,599
                  
                  
                  $
                  2,896
                  
                  
                  
                  58.8
                  %As
      a percent of net revenue
                  
                  
                  33.0
                  %
                  
                  
                  25.3
                  %
                  
                  
                  7.7
                  %




Gross
profit increased $1,703, or 58.8%, to $4,599 for the year ended October 31, 2008
from $2,896 for the year ended October 31, 2007. The increase in gross profit is
due to higher revenues noted above, partially offset by $796 increase in
material costs due to the higher volume of seeds sold. Gross profit as a percent
of net revenue increased 7.7% points from the year ended October 31, 2007 to the
year ended October 31, 2008. The increase is due to higher overall revenues,
reduced nuclide costs arising from lean manufacturing approach implemented in
2008 and lower outside service costs as we transition to internal stranding for
customers. Gains in gross profit percentage were partially offset by higher
labor costs arising from increased headcount and increases in facilities
overhead.




Selling
and marketing expenses


Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  % Change(in
      thousands)Selling
      and marketing expenses
                  
                  $
                  4,556
                  
                  
                  $
                  3,669
                  
                  
                  
                  24.1
                  %As
      a percent of net revenue
                  
                  
                  32.7
                  %
                  
                  
                  32.1
                  %
                  
                  
                  0.6
                  %




Selling and marketing expenses,
comprised primarily of salaries, commissions and marketing costs, increased
$887, or 24.1%, to $4,556 for the year ended October 31, 2008, from $3,669 for
the year ended October 31, 2007. The increase in selling and marketing expenses
is primarily attributed to a $273 increase in sales commissions related to the
increased sales of brachytherapy products, a $237 increase in research grants, a
$223 increase in personnel and temporary labor costs, a $117 cost for product
re-branding and a net $37 increase in other marketing spending, primarily on our
ClearPath device.





39





General
and administrative expenses ("G&A")


Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  % Change(in
      thousands)General
      and administrative expenses
                  
                  $
                  9,519
                  
                  
                  $
                  8,944
                  
                  
                  
                  5.5
                  %As
      a percent of net revenue
                  
                  
                  68.3
                  %
                  
                  
                  78.3
                  %
                  
                  
                  (10.0
                  )%





G&A
increased $575 or 5.5%, to $9,438 for the year ended October 31, 2008, from
$8,944 for the year ended October 31, 2007. The increase in G&A is primarily
attributed to an increase in personnel expenses of approximately $375 related to
higher headcount, a $204 increase in stock compensation expense, a $185 increase
in bad debt expense and a $94 net increase in all other general and
administrative expenses, partially offset by a $283 decrease in professional
fees.





Research
and development (“R&D”)


Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  % Change(in
      thousands)Research
      and development expenses
                  
                  $
                  3,801
                  
                  
                  $
                  1,780
                  
                  
                  
                  113.6
                  %As
      a percent of net revenue
                  
                  
                  27.3
                  %
                  
                  
                  15.6
                  %
                  
                  
                  11.7
                  %




R&D
increased $2,021 or 113.6%, to $3,801 for the year ended October 31, 2008, from
$1,780 for the year ended October 31, 2007. The increase in R&D spending is
primarily due to $375 increase in higher salaries and benefits related to higher
headcount, and $1,436 increase spending on product development for our
ClearPathTM breast brachytherapy device.





Severance


Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  % Change(in
      thousands)Severance
      expense
                  
                  $
                  1,411
                  
                  
                  $
                  n/a
                  
                  
                  
                  100.0
                  %As
      a percent of net revenue
                  
                  
                  10.1
                  %
                  
                  
                  n/a
                  
                  
                  
                  10.1
                  %




Severance
expense of $1,411 is related to negotiated severance contracts with three
employees whose positions with the Company were eliminated.





Interest
expense.Interest expense was $1,087 for the fiscal year ended
October 31, 2008, compared to $535 for the fiscal year ended October 31, 2007.
The interest expense in both fiscal years resulted from the intereston short-termand long-term debt and
amortization of warrants. The increase was attributable to an increase in the
outstanding balance of the short-term and long-term debt and the number of
warrants.





Adjustment for fair value of
derivatives.Adjustment for fair value of derivatives increased from $0
to $311 as a result of fluctuations recorded in the fair value of warrants
issued in connection with our borrowing activities.




40




Interest income and other income
(expense), net.Interest income and other income (expense) was
an expense of $50 for the fiscal year ended October 31, 2008, compared to income
of $31 for the fiscal year ended October 31, 2007 due to interest income on
slightly higher average cash balances during 2007.





Income (loss) from discontinued
operations.  The income from discontinued operations of $5,219
for the fiscal year ended October 31, 2008 resulted from the divestiture of the
Non-Therapeutic Product Line in September 2008. The income from discontinued
operations in 2008 was primarily due to a $4,502 gain realized on the disposal
of our non-therapeutic product line in September 2008, coupled with a $717
profit from operating the product through the date of the sale. The loss from
discontinued operations of $8,896 for the fiscal year ended October 31, 2007
includes a loss from operations of $10,453 from NOMOS, and an operating profit
of $1,557 from the divestiture of the non therapeutic product line.




Fiscal
2007 vs. Fiscal 2006


Net
Revenue
 Year Ended October 31,2007
                    
                    
                    2006
                    
                    
                    % Change(in
      thousands)Net
      revenue
                    
                    $
                    11,428
                    
                    
                    $
                    9,251
                    
                    
                    
                    23.5
                    %


Net revenue increased 23.5% to $11,428
for the year ended October 31, 2007 from $9,251 for the year ended October 31,
2006. The increase in revenue is due to a 23.6% increase in sales of our
brachytherapy seeds and accessories, with increased product sales partially
offset by a decline in average selling prices.





Gross profit


Year Ended October 31,2007
                  
                  
                  2006
                  
                  
                  % Change(in
      thousands)Gross
      profit
                  
                  $
                  2,896
                  
                  
                  $
                  2,032
                  
                  
                  
                  42.5
                  %As
      a percent of net revenue
                  
                  
                  25.3
                  %
                  
                  
                  22.0
                  %
                  
                  
                  3.3
                  %




Gross
profit increased $864, or 42.5%, to $2,896 for the year ended October 31, 2007
from $2,032 for the year ended October 31, 2006.  Gross profit as a
percent of net revenue increased 3.3% points from the year ended October 31,
2006 to the year ended October 31, 2007. The increase in our gross profit is
primarily due to the increase in sales, and the increase in gross profit as a
percent of sales is primarily due to reduced material usage costs in therapeutic
products, partially offset by a decline in average selling prices.





Selling
and marketing expenses


Year Ended October 31,2007
                  
                  
                  2006
                  
                  
                  % Change(in
      thousands)Selling
      and marketing expenses
                  
                  $
                  3,669
                  
                  
                  $
                  2,731
                  
                  
                  
                  34.3
                  %As
      a percent of net revenue
                  
                  
                  32.1
                  %
                  
                  
                  29.5
                  %
                  
                  
                  2.6
                  %




41




Selling and marketing expenses,
comprised primarily of salaries, commissions and marketing costs, increased
$938, or 34.3%, to $3,669 for the year ended October 31, 2007, from $2,731 for
the year ended October 31, 2006. The increase in selling and marketing expenses
is primarily attributed to higher sales commissions of $192 related to the
increased sales of brachytherapy products, and increased marketing spending on
our ClearPath device.
 
 General
and administrative expenses ("G&A")
 Year Ended October 31,2007
                          
                          
                          2006
                          
                          
                          % Change(in
      thousands)General
      and administrative expenses
                          
                          $
                          8,944
                          
                          
                          $
                          8,951
                          
                          
                          
                          —
                          %As
      a percent of net revenue
                          
                          
                          78.2
                          %
                          
                          
                          96.8
                          %
                          
                          
                          (18.6
                          )%
 
 G&A
decrease slightly to $8,944 for the year ended October 31, 2007 from $8,951 for
the year ended October 31, 2006. The slight decrease was the result of increases
in personnel expenses, which were more than offset by a decrease in the stock
compensation expense as a result of the implementation of SFAS 123(R), which
requires the expensing of stock options, and reduced bad debt expense resulting
from improved collections.
 
 Research
and development (“R&D”)
 Year Ended October 31,2007
                                    
                                    
                                    2006
                                    
                                    
                                    % Change(in
      thousands)Research
      and development expenses
                                    
                                    $
                                    1,780
                                    
                                    
                                    $
                                    1,160
                                    
                                    
                                    
                                    53.4
                                    %As
      a percent of net revenue
                                    
                                    
                                    15.6
                                    %
                                    
                                    
                                    12.5
                                    %
                                    
                                    
                                    3.1
                                    %
 
 R&D
increased $620 or 53.4%, to $1,780 for the year ended October 31, 2007, from
$1,160 for the year ended October 31, 2006. The increase in R&D spending is
primarily due to increased spending on product development for our ClearPathTM
breast brachytherapy device.
 
 Interest
expense.Interest expense was $535 for the fiscal year ended
October 31, 2007, compared to $401 for the fiscal year ended October 31, 2006.
The interest expense in both fiscal years resulted from the intereston short-termand long-term debt and
amortization of warrants. The increase was attributable to an increase in the
outstanding balance of the short-term and long-term debt and the number of
warrants.
 
 Interest income and other income
(expense), net.Interest income and other income (expense) was
income of $31 for the fiscal year ended October 31, 2007, compared to $282 for
the fiscal year ended October 31, 2006. The decrease in interest income is due
to declining cash balances in investment accounts in 2007 as cash was consumed
in operations.
 
 Loss from discontinued
operations.  The loss from discontinued operations of $8,896
for the fiscal year ended October 31, 2007 resulted from the divestiture of
NOMOS in September 2007, and resulted in an operating loss of $10,453 and the
divestiture of the non-therapeutic product line in September 2008 which resulted
in an operating profit of $1,557
 The loss
from discontinued operations of $6,201 for the fiscal year ended October 31,
2006 includes a loss from operations of $7,938 from NOMOS, an operating profit
of $1,483 from the non-therapeutic product line and a gain of $253 from the
discontinued Theseus operation.
 
 42
  Liquidity
and Capital Resources
 
 To date,
our short-term liquidity needs have generally consisted of working capital to
fund our ongoing operations and to finance growth in inventories, trade accounts
receivable, new product research and development, capital expenditures,
acquisitions and strategic investments in related businesses.  We have
satisfied these needs primarily through a combination of cash generated by
operations, lines of credit, public offerings and from private placements of our
common stock.  We will need to raise additional capital in fiscal 2009 to
be able to continue operations.  We believe that our current cash
balances combined with available borrowings under our credit facility will allow
us to operate through February 2009.   If events and
circumstances occur such that we do not meet our current operating plans, we are
unable to raise sufficient additional equity or debt financing, or our credit
facilities are insufficient or not available, 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.
  Our
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 $10,945, $20,998
and $17,130 for the years ended October 31, 2008, 2007 and 2006, respectively,
and have used cash in operations of $12,015, $12,318 and $15,921 for the years
ended October 31, 2008, 2007 and 2006, respectively.  As of October 31,
2008, we had an accumulated deficit of $158,871 cash and cash equivalents of
$2,256, working capital of $2,832 and $1,500 of interest-bearing
debt.
 
 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 and cash
equivalents.  At October 31, 2008, we had cash and cash equivalents
aggregating approximately $2,256, an increase of $1,647 from $609 at October 31,
2007. The increase was primarily attributed to $13,769 net cash raised in a
private placement sale of our common stock and $2,958 net cash received from the
sale of our non-therapeutic product line, offset by cash used in continuing
operations of $12,542 and capital expenditures of $1,169.
 
 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.
  Equipment and leasehold
improvements.  Equipment and leasehold improvements (“Fixed Assets”)
increased approximately $588 to $1,412 at October 31, 2008, from $824 at October
31, 2007.  The increase in Fixed Assets reflects capital expenditures of
$1,169 offset by depreciation expense.
  Accounts payable and accrued
expenses.  Accounts payable and accrued expenses decreased
approximately $790 to $4,884 as of October 31, 2008, from $5,674 at October 31,
2007, as we settled accounts with suppliers and vendors with cash raised from
the PIPE transaction in January 2008.
 
 Liquidity
and Capital Resource Requirements
  The
following table summarizes information about our material contractual
obligations as of October 31, 2008:
  43
  Payments due by period (in thousands)Contractual
                                        Obligations
                                      
                                      Total
                                      
                                      
                                      Less than 1
                                        year
                                      
                                      
                                      1-3 years
                                      
                                      
                                      3-5 years
                                      
                                      
                                      More than
                                        5 yearsBank
      debt
                                      
                                      $
                                      1,500
                                      
                                      
                                      $
                                      455
                                      
                                      
                                      $
                                      1,045
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Operating
      leases
                                      
                                      
                                      364
                                      
                                      
                                      
                                      268
                                      
                                      
                                      
                                      60
                                      
                                      
                                      
                                      36
                                      
                                      
                                      
                                      —License
      fees
                                      
                                      
                                      375
                                      
                                      
                                      
                                      125
                                      
                                      
                                      
                                      250
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Purchase
      commitments
                                      
                                      
                                      98
                                      
                                      
                                      
                                      98
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Severance
      liabilities
                                      
                                      
                                      1,092
                                      
                                      
                                      
                                      523
                                      
                                      
                                      
                                      569
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —$
                                      3,429
                                      
                                      
                                      $
                                      1,469
                                      
                                      
                                      $
                                      1,924
                                      
                                      
                                      $
                                      36
                                      
                                      
                                      $
                                      —
  Bank debt.  The
bank debt with Silicon Valley Bank consists of a $3,000 revolving credit
facility with an interest rate of prime plus 0.5% and a $3,000 Growth Capital
Loan with an interest rate of prime plus 2.25%.  The outstanding
balance at October 31, 2008 is zero for the revolving credit facility and $1,500
on the Growth Capital Loan.  Based on the current interest rate at
October 31, 2008, we estimate that our interest payments for the remainder of
2008 will be $42 and over the subsequent years until maturity will be
$391.
 
 Operating leases. We lease
our facilities under noncancelable operating leases which expire in mid 2009.
Under each lease, we are required to pay for insurance, taxes, utilities and
building maintenance, commonly known as a “triple net” lease. Future minimum
lease payments are subject to annual adjustment for increases in the Consumer
Price Index.   We also lease some equipment under non-cancelable
operating leases.
 
 License fees.We
license some of the technologies used in our products from third
parties.
 
 Purchase
commitments.We also have purchase commitments to a supplier
under blanket purchase orders.
 
 Severance
liabilities.We have committed to severance payments to
several employees whose employment was terminated in 2008.  We will be
making those payments over specified terms, and at October 31, 2008, $569 of
those payments are in long-term liabilities and $523 is included in accrued
expenses.
 
 Recent Accounting
Pronouncements
 
 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. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair value measurements,
and does not require any new fair value measurements. The application of SFAS
No. 157, however, may change current practice within an organization.
SFAS 157 is effective for fiscal years beginning after November 15,
2007. On February 12, 2008, the FASB issued FASB Staff Position FSP 157-2
which defers the effective date of SFAS No. 157 for one year for
non-financial assets and non-financial liabilities that are not recognized or
disclosed at fair value in the financial statements on a recurring basis. On
October 10, 2008, FASB issued FASB Staff Position FSP 157-3 which clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. We do
not believe that SFAS No. 157 will have a material impact on our financial
position, results of operations or cash flows.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” SFAS 159 provides companies with an
option to report selected financial assets and liabilities at fair value. The
standard’s objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. The standard requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the company’s choice to use
fair value on its earnings. It also requires companies to display the fair value
of those assets and liabilities for which the company has chosen to use fair
value on the face of the balance sheet. The new standard does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in SFAS 157,
“Fair Value
Measurements,” and SFAS 107, “Disclosures about Fair Value of
Financial Instruments.” SFAS 159 is effective as of the start of fiscal
years beginning after November 15, 2007. Early adoption is permitted. We
are evaluating this standard and therefore have not yet determined the impact
that the adoption of SFAS 159 will have on our financial position, results of
operations or cash flows.
  44
  In March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards, (“EITF Issue 06-11”).
Beginning January 1, 2008, we adopted EITF Issue 06-11. In accordance with
EITF Issue 06-11, we record a credit to additional paid-in capital for tax
deductions resulting from a dividend payment on non-vested share awards we
expect to vest. The adoption of EITF Issue 06-11 did not have any impact on our
consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008.  We are currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
our consolidated results of operations and financial condition.
 
 In
December 2007, the FASB issued SFAS No. 160, " Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 " (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent's ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners.   SFAS 160 is effective for fiscal
years beginning after December 15, 2008.  We are currently
evaluating the potential impact, if any, of the adoption of SFAS 160 on our
consolidated results of operations and financial condition.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement
No. 133. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. Entities are
required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. This standard is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. We are currently evaluating the impact, if any,
SFAS No. 161 will have on our consolidated financial position, results of
operations or cash flows.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy). This Statement is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles”. We currently adhere to the hierarchy of GAAP as presented in SFAS
No. 162, and therefore we do not expect its adoption will have a material impact
on our consolidated results of operations and financial condition.
 
 In June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (“EITF 03-6-1”). EITF 03-6-1 provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method in accordance with SFAS 128, Earnings per Share. EITF
03-6-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. Upon adoption,
we are required to retrospectively adjust the earnings per share data to conform
with the provisions in EITF 03-6-1. Early application of EITF 03-6-1 is
prohibited.  We are currently evaluating the impact EITF 03-6-1 will
have on our consolidated financial statements.
  45
  Related
Party Transactions
 
 We have
borrowed funds from, and received additional equity investments from, related
parties. See Note 10 — ”Borrowings” of the notes to the consolidated
financial statements
  Item
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Interest
Rate Risk
 
 The
interest rates we pay on certain of our debt instruments are subject to interest
rate risk.  Our growth capital term loan accrues interest at the
bank’s prime rate plus 2.25% and our revolving credit facility accrues interest
at the bank’s prime rate plus up to 1.5%.  Our financial instruments
include cash and cash equivalents. At October 31, 2008, 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 cash equivalents, changes in interest rates are not expected to have a
material effect on our near-term financial condition or results of
operations.
 
 Foreign
Currency Risk
 
 Our
policy is to not enter into derivative financial instruments. We do not have any
significant foreign currency exposure. In addition, we do not enter into any
futures or forward contracts and therefore do not have significant market risk
exposure with respect to commodity prices.
 
 Item
8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
 
 The
information required by this Item is presented in the consolidated financial
statements listed in Item 15(a) of Part IV of this Form 10-K Annual
Report and are incorporated herein by reference.
 
 Item
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
 None
 
 Item
9A (T).  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.
  46
  (b)          Evaluation
of financial reporting controls and procedures.
  Management’s
Report on Internal Control Over Financial Reporting.
  Management
is responsible for establishing and maintaining an adequate system of internal
control over financial reporting, pursuant to Rule 13a-15(c) of the
Exchange Act. This system is intended to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.
  A
Company’s internal control over financial reporting includes policies and
procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures
of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material affect on
the financial statements.
 
 Because
of its inherent  limitations,  internal  control over financial
reporting  determined to be effective can provide only reasonable assurance
with respect to  financial  statement  preparation  and may
not prevent or detect all 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.
 
 As
required by Rule 13a-15(c) under the Exchange Act, we have carried out an
evaluation, under the supervision and with the participation of our management,
including our CEO and our CFO, of the effectiveness, as of the end of the period
covered by this report, of the design and operation of our internal control over
financial reporting as defined in Rule 13a-15(f) promulgated by the SEC
under the Exchange Act and based on the framework set forth in Internal Controls- Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based upon that evaluation, our CEO and our CFO
concluded that our internal controls over financial reporting, as of the end of
such period, were effective.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal controls over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only the
management’s report in this annual report.
 
 (c)          Changes
in internal controls
 
 There
were no changes in our internal controls over financial reporting during the
quarter ended October 31, 2008, that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
 
 Item
9B.  OTHER INFORMATION.
 
 Not applicable.
  47
 
 PART
III
 
 Item
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE OF THE
REGISTRANT
 
 The
information required under this Item is incorporated by reference to our
definitive proxy statement pursuant to Regulation 14A to be filed with the
Commission no later than 120 days after the close of our fiscal year ended
October 31, 2008.
 
 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, 2008.
 
 Item
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
 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, 2008.
 
 Item
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 The
information required under this Item is incorporated by reference to our
definitive proxy statement pursuant to Regulation 14A to be filed with the
Commission no later than 120 days after the close of our fiscal year ended
October 31, 2008.
 
 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, 2008.
  48
  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:
 Page1.
                  Financial
      Statements of the CompanyReport
      of Independent Registered Public Accounting Firm – SingerLewak
      LLP
                  51Consolidated
      Balance Sheets
                  52Consolidated
      Statements of Operations
                  53Consolidated
      Statements of Changes in Stockholders' Equity (Deficit)
                  54Consolidated
      Statements of Cash Flows
                  55Notes
      to Consolidated Financial Statements
                  562.
                  Financial
      Statement ScheduleAll  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.
                  
                  Description2.1
                  
                  Purchase
      and Sale Agreement, between the Registrant and Eckert & Ziegler
      Isotope Products, Inc., dated August 29, 2008, incorporated by reference
      to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, filed
      September 5, 2008.3.1
                  
                  Amended
      and Restated Certificate of Incorporation of the Registrant, as amended on
      April 30, 2008 by the Certificate of Amendment of Amended Certificate of
      Incorporation, incorporated by reference to Exhibit 3.1 to the
      Registrant’s Quarterly Report on Form 10-Q, filed on June 16,
      2008.3.2
                  
                  Bylaws
      of the Registrant, (as amended December 5, 2007), incorporated by
      reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,
      filed on December 11, 2007.10.1+
                  
                  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, 2001.10.2+
                  
                  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,
      2000.10.3+
                  
                  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,
  2001.10.4+
                  
                  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, 2003.10.5
                  
                  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,
200510.6
                  
                  Loan
      Agreement and Security Agreement, dated October 5, 2005, between the
      Registrant, the Subsidiaries and Silicon Valley Bank., incorporated by
      reference to Exhibit 10.1 to the Registrant’s Form 8-K filed October 11,
      2005.10.7
                  
                  Amendment
      to Loan Agreement and Security Agreement, dated January 12, 2006, between
      the Registrant, the Subsidiaries and Silicon Valley Bank, incorporated by
      reference to Exhibit 10.25 of Form 10-K filed on January 18,
      2006.10.8
                  
                  Loan
      and Security Agreement, dated March 28, 2006, by and among the Registrant,
      certain subsidiaries and Partners for Growth II, L.P., incorporated by
      reference to the Registrant’s Current Report on Form 8-K filed on April 3,
      2006.10.9+
                  
                  North
      American Scientific, Inc. 2006 Stock Plan, incorporated by reference to
      Appendix A to the Registrant’s Definitive Proxy Statement filed on April
      5, 2006.10.10
                  
                  Securities
      Purchase Agreement dated June 6, 2006 between the Registrant and the
      investors, incorporated by reference to the Registrant’s Current Report on
      Form 8-K filed on June 7, 2006.10.11
                  
                  Form
      of Warrant Agreement between the Registrant and Three Arch Partners,
      incorporated by reference to the Registrant’s Current Report on Form 8-K
      filed on June 7, 2006.10.12
                  
                  Form
      of Warrant Agreement between the Registrant and certain other investors,
      incorporated by reference to the Registrant’s Current Report on Form 8-K
      filed on June 7,
2006.
  49
 
 10.13
                    
                    Second
      Amendment to Loan Agreement and Security Agreement, dated October 31,
      2006, between the Registrant, the Subsidiaries and Silicon Valley Bank
      incorporated by reference to the Registrant’s Current Report on Form 8-K
      filed on November 3, 2006.10.14+
                    
                    Employment
      Agreement between the Registrant and John B. Rush, dated March 22, 2007,
      incorporated by reference to the Registrant’s Current Report on Form 8-K/A
      filed on December 7, 2007.10.15
                    
                    Third
      Amendment to Loan Agreement and Security Agreement, dated as of August 24,
      2007, between the Registrant, the Subsidiaries and Silicon Valley Bank,
      incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
      Report on Form 10-Q, filed on September 19, 2007.10.16+
                    
                    Summary
      of Employment Arrangement between the Registrant and Troy A. Barring,
      dated September 4, 2007, incorporated by reference to Item 5.02 of the
      Registrant’s Current Report on Form 8-K filed on September 10,
      2007.10.17
                    
                    Agreement
      among North American Scientific, Inc., NOMOS Corporation, and Best Medical
      International, Inc., dated as of September 11, 2007, incorporated by
      reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed
      on September 14, 2007.10.18
                    
                    Fourth
      Amendment to Loan Agreement and Security Agreement, dated as of September
      14, 2007, between the Registrant, the Subsidiaries and Silicon Valley
      Bank, incorporated by reference to Exhibit 10.3 to the Registrant’s
      Quarterly Report on Form 10-Q, filed on September 19,
  2007.10.19
                    
                    Fifth
      Amendment to Loan Agreement and Security Agreement, dated as of October 3,
      2007, between the Registrant, the Subsidiaries and Silicon Valley Bank,
      incorporated by reference to Exhibit 10.41 of the Registrant’s Annual
      Report on Form 10-K, filed January 29, 2008.10.20
                    
                    Warrant
      Agreement, dated as of September 21, 2007, between the Registrant, the
      Subsidiaries and Agility Capital LLC, incorporated by reference to Exhibit
      10.2 to the Registrant’s Current Report on Form 8-K filed on October 24,
      2007.10.21
                    
                    Sixth
      Amendment to Loan Agreement and Security Agreement, dated as of October
      29, 2007, between the Registrant, the Subsidiaries and Silicon Valley
      Bank, incorporated by reference to Exhibit 10.44 of the Registrant’s
      Annual Report on Form 10-K, filed January 29, 2008.10.22
                    
                    Loan
      Agreement and Subordinated Note, dated as of October 30, 2007, between the
      Registrant and John A. Friede, incorporated by reference to Exhibit 10.45
      of the Registrant’s Annual Report on Form 10-K, filed January 29,
      2008.10.23*
                    
                    Seventh
      Amendment to Loan Agreement and Security Agreement, dated as of November
      20, 2007, between the Registrant, the Subsidiaries and Silicon Valley
      Bank.10.24*
                    
                    Eighth
      Amendment to Loan Agreement and Security Agreement, dated as of December
      18, 2007, between the Registrant, the Subsidiaries and Silicon Valley
      Bank.10.25+
                    
                    Amendment
      No.1 to the North American Scientific, Inc. 2006 Stock Plan, incorporated
      by reference to Exhibit 10.1 of the Registrant’s Current Report on Form
      8-K filed on May 5, 2008.10.26
                    
                    Ninth
      Amendment to Loan Agreement and Security Agreement, dated as of May 28,
      2008, between the Registrant, the Subsidiaries and Silicon Valley Bank,
      incorporated by reference to Exhibit 10.1 of the Registrant’s Current
      Report on Form 8-K, filed June 16, 2008.10.27
                    
                    Form
      of Warrant to purchase common stock of the Registrant, incorporated by
      reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K,
      filed June 16, 2008.10.28+
                    
                    Offer
      Letter, dated June 26, 2008, between the Registrant and Brett L. Scott,
      incorporated by reference to Exhibit 10.1 to the Registrant’s Current
      Report on Form 8-K, filed August 13, 2008.10.29+
                    
                    Stock
      Option Agreement, dated August 11, 2008, between the Registrant and Brett
      L. Scott, incorporated by reference to Exhibit 10.2 to the Registrant’s
      Current Report on Form 8-K, filed August 13, 2008.10.30
                    
                    Tenth
      Amendment to Loan Agreement and Security Agreement, dated as of September
      11, 2008, between the Registrant, the Subsidiaries and Silicon Valley
      Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s
      Current Report on Form 8-K, filed August 15, 2008.10.31
                    
                    Eleventh
      Amendment to Loan Agreement and Security Agreement, dated as of October
      10, 2008, between the Registrant, the Subsidiaries and Silicon Valley
      Bank, incorporated by reference to Exhibit 10.1 of the Registrant’s
      Current Report on Form 8-K, filed October 15, 2008.21.1*
                    
                    Subsidiaries
      of the Registrant.23.1*
                    
                    Consent
      of SingerLewak 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
  50





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


North
American Scientific, Inc.


Chatsworth,
California





We have
audited the accompanying consolidated balance sheets of North American
Scientific, Inc. and subsidiaries (collectively, the “Company”) as of October
31, 2008 and 2007, and the related consolidated statements of operations,
stockholders’ equity (deficit) and cash flows for each of the three years in the
period ended October 31, 2008. These financial statements 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2008, in conformity with U.S. generally accepted accounting
principles.





As
discussed in Note 12 to the financial statements, the Company has adopted the
provisions of Statement Financial Accounting Standards Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – as Interpretation of FASB
Statement No. 109 on November 1, 2007.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and negative operating cash flows. This raises substantial doubt about the
Company's ability to continue as a going concern.  Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





We were
not engaged to examine management’s assertion about the effectiveness of North
American Scientific, Inc.’s internal control over financial reporting as of
October 31, 2008 included in the accompanying Management’s Report on Assessment
of Internal Control over Financial Reporting and, accordingly, we do not express
an opinion thereon.





SINGER
LEWAK LLP





Los
Angeles, California


January
29, 2009





51




NORTH
AMERICAN SCIENTIFIC, INC.


Consolidated
Balance Sheets


(in
thousands, except share data)





October
      31,2008
                                                
                                                
                                                2007AssetsCurrent
      assetsCash
      and cash equivalents
                                                
                                                $
                                                2,256
                                                
                                                
                                                $
                                                609Accounts
      receivable, net of reserves
                                                
                                                
                                                1,907
                                                
                                                
                                                
                                                2,296Inventories,
      net of reserves
                                                
                                                
                                                796
                                                
                                                
                                                
                                                984Prepaid
      expenses and other current assets
                                                
                                                
                                                943
                                                
                                                
                                                
                                                724Receivable
      from sale of assets (Note 2)
                                                
                                                
                                                2,190
                                                
                                                
                                                
                                                —Assets
      of discontinued operations
                                                
                                                
                                                —
                                                
                                                
                                                
                                                636Total
      current assets
                                                
                                                
                                                8,092
                                                
                                                
                                                
                                                5,249Equipment
      and leasehold improvements, net
                                                
                                                
                                                1,412
                                                
                                                
                                                
                                                824Intangible
      assets, net
                                                
                                                
                                                98
                                                
                                                
                                                
                                                103Other
      assets
                                                
                                                
                                                34
                                                
                                                
                                                
                                                —Total
      assets
                                                
                                                $
                                                9,636
                                                
                                                
                                                $
                                                6,176Liabilities
      and Stockholders' Equity (Deficit)Current
      liabilitiesLines
      of credit, net of discount
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                3,241Short-term
      portion of long-term debt, net of discount
                                                
                                                
                                                376
                                                
                                                
                                                
                                                —Warrant
      derivative
                                                
                                                
                                                —
                                                
                                                
                                                
                                                173Accounts
      payable
                                                
                                                
                                                1,732
                                                
                                                
                                                
                                                2,564Accrued
      expenses
                                                
                                                
                                                3,152
                                                
                                                
                                                
                                                3,110Total
      current liabilities
                                                
                                                
                                                5,260
                                                
                                                
                                                
                                                9,088Long-term
      debt, net of discount
                                                
                                                
                                                988
                                                
                                                
                                                
                                                —Long-term
      severance liability
                                                
                                                
                                                569
                                                
                                                
                                                
                                                —Total
      liabilities
                                                
                                                
                                                6,817
                                                
                                                
                                                
                                                9,088Commitments
      and contingencies (Note 14)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Stockholders'
      equity (deficit)Preferred
      stock, $0.01 par value, 2,000,000 shares authorized; no shares
      issued
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Common
      stock, $0.01 par value, 150,000,000 (2008) and 100,000,000 (2007) shares
      authorized; 18,561,676 (2008) and 5,920,270 (2007) shares issued; and
      18,520,472 (2008) and 5,879,066 (2007) shares outstanding
                                                
                                                
                                                185
                                                
                                                
                                                
                                                59Additional
      paid-in capital
                                                
                                                
                                                161,732
                                                
                                                
                                                
                                                145,774Treasury
      stock, at cost – 41,204 common shares (2008 and 2007)
                                                
                                                
                                                (227
                                                )
                                                
                                                
                                                (227
                                                )Accumulated
      deficit
                                                
                                                
                                                (158,871
                                                )
                                                
                                                
                                                (148,518
                                                )Total
      stockholders' equity (deficit)
                                                
                                                
                                                2,819
                                                
                                                
                                                
                                                (2,912
                                                )Total
      liabilities and stockholders' equity (deficit)
                                                
                                                $
                                                9,636
                                                
                                                
                                                $
                                                6,176




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




52




NORTH
AMERICAN SCIENTIFIC, INC.


Consolidated
Statements of Operations


(in
thousands, except share and per share data)




For
      the Years Ended October 31,2008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2006Net
      revenue
                                                      
                                                      $
                                                      13,927
                                                      
                                                      
                                                      $
                                                      11,428
                                                      
                                                      
                                                      $
                                                      9,251Cost
      of revenue
                                                      
                                                      
                                                      9,328
                                                      
                                                      
                                                      
                                                      8,532
                                                      
                                                      
                                                      
                                                      7,219Gross
      profit
                                                      
                                                      
                                                      4,599
                                                      
                                                      
                                                      
                                                      2,896
                                                      
                                                      
                                                      
                                                      2,032Operating
      expenses:Selling
      expenses
                                                      
                                                      
                                                      4,556
                                                      
                                                      
                                                      
                                                      3,669
                                                      
                                                      
                                                      
                                                      2,731General
      and administrative expenses
                                                      
                                                      
                                                      9,519
                                                      
                                                      
                                                      
                                                      8,944
                                                      
                                                      
                                                      
                                                      8,951Research
      and development
                                                      
                                                      
                                                      3,801
                                                      
                                                      
                                                      
                                                      1,780
                                                      
                                                      
                                                      
                                                      1,160Severance
                                                      
                                                      
                                                      1,411
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Total
      operating expenses
                                                      
                                                      
                                                      19,287
                                                      
                                                      
                                                      
                                                      14,393
                                                      
                                                      
                                                      
                                                      12,842Loss
      from operations
                                                      
                                                      
                                                      (14,688
                                                      )
                                                      
                                                      
                                                      (11,497
                                                      )
                                                      
                                                      
                                                      (10,810
                                                      )Interest
      expense
                                                      
                                                      
                                                      (1,215
                                                      )
                                                      
                                                      
                                                      (636
                                                      )
                                                      
                                                      
                                                      (401
                                                      )Adjustments
      to fair value of derivatives
                                                      
                                                      
                                                      (311
                                                      )
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Interest
      and other income, net
                                                      
                                                      
                                                      50
                                                      
                                                      
                                                      
                                                      31
                                                      
                                                      
                                                      
                                                      282Loss
      before provision for income taxes
                                                      
                                                      
                                                      (16,164
                                                      )
                                                      
                                                      
                                                      (12,102
                                                      )
                                                      
                                                      
                                                      (10,929
                                                      )Provision
      for income taxes
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Loss
      from continuing operations
                                                      
                                                      
                                                      (16,164
                                                      )
                                                      
                                                      
                                                      (12,102
                                                      )
                                                      
                                                      
                                                      (10,929
                                                      )Income
      (loss) from discontinued operations, net of income tax
      effect (including gain on disposal of $4,502 in 2008 and loss on
      disposal of $7,107 in 2007)
                                                      
                                                      
                                                      5,219
                                                      
                                                      
                                                      
                                                      (8,896
                                                      )
                                                      
                                                      
                                                      (6,201
                                                      )Net
      loss
                                                      
                                                      $
                                                      (10,945
                                                      )
                                                      
                                                      $
                                                      (20,998
                                                      )
                                                      
                                                      $
                                                      (17,130
                                                      )Basic
      and diluted loss per share:Continuing
      operations
                                                      
                                                      $
                                                      (1.02
                                                      )
                                                      
                                                      $
                                                      (2.06
                                                      )
                                                      
                                                      $
                                                      (2.49
                                                      )Discontinued
      operations
                                                      
                                                      
                                                      0.33
                                                      
                                                      
                                                      
                                                      (1.52
                                                      )
                                                      
                                                      
                                                      (1.41
                                                      )Net
      loss per share
                                                      
                                                      $
                                                      (0.69
                                                      )
                                                      
                                                      $
                                                      (3.58
                                                      )
                                                      
                                                      $
                                                      (3.90
                                                      )Weighted
      average number of common shares outstanding -Basic and
      diluted
                                                      
                                                      
                                                      15,778,912
                                                      
                                                      
                                                      
                                                      5,868,854
                                                      
                                                      
                                                      
                                                      4,391,313





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




53




NORTH
AMERICAN SCIENTIFIC, INC.


Consolidated
Statements of Changes in Stockholders' Equity (Deficit)


(in
thousands, except share data)




Additional
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            TotalCommon
      Stock
                                            
                                            
                                            Paid-in
                                            
                                            
                                            Treasury
      Stock
                                            
                                            
                                            Accumulated
                                            
                                            
                                            Stockholders'Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Capital
                                            
                                            
                                            Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Deficit
                                            
                                            
                                            Equity
      (Deficit)Balances
      at October 31, 2005
                                            
                                            
                                            3,411,334
                                            
                                            
                                            $
                                            34
                                            
                                            
                                            $
                                            121,286
                                            
                                            
                                            
                                            21,605
                                            
                                            
                                            $
                                            (129
                                            )
                                            
                                            $
                                            (110,390
                                            )
                                            
                                            $
                                            10,801Common
      stock issued upon exercise of stock options
                                            
                                            
                                            437
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            2
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            2Common
      stock issued under employee stock purchase plan
                                            
                                            
                                            19,296
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            163
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            163Common
      stock issued  in  private placement net of costs of
      $2,035,000
                                            
                                            
                                            2,458,387
                                            
                                            
                                            
                                            25
                                            
                                            
                                            
                                            21,909
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            21,934Purchase
      of treasury stock
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            620
                                            
                                            
                                            
                                            (4
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (4
                                            )Issuance
      of warrants
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            526
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            526Stock
      compensation expense
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            896
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            896Net
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (17,130
                                            )
                                            
                                            
                                            (17,130
                                            )Balance
      at October 31, 2006
                                            
                                            
                                            5,889,454
                                            
                                            
                                            
                                            59
                                            
                                            
                                            
                                            144,782
                                            
                                            
                                            
                                            22,225
                                            
                                            
                                            
                                            (133
                                            )
                                            
                                            
                                            (127,520
                                            )
                                            
                                            
                                            17,188Common
      stock issued under employee stock purchase plan
                                            
                                            
                                            30,816
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            139
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            139Purchase
      of treasury stock
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            18,979
                                            
                                            
                                            
                                            (94
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (94
                                            )Issuance
      of warrants
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            174
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            174Stock
      compensation expense
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            679
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            679Net
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (20,998
                                            )
                                            
                                            
                                            (20,998
                                            )Balances
      at October 31, 2007
                                            
                                            
                                            5,920,270
                                            
                                            
                                            
                                            59
                                            
                                            
                                            
                                            145,774
                                            
                                            
                                            
                                            41,204
                                            
                                            
                                            
                                            (227
                                            )
                                            
                                            
                                            (148,518
                                            )
                                            
                                            
                                            (2,912
                                            )Adoption
      on FIN48
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            592
                                            
                                            
                                            
                                            592Common
      stock issued in a private placement, net of costs of
      $1,731,000
                                            
                                            
                                            12,601,628
                                            
                                            
                                            
                                            126
                                            
                                            
                                            
                                            13,643
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            13,769Common
      stock issued under employee stock purchase plan
                                            
                                            
                                            21,455
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            21
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            21Issuance
      of warrants (including $645 transferred from liability
      derivative)
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,434
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,434Stock
      compensation expense
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            872
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            872Exchange
      of NOMOS shares
                                            
                                            
                                            18,225
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Fractional
      shares from  the reverse stock split, net of costs of
      $12
                                            
                                            
                                            98
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (12
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (12
                                            )Net
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (10,945
                                            )
                                            
                                            
                                            (10,945
                                            )Balances
      at October 31, 2008
                                            
                                            
                                            18,561,676
                                            
                                            
                                            $
                                            185
                                            
                                            
                                            $
                                            161,732
                                            
                                            
                                            
                                            41,204
                                            
                                            
                                            $
                                            (227
                                            )
                                            
                                            $
                                            (158,871
                                            )
                                            
                                            $
                                            2,819




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




54




NORTH
AMERICAN SCIENTIFIC, INC.


Consolidated
Statements of Cash Flows


(in
thousands)




For
      the Years Ended October 31,2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006Cash
      flows from operating activities:Net
      loss
                                              
                                              $
                                              (10,945
                                              )
                                              
                                              $
                                              (20,998
                                              )
                                              
                                              $
                                              (17,130
                                              )Income
      (loss) from discontinued operations
                                              
                                              
                                              5,219
                                              
                                              
                                              
                                              (8,896
                                              )
                                              
                                              
                                              (6,201
                                              )Net
      loss from continuing operations
                                              
                                              
                                              (16,164
                                              )
                                              
                                              
                                              (12,102
                                              )
                                              
                                              
                                              (10,929
                                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                              
                                              
                                              560
                                              
                                              
                                              
                                              570
                                              
                                              
                                              
                                              587Amortization
      of warrants and loan origination fees
                                              
                                              
                                              934
                                              
                                              
                                              
                                              606
                                              
                                              
                                              
                                              236Change
      in fair value of warrant derivative liability
                                              
                                              
                                              311
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Provision
      for doubtful accounts
                                              
                                              
                                              22
                                              
                                              
                                              
                                              (163
                                              )
                                              
                                              
                                              218Provision
      for inventory adjustments
                                              
                                              
                                              (32
                                              )
                                              
                                              
                                              191
                                              
                                              
                                              
                                              (88
                                              )Share-based
      compensation expense
                                              
                                              
                                              872
                                              
                                              
                                              
                                              679
                                              
                                              
                                              
                                              896Loss
      on sale of equipment
                                              
                                              
                                              39
                                              
                                              
                                              
                                              24
                                              
                                              
                                              
                                              —Changes
      in assets and liabilities, net of acquisitions and discontinued
      operations:Accounts
      receivable
                                              
                                              
                                              7
                                              
                                              
                                              
                                              398
                                              
                                              
                                              
                                              (1,001
                                              )Inventories
                                              
                                              
                                              220
                                              
                                              
                                              
                                              (377
                                              )
                                              
                                              
                                              (376
                                              )Prepaid
      expenses and other current assets
                                              
                                              
                                              (300
                                              )
                                              
                                              
                                              (189
                                              )
                                              
                                              
                                              (432
                                              )Accounts
      payable
                                              
                                              
                                              (157
                                              )
                                              
                                              
                                              157
                                              
                                              
                                              
                                              242Accrued
      expenses
                                              
                                              
                                              577
                                              
                                              
                                              
                                              (417
                                              )
                                              
                                              
                                              (417
                                              )Long-term
      severance
                                              
                                              
                                              569
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Net
      cash used in continuing operations
                                              
                                              
                                              (12,542
                                              )
                                              
                                              
                                              (10,623
                                              )
                                              
                                              
                                              (11,064
                                              )Net
      cash provided by (used in) discontinued operations (including $2,190
      change in receivable from sale of assets)
                                              
                                              
                                              527
                                              
                                              
                                              
                                              (1,695
                                              )
                                              
                                              
                                              (4,857
                                              )Net
      cash used in operating activities
                                              
                                              
                                              (12,015
                                              )
                                              
                                              
                                              (12,318
                                              )
                                              
                                              
                                              (15,921
                                              )Cash
      flows from investing activities:Proceeds
      from sale of marketable securities
                                              
                                              
                                              —
                                              
                                              
                                              
                                              8,420
                                              
                                              
                                              
                                              2,573Proceeds
      from sale of fixed assets
                                              
                                              
                                              —
                                              
                                              
                                              
                                              15
                                              
                                              
                                              
                                              —Purchases
      of marketable securities
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (10,000
                                              )Patent
      application fees
                                              
                                              
                                              (22
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Capital
      expenditures
                                              
                                              
                                              (1,169
                                              )
                                              
                                              
                                              (171
                                              )
                                              
                                              
                                              (380
                                              )Net
      cash provided by (used in) continuing operations
                                              
                                              
                                              (1,191
                                              )
                                              
                                              
                                              8,264
                                              
                                              
                                              
                                              (7,807
                                              )Net
      cash provided by (used in) discontinued operations
                                              
                                              
                                              2,954
                                              
                                              
                                              
                                              392
                                              
                                              
                                              
                                              (94
                                              )Net
      cash provided by (used in) investing activities
                                              
                                              
                                              1,763
                                              
                                              
                                              
                                              8,656
                                              
                                              
                                              
                                              (7,901
                                              )Cash
      flows from financing activities:Net
      proceeds from (repayment of) line of credit
                                              
                                              
                                              (3,323
                                              )
                                              
                                              
                                              3,323
                                              
                                              
                                              
                                              —Net
      proceeds from long-term borrowings
                                              
                                              
                                              1,500
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Fees
      paid to effect reverse stock split
                                              
                                              
                                              (12
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Loan
      origination fees paid
                                              
                                              
                                              (56
                                              )
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Net
      proceeds from sale of common stock
                                              
                                              
                                              13,769
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              21,934Net
      proceeds from exercise of stock options and stock purchase
      plan
                                              
                                              
                                              21
                                              
                                              
                                              
                                              139
                                              
                                              
                                              
                                              165Purchase
      of stock for treasury
                                              
                                              
                                              —
                                              
                                              
                                              
                                              (94
                                              )
                                              
                                              
                                              (4
                                              )Net
      cash provided by (used in) continuing operations
                                              
                                              
                                              11,899
                                              
                                              
                                              
                                              3,368
                                              
                                              
                                              
                                              22,095Net
      cash provided by (used in) discontinued operations
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Net
      cash provided by financing activities
                                              
                                              
                                              11,899
                                              
                                              
                                              
                                              3,368
                                              
                                              
                                              
                                              22,095Net
      increase (decrease) in cash and cash equivalents
                                              
                                              
                                              1,647
                                              
                                              
                                              
                                              (294
                                              )
                                              
                                              
                                              (1,727
                                              )Cash
      and cash equivalents at beginning of year
                                              
                                              
                                              609
                                              
                                              
                                              
                                              903
                                              
                                              
                                              
                                              2,630Cash
      and cash equivalents at end of year
                                              
                                              $
                                              2,256
                                              
                                              
                                              $
                                              609
                                              
                                              
                                              $
                                              903





Supplemental
disclosure:


In the
fiscal years ended October 31, 2008, 2007 and 2006, the Company issued warrants
with an estimated fair value totaling $1,434, $347 and $526, respectively, to a
bank and a debt provider as consideration for entering into and amending loan
and security agreements.





In the
fiscal years ended October 31, 2008, 2007 and 2006, the Company paid interest
expense of $144, $68 and $164, respectively.  In the fiscal years
ended October 31, 2008, 2007 and 2006, the Company paid $4, $13 and $21,
respectively, to Federal and state taxing authorities for income
taxes.





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





55




NORTH
AMERICAN SCIENTIFIC, INC.


Notes
to Consolidated Financial Statements


(in
thousands, except share and per share data)





NOTE
1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Business





North
American Scientific, Inc. (the "Company"), a Delaware corporation, designs,
develops and manufactures and sells radioisotopic products including
brachytherapy seeds and accessories used in the treatment of cancer.  The
Company’s non-therapeutic product line, which were used in medical,
environmental, research and industrial applications, was discontinued in
September 2008. The Company’s NOMOS operations (“NOMOS”), which developed and
marketed products used during external beam radiation therapy for the treatment
of cancer, was discontinued in September 2007. (See Note 2).





Management’s
Plans





The
Company has incurred net losses of $10,945, $20,998 and $17,130 for the years
ended October 31, 2008, 2007 and 2006, respectively, and has used cash in
operations of $12,015, $12,318 and $15,921 for the years ended October 31, 2008,
2007 and 2006, respectively.  As of October 31, 2008, the Company had an
accumulated deficit of $158,871, cash and cash equivalents of $2,256, working
capital of $2,832, and $1,500 of interest-bearing debt.





The
Company has incurred significant net losses since inception, and has relied on
its ability to obtain financing, which to date has been through the sale of
common shares and the issuance of promissory notes.  Management
expects operating losses and negative cash flows to continue for the forseeable
future as the Company incurs additional costs and expenses related to the
continued development of its products, and obtaining FDA approval for new
indications. These factors raise a substantial doubt about the Company’s ability
to continue as a going concern. The accompanying financial statements have been
prepared on a going concern basis that contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
financial statements do not include adjustments relating to the recoverability
of recorded asset amounts or the amounts or classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company’s ability to meet its obligations in the ordinary course of business
is dependent upon its ability to establish profitable operations, or to secure
other sources of financing to fund operations. Management intends to raise
working capital through debt or additional equity financing. However, there can
be no assurance such financing can be successfully completed on terms acceptable
to the Company.





Principles
of Consolidation





The
consolidated financial statements include the accounts of North American
Scientific, Inc., a Delaware corporation, and its subsidiaries, North American
Scientific, Inc., a California corporation, Disc Ops Corporation (formally
“NOMOS Corporation”) and Theseus Corporation. All significant inter-company
accounts and transactions have been eliminated in consolidation.





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. Significant areas for which
management evaluates its estimates include those related to revenue recognition,
allowance for doubtful accounts, inventory reserves, valuation of deferred
income taxes, tax contingencies, long-lived and intangible assets and
share-based compensation. Actual results could differ from those
amounts.




56




Cash
and Cash Equivalents





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





Inventories





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





The
Company's products which contain radiation 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, inventories,
accounts payable, and accrued expenses approximate fair value because of their
short maturities.





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 the existing accounts receivable. The Company
determines the allowance based on historical write-off experience, the age of
the customer receivable balance and customer economic data. The Company reviews
its allowance for doubtful accounts monthly. Past due balances over 60 days and
over a specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance when the Company believes that it
is probable the receivable will not be recovered. The Company does not have any
off-balance-sheet credit exposure related to its customers.





Derivative
Liabilities




The
Company issued warrants in connection with its borrowing activities that
included an uncertain purchase price. The Company evaluated the warrants under
SFAS No. 133 – Accounting for Derivative Instruments and Hedging Activities and
Emerging Issues Task Force Issue 00-19 – Accounting for Derivative Financial
Indexed to, and Potentially Settled in, a Company’s Own Stock  and
determined the warrants should be accounted for as derivative liabilities at
estimated fair value, and marked-to-market at subsequent measurement dates. The
Company used the Black-Scholes option-pricing model to determine the fair value
of the derivative liabilities at each measurement date. Key assumptions of the
Black-Scholes option-pricing model include applicable volatility rates,
risk-free interest rates and the instruments’ expected remaining life. The
fluctuations in estimated fair value are recorded as Adjustments to Fair Value
of Derivatives in the Statement of Operations. On December 12, 2007, the
uncertain purchase price became certain, and the fair value of the derivatives
were reclassed  from liabilities to equity.




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




57




Intangible
Assets





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





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





Long-Lived
Assets





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





Included
in the Loss from Discontinued Operations for the year ended October 31, 2007 is
a $6,654 impairment charge and $464 in closing costs relating the disposition of
certain NOMOS assets and liabilities. The impairment charge includes $5,479
charge for impairment of NOMOS long-lived assets and a $1,175 charge for the
decrease in the carrying value of NOMOS inventory.





Revenue
Recognition





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





Shipping
and Handling





Charges
to customers for shipping and handling are included as a component of cost of
revenue.  Shipping and handling costs are expensed as incurred and
recorded as a component of cost of revenue.





Advertising





Advertising
costs are expensed as incurred.  Included in sales and marketing
expense for the years ended October 31, 2008, 2007 and 2006 are $73, $143, and
$75, respectively.





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.




58




Stock-based
Compensation





The
Company accounts for its share-based payments under the guidance set forth in
SFAS No. 123(R), “Share-Based
Payment”, 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. The Company also applies the guidance found in SAB No. 107
with respect to share-based payments and SFAS No. 123(R).





The
Company adopted SFAS 123(R) using the modified prospective transition method as
of and for the fiscal year ended October 31, 2006.  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 Consolidated Statement of
Operations includes compensation expense for share-based payment awards granted
or modified since the beginning of the fiscal year ended October 31,
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.





On March
16, 2006, the Company granted a total of 130,100 stock options to its employees
that contain certain market conditions (“2006 Premium Price Awards”) The 2006
Premium Price Awards are, to the extent provided by law, incentive stock options
that have an exercise price of $16.75 per share, which is equal to 159% of the
fair market value of the Company’s common stock on the grant date. The 2006
Premium Price Awards also include a condition that provides that such stock
options will only vest if the closing price of the Company's common stock is
equal to or greater than $16.75 on each day over any consecutive four month
period beginning on any date after the date of grant and ending no later than
the third anniversary of the date of grant.  If the market condition
is not satisfied by the third anniversary of the date of grant, the 2006 Premium
Price Awards will not vest.  Subject to the attainment of the market
condition by the Company, the 2006 Premium Price Awards will vest, if at all, in
equal annual installments over a four year period beginning on the second
anniversary of the grant date of March 16, 2006.  The 2006 Premium
Price Awards had a term of 8 years from the date of grant. The 2006 Premium
Price Awards, share-based compensation expense has been estimated using a 46%
forfeiture rate.





On
February 15, 2008, the Company’s Board of Directors approved, subject to the
approval of the Company’s stockholders, a plan to reprice certain existing
employee stock options at $2.05 per share, the closing price of the Company’s
common stock on February 15, 2008. The 2006 Premium Price Awards were re-priced
to $3.25 per share, which is equal to 159% of the re-priced fair value of the
Company’s common stock. In addition, the Company’s Board of Directors also
approved, subject to the approval of the Company’s stockholders, a plan to
exchange options held by directors of the Company for a one-time stock option
grant at $2.10 per share, the closing price of the Company’s stock on February
13, 2008. The Company’s stockholders approved both the employee stock option
re-pricing plan and the director exchange plan at the annual meeting held on
April 29, 2008. (See Note 11 – Stockholders’ Equity for further
discussion). The Company recorded the re-pricing of the employee stock options
and the exchange of the directors’ stock options in accordance the guidance in
SFAS 123(R), Paragraph 51 “Modifications of Awards of Equity Instruments.”
Pursuant to this guidance, the measurement date can precede the stockholders’
approval date when stockholder approval is considered to be a formality. The
Company set the measurement date at the Board of Director’s approval date. The
re-pricing exercise of employee stock options generated $332 incremental
share-based compensation for un-vested and re-priced stock options, which is
being recognized over the vesting period of the new employee stock options. The
exchange of options held by directors of the Company generated $166 incremental
share-based compensation for un-vested and exchanged options, which is being
recognized over the three-year vesting period of the newly issued director stock
options.




59





Share-based
compensation expense related to stock options and employee stock purchases,
including the amortized portion of the incremental share-based compensation for
the re-priced employee stock options and the exchanged director stock options
was $872, $679 and $896 for the fiscal years ended October 31, 2008, 2007 and
2006, respectively, and was recorded in the financial statements as a component
of general and administrative expense.





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, the estimated fair values of the options are
amortized over the options’ vesting periods.





Reverse
Stock Split





On April
29, 2008, the Company’s stockholders approved a 1 share for 5 share reverse
split to regain compliance with the NASDAQ minimum bid price rule. The reverse
split became effective on May 1, 2008, at which time the Company began trading
under its new stock symbol “NASM”. All share and per share information in the
consolidated financial statements and notes have been restated to reflect the
effect of the stock split for all periods presented. The reverse stock split had
no effect on the par value of the Company’s common stock or the total authorized
shares.





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.


Stock
options to purchase 2,072,470, 791,862 and 583,586 common shares for the years
ended October 31, 2008, 2007 and 2006, respectively, and stock warrants to
purchase 1,876,994, 473,659 and 118,944 common shares for the years ended
October 31, 2008, 2007 and 2006 were not included in the computation of diluted
loss per share for those years because their effect would have been
anti-dilutive.





Income
Taxes and Uncertain Tax Positions





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The Company has recorded 100% valuation allowance
against its deferred tax assets until such time that it becomes more likely than
not that the Company will realize the benefits of its deferred tax assets. On
November 1, 2007, the Company implemented Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109 ,”
(FIN 48). See Note 12 - Income Taxes.




60





Diversification
of Credit Risk





The
Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents 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, 2008, $1,969 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, 2008 and 2007, there was one customer and two customers,
respectively that made up more than 10% of the accounts receivable and one
customer and two customers, respectively, which generated more than 10% of sales
for the years ended October 31, 2008 and 2007. No customers generated more than
10% of sales for the year ended October 31, 2006.





The
Company relies on certain companies as the sole source of various materials in
its manufacturing process. Any extended interruption in the supply of these
materials could result in the failure to meet customer demand and materially
impact future operating results. As of October 31, 2008 and 2007, the purchases
from one of the Company’s vendors represented more than 10% of total purchases
and the balance owed to that vendor at October 31, 2008 and 2007 represented
more than 10% of total accounts payable. At October 31, 2008, there was one
other vendor who represented more than 10% of total accounts
payable.





Reclassifications





Certain
reclassifications have been made to prior year financial statements to conform
to current year presentation.





Recent Accounting
Pronouncements





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. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair value measurements,
and does not require any new fair value measurements. The application of SFAS
No. 157, however, may change current practice within an organization.
SFAS 157 is effective for fiscal years beginning after November 15,
2007. On February 12, 2008, the FASB issued FASB Staff Position FSP 157-2
which defers the effective date of SFAS No. 157 for one year for
non-financial assets and non-financial liabilities that are not recognized or
disclosed at fair value in the financial statements on a recurring basis. On
October 10, 2008, FASB issued FASB Staff Position FSP 157-3 which clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. We do
not believe that SFAS No. 157 will have a material impact on our financial
position, results of operations or cash flows.





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




61





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008.The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition.





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51" (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent's ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated SFAS 160   also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners SFAS 160 is effective for fiscal years
beginning after December 15, 2008.The Company is currently evaluating the
potential impact, if any, of the adoption of   SFAS 160 on its consolidated
results of operations and financial condition.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. Entities are
required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. This standard is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company is currently evaluating the impact, if
any, SFAS No. 161 will have on its consolidated financial position, results
of operations or cash flows.




In March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards, (“EITF Issue 06-11”).
Beginning January 1, 2008, the Company adopted EITF Issue 06-11. In
accordance with the EITF Issue, the Company records a credit to additional
paid-in capital for tax deductions resulting from a dividend payment on
non-vested share awards the Company expects to vest. The adoption of EITF Issue
06-11 did not have any impact on the Company’s consolidated financial
statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy). This Statement is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles”. The Company currently adheres to the hierarchy of GAAP as presented
in SFAS No. 162, and does not expect its adoption will have a material impact on
its consolidated results of operations and financial condition.





In June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (“EITF 03-6-1”). EITF 03-6-1 provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method in accordance with SFAS 128, Earnings per Share. EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. Upon adoption, the
Company is required to retrospectively adjust its earnings per share data to
conform with the provisions in EITF 03-6-1. Early application of EITF 03-6-1 is
prohibited. The Company is currently evaluating the impact EITF 03-6-1 will have
on its consolidated financial statements.




62


NOTE
2 - DISCONTINUED OPERATIONS
 
 Non-Therapeutic
Product Line
 
 On August
29, 2008, the Company entered into an agreement relating to the sale of its
non-therapeutic product line to Eckert & Ziegler Isotope Products, Inc.
(“EZIP”). The sale was completed on September 5, 2008. The Company expects its
departure from the non-therapeutic business will allow it to concentrate on its
core business of brachytherapy products and to provide necessary working
capital. The agreement for the sale transferred inventory, certain fixed assets
and intellectual property with a carrying value of $605 to EZIP in return for a
purchase price of up to $6,000, which was paid $3,000 at closing and a
promissory note for $2,000, due in January 2009. An additional $1,000 may be
paid to the Company in September 2009, upon the achievement of certain
sales-based milestones measured during the 12 month period beginning at the date
of the sale. Based on available evidence at October 31, 2008, EZIP has achieved
15.1% of the target sales, and as a result, the Company has recorded $151 as
part of the $4,502 gain on disposition of its non-therapeutic product line for
the year ended October 31, 2008. The Company believes the collection of the
sales-based milestone receivable is probable since the sales agreement requires
payment by EZIP for percentage milestones achieved. The breakdown of the gain on
disposition is as follows:
 
 Cash
      received at closing
                          
                          $
                          3,000Promissory
      note due January 2009
                          
                          
                          2,000Milestone
      receivable due September 2009
                          
                          
                          151Purchase
      price as recorded
                          
                          $
                          5,151Less:Book
      Value of assets sold
                          
                          
                          605Expenses
      incurred
                          
                          
                          44Gain
      on disposition
                          
                          $
                          4,502
 
 The gain
on sale of disposal is recorded as an element of income (loss) from discontinued
operations for the year ended October 31, 2008. The balance owed on the
promissory note due January 2009 and the milestone receivable, along with $39
arising from a transitional arrangement for EZIP to use the Company’s
facility and computer support through October 31, 2008, are recorded as a
Receivable from Sale of Assets on the Company's Consolidated Balance Sheet at
October 31, 2008. The promissory note was paid in full in January
2009.
 
 There
were no assets held for sale at October 31, 2008. Assets of discontinued
operations on the Company’s Consolidated Balance Sheets consist of the following
at October 31, 2007.
  Inventory
                          
                          $
                          561Fixed
      Assets, net of accumulated depreciation of $385
                          
                          
                          68Intellectual
      property, net of accumulated amortization of $5
                          
                          
                          7$
                          636
 
 63
  The
assets of discontinued operations are recorded at the lesser of cost or net
realizable value. No significant changes occurred in their valuation during
2008, and the Company determined that there was no impairment to their carrying
value prior to the sale.
 
 NOMOS
 
 On August
3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology
business (“NOMOS”), which develops and markets IMRT/IGRT products used during
external beam radiation therapy for the treatment of cancer. The Company expects
that the divestiture of NOMOS will allow it to better utilize financial
resources to benefit the marketing and development of innovative brachytherapy
products for the treatment of cancer.  The Company executed a purchase
and sale agreement with Best Medical International, Inc. (“Best”) to purchase
certain assets and to assume certain liabilities of NOMOS, with a carrying value
of $489 at September 17, 2007 for $500. The Company incurred $464 in legal and
other closing costs in connection with the sale. In connection with the
divestiture of NOMOS, the Company determined that the carrying value of the
NOMOS assets held for sale at July 31, 2007 exceeded their fair value, as
determined by estimated future cash flows, and therefore, recorded a $6,654
charge for the impairment of its net assets. The sale was completed on September
17, 2007. These amounts have been recorded as part of the loss from discontinued
operations for the year ended October 31, 2007.
 
 At
October 31, 2008 and 2007, the Company has included in its Accounts Payable and
Accrued Liabilities on its Balance Sheet $422 and $1,073, respectively, of
retained obligations to its vendors, customers and former employees of the NOMOS
operation, to be paid in accordance with their terms.
 
 THESEUS
 
 In September 2004, the Company
discontinued its Theseus Operation which had been engaged in the research and
development of a proprietary radiopharmaceutical agent (referred to as
“Hynic-Annexin V”) since its acquisition in October 2000. As a result of the
shut-down, the Company has presented the Theseus operation as a discontinued
operation in the accompanying financial statements.  For the fiscal
year ended October 31, 2006, the Company recorded $253 in income related to that
discontinued operation as a result of changes in its estimated costs to shut
down the operations of Theseus and the subsequent write off of the remaining
accounts. There were no revenues relating to the Theseus discontinued operations
for the years ended October 31, 2008, 2007 or 2006.
  Summarized
statement of earnings data for discontinued operations for the Fiscal Years
ended October 31 (in thousands):
  2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2006Net
      revenue:Non-Therapeutic
      Product Line
                                                    
                                                    $
                                                    3,028
                                                    
                                                    
                                                    $
                                                    3,889
                                                    
                                                    
                                                    $
                                                    3,343NOMOS
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    10,309
                                                    
                                                    
                                                    
                                                    16,394$
                                                    3,028
                                                    
                                                    
                                                    $
                                                    14,198
                                                    
                                                    
                                                    $
                                                    19,737Income
      (loss) from discontinued operations before income tax
    benefit:Gain
      (loss) on disposal:Non-Therapeutic
      Product Line
                                                    
                                                    $
                                                    4,502
                                                    
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    —NOMOS
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (7,107
                                                    )
                                                    
                                                    
                                                    —Discontinued
      operations:Non-Therapeutic
      Product Line
                                                    
                                                    
                                                    881
                                                    
                                                    
                                                    
                                                    1,557
                                                    
                                                    
                                                    
                                                    1,484NOMOS
                                                    
                                                    
                                                    (164
                                                    )
                                                    
                                                    
                                                    (3,346
                                                    )
                                                    
                                                    
                                                    (7,938
                                                    )Theseus
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    253Income
      tax benefit, net of reserve
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —Income
      (loss) from discontinued operations
                                                    
                                                    $
                                                    5,219
                                                    
                                                    
                                                    $
                                                    (8,896
                                                    )
                                                    
                                                    $
                                                    (6,201
                                                    )Income
      (loss) from discontinued operations, per share
                                                    
                                                    $
                                                    0.33
                                                    
                                                    
                                                    $
                                                    (1.52
                                                    )
                                                    
                                                    $
                                                    (1.41
                                                    )
  64
  NOTE
3—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 its existing accounts receivable. The Company
determines the allowance based on historical write-off experience, age of the
customer account and customer economic data, and reviews the 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 its customers.
 
 Accounts
receivable consist of the following (in thousands):
 October 31,2008
                                        
                                        
                                        2007Accounts
      receivable – trade
                                        
                                        $
                                        2,042
                                        
                                        
                                        $
                                        2,475Less:
      allowance for doubtful accounts
                                        
                                        
                                        (135
                                        )
                                        
                                        
                                        (179
                                        )$
                                        1,907
                                        
                                        
                                        $
                                        2,296
 
 The
activity in the allowance for doubtful accounts is as follows (in
thousands):
  Year
      Ended October 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Balance,
      beginning of year
                                    
                                    $
                                    179
                                    
                                    
                                    $
                                    506
                                    
                                    
                                    $
                                    503Charged
      to cost and expenses
                                    
                                    
                                    22
                                    
                                    
                                    
                                    (163
                                    )
                                    
                                    
                                    218Deductions-
      write offs
                                    
                                    
                                    (66
                                    )
                                    
                                    
                                    (164
                                    )
                                    
                                    
                                    (215
                                    )Balance,
      end of year
                                    
                                    $
                                    135
                                    
                                    
                                    $
                                    179
                                    
                                    
                                    $
                                    506
  65
  NOTE
4—INVENTORIES
 
 Inventories
consist of the following (in thousands):
  October 31,2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    820
                    
                    
                    $
                    891Work
      in process
                    
                    
                    44
                    
                    
                    
                    110Finished
      goods
                    
                    
                    105
                    
                    
                    
                    189Reserve
      for excess and obsolete inventory
                    
                    
                    (173
                    )
                    
                    
                    (206
                    )$
                    796
                    
                    
                    $
                    984
 
 The
activity in the reserve for excess and obsolete inventory is as follows (in
thousands):
  Year
      Ended October 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Balance,
      beginning of year
                                  
                                  $
                                  206
                                  
                                  
                                  $
                                  50
                                  
                                  
                                  $
                                  50Charged
      to cost and expenses
                                  
                                  
                                  (32
                                  )
                                  
                                  
                                  191
                                  
                                  
                                  
                                  (88
                                  )Deductions-
      write offs
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  (35
                                  )
                                  
                                  
                                  88Balance,
      end of year
                                  
                                  $
                                  173
                                  
                                  
                                  $
                                  206
                                  
                                  
                                  $
                                  50
 
 NOTE
5—PREPAIDS AND OTHER CURRENT ASSETS
 
 Prepaids
and other current assets consist of the following (in thousands):
  October 31,2008
                  
                  
                  2007Prepaid
      insurance
                  
                  $
                  167
                  
                  
                  $
                  171Prepaid
      licenses
                  
                  
                  62
                  
                  
                  
                  53Prepaid
      rent
                  
                  
                  31
                  
                  
                  
                  29Prepaid
      property taxes
                  
                  
                  28
                  
                  
                  
                  30Prepaid
      health insurance
                  
                  
                  —
                  
                  
                  
                  96Receivable
      from insurance carriers (1)
                  
                  
                  558
                  
                  
                  
                  87Receivable
      from Best Medical
                  
                  
                  —
                  
                  
                  
                  127Employee
      receivables
                  
                  
                  1
                  
                  
                  
                  84Other
                  
                  
                  96
                  
                  
                  
                  47$
                  943
                  
                  
                  $
                  724
  (1)
Pursuant to the terms of the Company’s insurance policy, the Company’s insurance
carrier has agreed to reimburse the Company for up to 40% of its legal expenses
incurred in the defense of its patent rights in the ongoing litigation. The
Company has recorded the receivable from the insurance carrier as part of
Prepaid and Other Current Assets on its Balance Sheet, and reduced legal
expenses included in General and Administrative Expenses on the Statement of
Operations at and for the year ended October 31, 2008. Of the total receivable
of $558, $446 was received in November 2008. The balance due from insurance
carriers at October 31, 2007 represents policy refunds owed to the Company as a
result of the sale of its NOMOS operations. These refunds were fully received
during the year ended October 31, 2008.
 
 66
 NOTE
6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
 Equipment
and leasehold improvements consist of the following (in thousands):
  October 31,2008
                                                                    
                                                                    
                                                                    2007Furniture,
      fixtures and equipment
                                                                    
                                                                    $
                                                                    4,604
                                                                    
                                                                    
                                                                    $
                                                                    4,451Leasehold
      improvements
                                                                    
                                                                    
                                                                    1,958
                                                                    
                                                                    
                                                                    
                                                                    2,1946,562
                                                                    
                                                                    
                                                                    
                                                                    6.645Less:
      accumulated depreciation
                                                                    
                                                                    
                                                                    (5,150
                                                                    )
                                                                    
                                                                    
                                                                    (5,821
                                                                    )$
                                                                    1,412
                                                                    
                                                                    
                                                                    $
                                                                    824
 
 Depreciation
expense was $533, $543, and $560 for the fiscal years ended October 31,
2008, 2007 and 2006, respectively.
 
 NOTE
7—INTANGIBLE ASSETS
 
 Intangible
assets consist of the following (in thousands):
  October 31,2008
                                                    
                                                    
                                                    2007Amortizable
      intangible assetsPurchased
      technology
                                                    
                                                    $
                                                    158
                                                    
                                                    
                                                    $
                                                    158Existing
      customer relationships
                                                    
                                                    
                                                    11
                                                    
                                                    
                                                    
                                                    11Trademark
                                                    
                                                    
                                                    19
                                                    
                                                    
                                                    
                                                    19Patents
      and licenses
                                                    
                                                    
                                                    108
                                                    
                                                    
                                                    
                                                    86296
                                                    
                                                    
                                                    
                                                    274Less:
      accumulated amortization
                                                    
                                                    
                                                    (198
                                                    )
                                                    
                                                    
                                                    (171
                                                    )$
                                                    98
                                                    
                                                    
                                                    $
                                                    103
 
 Amortization
expense was $27 for each of the fiscal years ended October 31, 2008, 2007
and 2006, and is included in general and administrative expense on the
accompanying consolidated statement of operations.  The estimate of
aggregate amortization expense for the subsequent years is as follows (in
thousands):
  For
      the Years Ended October 31,2009
                    
                    $
                    282010
                    
                    
                    282011
                    
                    
                    282012
                    
                    
                    14$
                    98
 
 67
  NOTE
8- ACCRUED EXPENSES
 
 Accrued
expenses consist of the following (in thousands):
  October 31,2008
                    
                    
                    2007Payroll
                    
                    $
                    277
                    
                    
                    $
                    190Bonus
                    
                    
                    223
                    
                    
                    
                    300Severance
                    
                    
                    523
                    
                    
                    
                    51Vacation
                    
                    
                    390
                    
                    
                    
                    271Commission
                    
                    
                    80
                    
                    
                    
                    114Customer
      Deposits
                    
                    
                    319
                    
                    
                    
                    342Vendor
      Payments
                    
                    
                    570
                    
                    
                    
                    471Site
      Decommissioning Costs
                    
                    
                    287
                    
                    
                    
                    345Professional
      Fees
                    
                    
                    294
                    
                    
                    
                    191Income
      Taxes
                    
                    
                    120
                    
                    
                    
                    559Other
                    
                    
                    69
                    
                    
                    
                    276$
                    3,152
                    
                    
                    $
                    3,110
 
 
 On March
19, 2008 (the “Effective Date”), the Company reached agreement with its former
Vice-President of New Product Development (“VP”) to sever his employment.
Pursuant to the terms of the severance agreement, the Company will continue to
pay his annual salary of $168 in bi-weekly installments for 18 months,
beginning on the Effective Date. In further consideration, the Company agreed to
pay medical, dental and vision benefits during the same period. The Company will
continue to cover legal costs relating to certain ongoing litigation for the VP
as previously determined under his employment agreement.
 
 In
addition, the Company reached agreement with its former Chief Technology Officer
(“CTO”) to sever his employment, effective May 31, 2008. Pursuant to the terms
of its employment agreement with the CTO, the Company will pay 36 equal monthly
installments of $28 in salary continuation beginning June 1, 2008. Also, in May
2008, the Company reached agreement with its former Vice-President of Technical
Development to sever his employment. Pursuant to the terms of the severance
agreement, the Company paid $48 as salary continuation, plus medical benefits
over four months beginning May 2008.
 
 Relating
to these agreements, the Company incurred $1,411 included as severance expense
on the Consolidated Statement of Operations for the year ended October 31, 2008,
and has accrued the remaining $1,092 costs relating to these agreements and
the amount is included in Accrued Expenses and Long-Term Severance on the
Consolidated Balance Sheet at October 31, 2008.
 68
  NOTE
9- WARRANT DERIVATIVES
 
 There
were no warrant derivative liabilities outstanding at October 31, 2008, and
warrant derivative liabilities were $173 at October 31, 2007. The warrant
derivative liabilities are recorded at estimated fair value and are
marked-to-market at each subsequent measurement date. The liabilities were
incurred when the Company issued warrants to a lender with an uncertain pricing
component in connection with its borrowing activities (see Note 10 —
Borrowings – Agility Capital LLC). The uncertain pricing component became
certain on December 12, 2007, upon the signing of the Securities Purchase
Agreements with certain Investors, and the Company reclassed the fair value of
the warrant derivatives from liability to equity. See Note 11—Stockholders’
Equity. The Company has accounted for the warrant derivative liabilities in
accordance with guidance under SFAS No. 133 and EITF 00-19. Changes in the
liability warrants balance related to Agility Capital LLC borrowings for the
year ended October 31, 2008 are as follows (in thousands):
  Balance,
      October 31, 2007
                          
                          $
                          173Additions:Fair
      Value – Warrants issued for Second Amendment to the Loan
      Agreement
                          
                          
                          161Fair
      Value Adjustments during the period
                          
                          
                          311645Less:
      Fair value of warrants transferred to permanent equity
                          
                          
                          (645
                          )Balance,
      October 31, 2008
                          
                          $
                          —
 
 The fair
value of the warrant issued in connection with the Second Amendment to the Loan
Agreement with Agility Capital, LLC has been recorded as Loan Discount Fees and
amortized to Interest and Other Expense over the term of the loan amendment, and
the fair value adjustments during the period have been recorded as Adjustments
to Fair Value of Derivatives in the Statement of Operations for the year ended
October 31, 2008. The fair value of the warrants transferred to permanent equity
are included in Additional Paid-in Capital on the Balance Sheet at October 31,
2008.
 
 NOTE
10 – BORROWINGS
 
 The
borrowings were $1,364, net of discount at October 31, 2008, and $3,241 at
October 31, 2007, consisting of a loan and lines of credit with a bank, and
subordinated short-term notes with private lenders. Borrowing activities for the
year  ended October 31, 2008 are:
 
 October 31,
                                
                                
                                
                                
                                
                                
                                
                                
                                October 31,2007
                                
                                
                                Borrowings
                                
                                
                                Repayments
                                
                                
                                2008Silicon Valley Bank -Line
      of credit
                                
                                $
                                1,573
                                
                                
                                $
                                438
                                
                                
                                $
                                (2,011
                                )
                                
                                $
                                —Bridge
      loan sub-limit
                                
                                
                                750
                                
                                
                                
                                4,189
                                
                                
                                
                                (4,939
                                )
                                
                                
                                —Short-term
      portion of long-term debt
                                
                                
                                —
                                
                                
                                
                                455
                                
                                
                                
                                —
                                
                                
                                
                                455Subordinated
      short-term notes -Agility
      Capital, LLC
                                
                                
                                1,000
                                
                                
                                
                                —
                                
                                
                                
                                (1,000
                                )
                                
                                
                                —John
      Friede Note
                                
                                
                                —
                                
                                
                                
                                250
                                
                                
                                
                                (250
                                )
                                
                                
                                —Three
      Arch Partners, et al
                                
                                
                                —
                                
                                
                                
                                1,000
                                
                                
                                
                                (1,000
                                )
                                
                                
                                —Total
      borrowings
                                
                                
                                3,323
                                
                                
                                
                                6,332
                                
                                
                                
                                (9,200
                                )
                                
                                
                                455Less
      Unamortized loan discount fees.
                                
                                
                                (82
                                )
                                
                                
                                (986
                                )
                                
                                
                                989
                                
                                
                                
                                (79
                                )Total
      short-term borrowings
                                
                                $
                                3,241
                                
                                
                                $
                                5,346
                                
                                
                                $
                                (8,211
                                )
                                
                                $
                                376Long-Term
      Borrowings:Growth
      Capital Loan
                                
                                
                                —
                                
                                
                                
                                1,045
                                
                                
                                
                                —
                                
                                
                                
                                1,045Less
      Unamortized loan discount fees.
                                
                                
                                —
                                
                                
                                
                                (57
                                )
                                
                                
                                —
                                
                                
                                
                                (57
                                )Total
      long-term borrowings
                                
                                $
                                —
                                
                                
                                $
                                988
                                
                                
                                
                                —
                                
                                
                                $
                                988
  69


Interest
expense was $153, excluding $166 loan discount fees paid in cash and $895 fair
value of warrants issued in connection with lending activities, for the year
ended October 31, 2008. Interest expense $68, excluding $112 loan discount fees
paid in cash and $574 fair value of warrants issued in connection with lending
activities, for the year ended October 31, 2007.
 
 Lines
of Credit
 
 Silicon
Valley Bank
 
 On
October 5, 2005, the Company entered into a Loan and Security Agreement (the
“Loan Agreement”) with Silicon Valley Bank (the “Bank”). On January 12,
2006, the Company entered into a First Amendment to Loan and Security Agreement
(the “First Amendment”) with the Bank and as consideration granted the Bank a
warrant to purchase 7,936 shares of the Company’s common stock at an exercise
price of $9.45 per share.  The warrant will expire in five years unless
previously exercised. The fair value of the warrant on the date of grant was $51
and was amortized to interest expense.
  Stock
      price
                      
                      $
                      1.89Dividend
      yield
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      63
                      %Risk-free
      interest rate
                      
                      
                      4.9
                      %Expected
      life
                      
                      5
      years
  On
October 31, 2006, the Company entered into a Second Amendment to the Loan
Agreement (the “Second Amendment”) with the Bank.  The Second Amendment
extended the term of the line of credit to October 3, 2007 and revised certain
terms of the Loan Agreement.  On August 24, 2007, the Company entered
into a Third Amendment to the Loan Agreement (the “Third Amendment”) with the
Bank. The Third Amendment added a Bridge Loan Sub-limit to the Loan Agreement of
up to $1.5 million at an interest rate of prime plus 4.0%, subject to a
borrowing base formula, and decreased the minimum tangible net worth that must
be maintained by the Company from $5.0 million to $2.0 million. The maturity
date of the Bridge Loan Sub-limit was the earlier of October 3, 2007 or the date
the Company closed a private investment public equity transaction. Concurrent
with the Third Amendment, the Company issued the Bank a warrant for 60,000
shares of the Company’s common stock at an exercise price of $4.90, the closing
price of the Company’s common stock on August 24, 2007. The Company calculated
the fair value of the warrant on the date of grant to be $175 using the
Black-Scholes model incorporating the following assumptions:
  Dividend
      yield
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      67
                      %Risk-free
      interest rate
                      
                      
                      4.4
                      %Expected
      life
                      
                      5
      years
 
 The value
of the warrant has been amortized over the term of the line of credit, and is
included in Interest and Other Expense on the Income Statement for the year
ended October 31, 2008.
 
 On
September 14, 2007, the Company entered into a Fourth Amendment to the Loan
Agreement (the “Fourth Amendment”) with the Bank. The Fourth Amendment included:
(i) a forbearance by the Bank from exercising its rights and remedies against
the Company, until such time as the Bank determines in its discretion to cease
such forbearance, due to the default under the Loan Agreement resulting from the
Company failing to comply with the tangible net worth covenant in the Loan
Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a
subordinated debt facility of up to $750 with Agility Capital LLC. In connection
with the Fourth Amendment, the Bank consented to the divestiture of NOMOS and
released its lien on the NOMOS assets.
  70
  On
October 3, 2007, the Company entered into a Fifth Amendment and Forbearance to
the Loan Agreement (the “Fifth Amendment”) with the Bank. The Fifth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 9, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 9, 2007 or the date the Company closes a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to an increase in
the Company’s subordinated debt facility with Agility Capital LLC from $750 to
up to $1,000.
  On
October 29, 2007, the Company entered into a Sixth Amendment and Forbearance to
the Loan Agreement (the “Sixth Amendment”) with the Bank. The Sixth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 20, 2007 or the date the Company closes a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to the Company’s
issuing up to $500 in unsecured subordinated debt to Mr. John Friede, or an
entity owned or controlled by Mr. Friede. At the time, Mr. Friede was a
significant stockholder of the Company, and was a director of the Company at the
date of the agreement.
  On
November 20, 2007, the Company entered into a Seventh Amendment and Forbearance
to its Loan Agreement (the “Seventh Amendment”) with the Bank. The Seventh
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to December 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of December 20, 2007 or the date the Company closes a
private investment public equity transaction, and (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007. In connection with the Seventh
Amendment, the Company granted a warrant to the Bank to purchase 18,181 shares
of the Company’s common stock, at a warrant price of $2.75 per share, which is
equal to the closing price of the Company’s common stock on November 20, 2007,
the date the Company’s Board of Directors approved the issuance of this warrant.
The number of shares are subject to adjustment as provided by the terms of the
warrant. 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 $31
using the Black-Scholes model incorporating the following
assumptions:
  Dividend
      yield
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      71
                      %Risk-free
      interest rate
                      
                      
                      3.5
                      %Expected
      life
                      
                      5
      years
  The value
of the warrant has been amortized over the term of the line of credit, and is
included in Interest and Other Expense on the Income Statement for the year
ended October 31, 2008.
  On
December 18, 2007, the Company entered into an Eighth Amendment and Forbearance
to the Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to the earlier of February 1, 2008 or the date the Company completes its private
placement, (ii) a forbearance by the Bank from exercising its rights and
remedies against the Company, until such time as the Bank determines in its
discretion to cease such forbearance, due to the defaults under the Loan
Agreement resulting from the Company failing to comply with the tangible net
worth covenant in the Loan Agreement as of July 31, 2007, August 31, 2007,
September 30, 2007 and October 31, 2007 and (iii) a consent from the Bank to
allow the Company to repay its outstanding loan from Mr. John A. Friede in the
amount of $250. In connection with the Eighth Amendment, the Company granted a
warrant to the Bank to purchase 38,461 shares of the Company’s common stock as
determined by dividing the warrant price of $50 by the $1.30 warrant price per
share, which is equal to the closing price of the Company’s common stock on
December 18, 2007, the date the Company’s Board of Directors approved the
issuance of this warrant. The number of shares are subject to adjustment as
provided by the terms of the warrant. 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 $33 using the Black-Scholes model
incorporating the following assumptions:
  71
  Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        82
                        %Risk-free
      interest rate
                        
                        
                        3.5
                        %Expected
      life
                        
                        5
      years
 
 The value
of the warrant has been amortized over the term of the line of credit, and is
included in Interest and Other Expense on the Income Statement for the year
ended October 31, 2008.
 
 The
Company paid the $1,275 and $755 outstanding balance of the Line of Credit and
the Bridge Sub-Limit, including accrued interest on January 23, 2008. The Bridge
Sub-Limit agreement was terminated in accordance with its terms upon payment of
the outstanding balance.
 
 On May
28, 2008, the Company entered into a Ninth Amendment to the Loan Agreement (the
“Ninth Amendment”) with the Bank. The Ninth Amendment renews the revolving
credit facility under which the Company may borrow an additional $3,000 based
upon eligible receivables. The revolving credit facility is payable monthly and
carries interest at prime plus 0.50%, and is subject to certain financial
covenants. The revolving credit facility expires 24 months from the date of
execution of the Ninth Amendment.
 
 The Ninth
Amendment also includes a $3,000 Growth Capital Loan which provides for an
advance period during which $1,500 was advanced to the Company on June 7, 2008,
and $1,500 may be advanced to the Company no later than September 30, 2008 (see
Eleventh Amendment below). The Growth Capital Loan provides for interest only
payments through the advance period at prime plus 2.25%, and 36 month repayment
including principal and interest. At October 31, 2008, $376 and $988, net of
loan origination fees of $79 and $57, is included in the Balance Sheet as
short-term and long-term borrowings, respectively. Interest expense on the
Growth Capital Loan amounted to $65 through October 31, 2008.
 
 In
connection with the Ninth Amendment, the Company granted a warrant to the Bank
to purchase 99,337 shares of the Company’s common stock as determined by
dividing the warrant price of $150 by the $1.51 warrant price per share, which
is equal to the closing price of the Company’s common stock on May 19, 2008, the
date the Company’s Board of Directors approved the issuance of this warrant. The
number of shares are subject to adjustment as provided by the terms of the
warrant. 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 $118
using the Black-Scholes model incorporating the following
assumptions:
 
 Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        89
                        %Risk-free
      interest rate
                        
                        
                        3.3
                        %Expected
      life
                        
                        5
      years
 
 The total
debt discount of $118 is recorded as net to the total borrowings in the Ninth
Amendment. The debt discount of $56 related to the revolving line of credit
facility is amortized over the life of the facility. The remaining debt discount
related to the Growth Capital Loan is determined through allocation based on the
relative fair value of the loan and the relative fair value of the warrant. The
amount allocated to the warrant, accounted for as debt discount, is amortized
over the life of the Growth Capital Loan using the effective interest
method.
  72
 
 On
September 11, 2008, the Company and the Bank executed the Tenth Amendment to the
Loan Agreement (the “Tenth Amendment”) which provides a waiver to the Company
for its non-compliance with the Minimum Tangible Net Worth Covenant at July 31,
2008.
 
 On
October 10, 2008, the Company and the Bank executed an Eleventh Amendment to the
Loan Agreement (the “Eleventh Amendment”) to modify the definition of eligible
accounts and to modify the disbursement and repayment of the Growth Capital
Loan.  Under the Eleventh Amendment, the final $1,500 of the Growth
Capital Loan is to be disbursed prior to March 31, 2009 subject to certain
conditions, as defined.  Additionally, the outstanding principal
balance of the Growth Capital Loan will be repaid in thirty-three (33) equal
monthly payments commencing on January 1, 2009.
 
 The Loan
Agreement is collateralized by the substantially all the assets of the
Company.
 
 At
October 31, 2008, the Company is in compliance with all covenants.
  Subordinated
Short-Term Borrowings
 
 Partners
for Growth, LLC
 
 On March
28, 2006, the Company entered into a Loan and Security Agreement (the “PFG Loan
Agreement”)  with
Partners for Growth, LLC (“PFG”) for a secured, revolving line of credit of up
to $4,000, which supplemented an existing line of credit provided by the Bank.
The line of credit had a term of eighteen months, and earned interest at prime
rate as quoted in The
Wall Street Journal.
Borrowings under the line of credit were subject to a borrowing base formula.
Amounts owing under the line of credit were secured by all of the assets of the
Company and were subordinated to amounts owing under the line of credit with the
Bank. The line of credit did not contain financial covenants; however the
Company was subject to other customary covenants, including reporting
requirements, and events of default. In connection with the PFG Loan Agreement,
the Company also granted PFG a warrant to purchase 79,000 shares of the
Company’s common stock at an exercise price of $9.45 per share. As a result of
the private placement of the Company’s common stock completed on June 7, 2006,
and pursuant to the anti-dilution terms of the warrant issued to PFG, the
warrant was amended to increase the number of shares of the Company’s common
stock that PFG can purchase from 79,000 shares to 111,007 shares, and the
exercise price was decreased from $9.45 per share to $6.75 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 using
the Black-Scholes model incorporating the following assumptions:
 
 Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        63
                        %Risk-free
      interest rate
                        
                        
                        4.9
                        %Expected
      life
                        
                        5
      years
 
 The value
of the warrant was deferred and amortized over the life of the loan at $27 per
month and is included in Interest and Other Expense on the income statement. As
of October 31, 2007, the value of the warrant was fully amortized. On August 30,
2007 the Company terminated the PFG Loan Agreement with PFG by mutual consent.
As a result of the termination, PFG released all liens on the Company’s assets.
There were no outstanding borrowings under the PFG Loan Agreement at the date of
termination.
  73
  Agility
Capital, LLC
 
 On
September 21, 2007, the Company entered into a Loan Agreement (the “Agility Loan
Agreement”) with Agility Capital, LLC (“Agility”). The Agility Loan Agreement
provided for advances of up to $750 subject to the achievement of certain
milestones. Amounts owing under the Agility Loan Agreement were secured by all
of the Company's assets, and were subordinated to amounts owing under the line
of credit with the Bank. The Agility Loan Agreement did not contain financial
covenants; however, the Company is subject to other customary covenants,
including reporting requirements, and events of default. The Company was
obligated to pay interest on borrowings under the Agility Loan Agreement at the
prime rate, as quoted in The
Wall Street Journal, plus 6%.  The Agility Loan Agreement term
was 60 days, and all amounts outstanding thereunder were due and payable on
November 20, 2007. The Company paid an origination fee of $20 to Agility in
connection with the Agility Loan Agreement. The origination fee and legal
expenses were amortized over the term of the Agility Loan Agreement at $10 per
month, and is included in Interest and Other Expense on the income statement.
The Company further covered $15 of Agility’s legal fees in connection with the
Agility Loan Agreement, which were recorded as general and administrative
expenses.
 
 On
October 18, 2007, the Company entered into a First Amendment (the “First
Amendment”) to the Agility Loan Agreement. The First Amendment provides for
advances of up to $1,000. Amounts advanced under the Agility Loan Agreement are
subordinated to the existing line of credit provided by the Bank. In addition,
within the First Amendment, Agility consented to the Company incurring up to
$500 of subordinated unsecured indebtedness to Mr. John A. Friede or an entity
owned or controlled by him (“Friede”), provided that Friede executes and
delivers to Agility a subordination agreement pursuant to which the debt owed by
the Company to Friede will be subordinated to the debt owed to Agility. The
Company paid an origination fee of $10 to Agility in connection with the First
Amendment.
 
 On
November 20, 2007, the Company executed a Second Amendment to the Agility Loan
Agreement (the “Second Amendment”) with Agility to extend the maturity date of
the Agility Loan Agreement from November 20, 2007 to December 21,
2007.
 
 On
December 20, 2007, the Company executed a Third Amendment to the Agility Loan
Agreement (the “Third Amendment”) with Agility. The Third Amendment includes (i)
an extension of the maturity date of the Loan Agreement to February 1, 2008,
(ii) a loan modification and extension fee of $20, paid by the Company upon the
execution of the amendment, and (iii) a consent from Agility to allow the
Company to repay its outstanding loan from Friede in the amount of $250. The
loan modification and extension fee has been amortized over the term of the loan
and is included in Interest and Other Expense on the income statement. As of
October 31, 2008, the Company has repaid the principal balance and accrued
interest on the Agility Loan Agreement.
 
 In
connection with the Agility Loan Agreement, on September 21, 2007, the Company
issued a warrant exercisable into 69,079 shares of the Company’s common stock at
an exercise price of $3.80 per share, as determined by the closing price of the
Company’s common stock on September 20, 2007, the day immediately preceding the
issue date of the warrant (the “Initial Warrant”). The Initial Warrant will
expire in seven years unless previously exercised.
 
 The
Company calculated the fair value of the Initial Warrant of 69,079 shares on the
date of grant to be $149 using the Black-Scholes model incorporating the
following assumptions:
 
 Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        69
                        %Risk-free
      interest rate
                        
                        
                        4.4
                        %Expected
      life
                        
                        7
      years
 
 In
connection with the First Amendment, and in exchange for Agility’s returning to
the Company the Initial Warrant issued on September 21, 2007, the Company
granted Agility a revised $363 warrant to purchase 95,394 shares of the
Company’s common stock at an exercise price of $3.80 per share, as determined by
the closing price of the Company’s common stock on September 20, 2007, the day
immediately preceding the issue date of the Initial Warrant (the “Revised
Warrant”). The Revised Warrant will expire in seven years unless previously
exercised.
  74
 
 The
Company calculated the fair value of the Revised Warrant of 95,394 shares on the
date of grant to be $253 using the Black-Scholes model incorporating the
following assumptions:
 
 Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        71
                        %Risk-free
      interest rate
                        
                        
                        4.3
                        %Expected
      life
                        
                        7
      years
 
 The terms
of the Revised Warrant provided that the price per share and the number of
shares to be issued under the the Revised Warrant will adjust to the price at
which the Company next issued its common stock or other equity-linked
securities, provided that any amount is outstanding under the Agility Loan
Agreement. In evaluating the terms of the Revised Warrant under EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” (“EITF 00-19”), the Company was unable to determine the price at
which it will next issue its common stock or other equity-linked securities at
the date the warrant was issued. If that next issue price was below a certain
price point, the Company would not have had sufficient authorized shares to
settle the warrant after considering all other commitments that may require the
issuance of its common stock during the life of the Revised Warrant. The Company
concluded that the Revised Warrant is correctly classified as a liability and
has been revalued to fair value each reporting period. At December 12, 2007, the
Company entered into a Securities Purchase Agreement to issue shares of its
common stock at $1.23 per share. Pursuant to the terms of the Revised Warrant,
the Company increased to 294,715 the number of shares to be issued under the
Revised Warrant, and revalued the Revised Warrant at that date.
 
 The
Company calculated the fair value of the Revised Warrant to be $394 and $173 at
December 12, 2007 and October 31, 2007, respectively, using the Black-Scholes
model incorporating the following assumptions:
 
 December 12, 2007
                    
                    
                    October 31, 2007Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    74
                    %
                    
                    
                    71
                    %Risk-free
      interest rate
                    
                    
                    3.7
                    %
                    
                    
                    4.3
                    %Expected
      life
                    
                    7
      years
                    
                    
                    7
      years
 
 The
Initial Warrant has been fair valued and classified as a liability at the time
of the grant. The fair value of $149 for the Initial Warrant was classified as
debt discount and has been fully amortized to interest and other expense as of
October 31, 2008. The Revised Warrant has been fair valued and the change in the
fair value of the Initial Warrant and the Revised Warrant was expensed as of
October 31, 2007. The subsequent change in the fair value of the Revised Warrant
has been recorded as fair value expense and is included in Interest and Other
Expense as of October 31, 2008. The $394 fair value of the Revised Warrant at
December 12, 2007 has been reclassified to permanent equity as Additional
Paid-in Capital as of October 31, 2008 in accordance with the guidance under
EITF 00-19.
 
 In
connection with the Second Amendment, the Company granted Agility a $231 warrant
to purchase 84,091 shares of the Company’s common stock at an exercise price of
$2.75 per share, as determined by the closing price of the Company’s common
stock on November 19, 2007, the day immediately preceding the issue date of the
warrant (the “Agility Second Warrant”). The Agility Second Warrant will expire
in seven years unless previously exercised. Similar to the Revised Warrant, the
terms of the Agility Second Warrant provided that the price per share and the
number of shares to be issued under the Agility Second Warrant will adjust to
the price at which the Company next issued its common stock or other
equity-linked securities, provided that any amount is outstanding under the
Agility Loan Agreement. As with the Revised Warrant, the Company concluded that
the Agility Second Warrant is correctly classified as a liability and has been
revalued to fair value each reporting period. At December 12, 2007, the Company
entered into a Securities Purchase Agreement to issue shares of its common stock
at $1.23 per share. Pursuant to the terms of the Agility Second Warrant, the
Company increased to 188,008 the number of shares to be issued under the Agility
Second Warrant, and revalued the Agility Second Warrant at that
date.
  75
  The
Company calculated the fair value of the Agility Second Warrant to be $251 and
$161 at December 12, 2007 and November 20, 2007, respectively, using the
Black-Scholes model incorporating the following assumptions:
 
 December 12, 2007
                    
                    
                    November 20, 2007Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    74
                    %
                    
                    
                    71
                    %Risk-free
      interest rate
                    
                    
                    3.7
                    %
                    
                    
                    3.7
                    %Expected
      life
                    
                    7
      years
                    
                    
                    7
      years
 
 The
Agility Second Warrant has been fair valued and classified as a liability at the
time of the grant. The $161 fair value of the Agility Second Warrant was
classified as debt discount and has been fully amortized to interest and other
expense as of October 31, 2008. The subsequent change in the fair value of the
Agility Second Warrant has been recorded as fair value expense and is included
in Interest and Other Expense as of October 31, 2008. The $251 fair value of the
Agility Second Warrant at December 12, 2007 has been reclassified to permanent
equity as Additional Paid-in Capital as of October 31, 2008 in accordance with
the guidance under EITF 00-19.
 
 In
connection with the Third Amendment, the Company granted Agility a $200 warrant
(the “Agility Third Warrant”) to purchase 162,601 shares of the Company’s common
stock at an exercise price of $1.23 per share, as determined by the issue price
of the Company’s common stock pursuant to the Securities Purchase Agreements
dated December 12, 2007. The Agility Third Warrant will expire in seven years
unless previously exercised. The Company calculated the fair value of the
warrant on the date of grant to be $158 using the Black-Scholes model
incorporating the following assumptions:
 
 Dividend
      yield
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      79
                      %Risk-free
      interest rate
                      
                      
                      3.7
                      %Expected
      life
                      
                      7
      years
 
 The value
of the Agility Third Warrant has been amortized over the term of the line of
credit, and is included in Interest and Other Expense on the income statement
for the year ended October 31, 2008. The $158 fair value of the Agility Third
Warrant at the grant date has been classified as permanent equity in Additional
Paid-in Capital as of October 31, 2008 in accordance with the guidance under
EITF 00-19.
 
 In
addition, in accordance with the terms of the collective outstanding warrants
granted to Agility, the Company filed a registration statement on Form S-3
covering the resale of the warrant shares (the “Registration Statement”) with
the Securities Exchange Commission (the “SEC”) on July 16, 2008. The
Registration Statement was declared effective by the SEC on July 24,
2008.
 
 John
Friede Note
 
 On
October 30, 2007, the Company entered into a Loan Agreement (the “Friede Loan
Agreement”) with Friede, at the time a significant stockholder and director of
the Company. Subject to the terms of the Friede Loan Agreement, Friede agreed to
loan the Company $500 in two installments of $250 each. The loan was unsecured
and subordinated to the loan agreements with Silicon Valley Bank and Agility
Capital LLC. On November 1, 2007, the Company executed the promissory note
underlying the loan, and received the first $250 installment. The Company and
Friede amended the Friede Loan Agreement on November 20, 2007, prior to funding
of the second $250 installment, to extend the maturity date of the Friede Loan
Agreement from November 20, 2007 to December 20, 2007, and to reduce the
borrowing capacity to $250 from $500. The loan balance, plus accrued interest
were paid in full on December 20, 2007.
  76
  In
connection with the Friede Loan Agreement, the Company agreed to issue to the
Lender a $200 Warrant (the “Friede Warrant”) to purchase 61,538 shares of the
Company’s common stock at an exercise price of $3.25 per share. The Friede
Warrant will expire 7 years from the date of issue unless previously exercised.
The Company calculated the fair value of the Friede Warrant on the date of grant
to be $119 using the Black-Scholes model incorporating the following
assumptions:
  Dividend
      yield
                                
                                
                                0
                                %Expected
      volatility
                                
                                
                                71
                                %Risk-free
      interest rate
                                
                                
                                4.2
                                %Expected
      life
                                
                                7
      years
 
 The value
of the Friede Warrant has been amortized over the term of the line of credit,
and is included in Interest and Other Expense on the income statement for the
year ended October 31, 2008. The $119 fair value of the Friede Warrant at the
grant date has been classified as permanent equity in Additional Paid-in Capital
as of October 31, 2008 in accordance with the guidance under EITF
00-19.
 
 Three
Arch Capital (et al)
  On
December 7, 2007, the Company entered into a Loan Agreement (the “Three Arch
Loan Agreement”) with Three Arch Capital, L.P., TAC Associates, L.P., Three Arch
Partners IV, L.P. and Three Arch Associates IV, L.P. (the “Lenders”). The
Lenders are, collectively, the largest stockholder of the Company, and Dr.
Wilfred Jaeger and Roderick Young, are directors of the Company and affiliates
of the Lenders. The transaction contemplated by the Three Arch Loan Agreement
was approved by a committee of the Company’s Board of Directors consisting only
of disinterested directors.
 
 Under the
Three Arch Loan Agreement, the Lenders loaned $1,000 to the Company and the
Company issued notes to the Lenders (the “Notes”). The Notes bear interest at an
annual rate equal to the prime rate plus six percent (6%) and are subordinated
to the Company’s indebtedness to Silicon Valley Bank and Agility Capital LLC.
The Notes became due and payable upon the close of the Company’s private
investment public equity financing transaction on January 18, 2008. The Company
paid $20 loan fee in connection with the Three Arch Loan Agreement, which has
been amortized to Interest and Other Expenses as of October 31, 2008. The
balance of the Three Arch Loan Agreement, plus accrued interest, was paid in
full as of October 31, 2008.
 
 In
connection with the Three Arch Loan Agreement, the Company granted the Lenders
warrants (the “Three Arch Warrants”) to purchase, in the aggregate, 205,127
shares of the Company’s common stock at a purchase price of $1.95 per share. The
Three Arch Warrants will expire 7 years from the date of issue unless previously
exercised. The Company calculated the fair value of the Three Arch Warrants on
the date of grant to be $329 using the Black-Scholes model incorporating the
following assumptions:
 
 Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        74
                        %Risk-free
      interest rate
                        
                        
                        3.8
                        %Expected
      life
                        
                        7
      years
 
 The value
of the Three Arch Warrants has been amortized over the term of the line of
credit, and is included in Interest and Other Expense on the income statement
for the year ended October 31, 2008. The $329 fair value of the Three Arch
Warrants at the grant date has been classified as permanent equity in Additional
Paid-in Capital as of October 31, 2008 in accordance with the guidance under
EITF 00-19.
  77
 
 The
following table summarizes the warrant activity and related interest and fair
value impact on the Company’s operations for the year  ended October
31, 2008:
 
 Statement of OperationsWarrant coverage for:
                      
                      Number of
                        Warrant
                        Shares
                      
                      
                      Amortization
                        of Interest
                        Expense
                        related to Fair
                        Value of
                        Warrant
                      
                      
                      Adjustment to
                        Fair Value
                        Expense of the
                        Warrant in
                        Accordance with
                        EITF00-19October
      31, 2007:Deferred
      loan discount fees amortized in 2008
                      
                      
                      —
                      
                      
                      $
                      64
                      
                      
                      $
                      —Issued
      in first quarter of 2008:Silicon
      Valley Bank Line of Credit:Amendment
      7
                      
                      
                      18,181
                      
                      
                      
                      31
                      
                      
                      
                      —Amendment
      8
                      
                      
                      38,461
                      
                      
                      
                      33
                      
                      
                      
                      —Amendment
      9
                      
                      
                      99,337
                      
                      
                      
                      —
                      
                      
                      
                      —John
      Friede Note
                      
                      
                      61,538
                      
                      
                      
                      119
                      
                      
                      
                      —Agility
      Capital, LLC Note:Fair
      value change – 2007 warrants
                      
                      
                      294,715
                      
                      
                      
                      —
                      
                      
                      
                      221Amendment
      2
                      
                      
                      188,008
                      
                      
                      
                      161
                      
                      
                      
                      90Amendment
      3
                      
                      
                      162,601
                      
                      
                      
                      158
                      
                      
                      
                      —Three
      Arch Partners, et al Note
                      
                      
                      205,127
                      
                      
                      
                      329
                      
                      
                      
                      —1,067,968
                      
                      
                      $
                      895
                      
                      
                      $
                      311
 
 NOTE
11—STOCKHOLDERS' EQUITY
 
 Preferred
Stock
 
 The
Company has authorized the issuance of 2,000,000 shares of preferred stock;
however, no shares have been issued.  The designations, rights and
preferences of any preferred stock that may be issued will be established by the
Board of Directors at or before the time of such issuance.
 
 Authorized
Shares of Common Stock
 
 Pursuant
to a consent solicitation dated April 5, 2007, a majority of the Company’s
shareholders consented to amend the Company’s Certificate of Incorporation to
increase the total number of authorized shares of common stock of the Company
from 40,000,000 shares to 100,000,000 shares on April 20, 2007. The Company used
some of the additional authorized shares to cover the grant of stock options to
the Company’s President and Chief Executive Officer and the Company intends to
use some of the shares for issuance in connection with the Company’s stock-based
benefit plans, as well as for future equity financings and other corporate
purposes. On January 17, 2008, the Company received shareholder approval, in
conjunction with the 2007 PIPE transaction, to increase to 150,000,000 its
authorized shares of common stock.
 
 Sale
of Common Stock and Warrants
 
 2006
PIPE
 
 Pursuant
to the terms of the Securities Purchase Agreement dated June 6, 2006 (the "2006
Securities Purchase Agreement") the Company completed a private placement of
2,458,387 shares of its common stock on June 7, 2006 at a purchase price of
$9.75 per share as well as warrants to purchase an additional 1,229,193 shares
of the Company’s common stock at an exercise price of $10.40 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.
  78
  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 2006 Securities Purchase Agreement.  Under
the 2006 Securities Purchase Agreement, the Company 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. The Company 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.
 
 The 2006
Securities Purchase Agreement required that we increase the number of members of
the Board of Directors of the Company (the “Board”) from seven members to nine
members.  Under the 2006 Securities Purchase Agreement, 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 700,000
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 400,000 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 2006
Securities Purchase Agreement, we increased the number of members of our Board
from seven members to nine members and Three Arch Partners designated Wilfred E.
Jaeger, M.D. and Roderick A. Young to fill the two vacancies.  Our
Board elected Dr. Jaeger and Mr. Young to serve as members of the Board on June
13, 2006.
 
 In
connection with the issuance of the warrants and upon closing of the
transaction, we entered into a Warrant Agreement with our transfer agent
relating to the warrant of Three Arch Partners and a different Warrant Agreement
with our transfer agent relating to the warrants of the investors other than
Three Arch Partners.  The material differences between the two Warrant
Agreements are described below.
 
 The Three
Arch Partners Warrant Agreement includes a non-waivable provision that provides
that the number of shares issuable upon exercise of the warrants that may be
acquired by Three Arch Partners will be limited to the extent necessary to
assure that, following such exercise, the total number of shares of common stock
then beneficially owned by Three Arch Partners and its affiliates does not
exceed 19.9% of the total number of issued and outstanding shares of common
stock as of the date of such exercise (including for such purpose the shares of
common stock issuable upon such exercise of warrants), unless approved by our
stockholders prior to such exercise.  The Warrant Agreement relating
to the warrants of the other investors does not include such a
provision.
 
 The
Warrant Agreement relating to the investors other than Three Arch Partners
includes a waivable provision that provides that the number of shares issuable
upon exercise of the warrants that may be acquired by a registered holder of
warrants upon an exercise of warrants will be limited to the extent necessary to
assure that, following such exercise, the total number of shares of common stock
then beneficially owned by its holder and its affiliates does not exceed 4.99%
of the total number of issued and outstanding shares of common stock (including
for such purpose the shares of common stock issuable upon such exercise of
warrants).  This provision may be waived by a registered holder of
warrants, at the election of such holder, upon not less than 61 days prior
notice to us.  This Warrant Agreement also contains a non-waivable
provision that provides that the number of shares issuable upon the exercise of
the warrants that may be acquired by a registered holder of warrants upon an
exercise of warrants will be limited to the extent necessary to assure that,
following such exercise, the total number of shares of common stock then
beneficially owned by such holder and its affiliates does not exceed 9.99% of
the total number of issued and outstanding shares of common stock (including for
such purpose the shares of common stock issuable upon such exercise of
warrants).  The Warrant Agreement relating to the warrants of Three
Arch Partners does not include such provisions.
  79
  2007
PIPE
 
 Pursuant
to the terms of the Securities Purchase Agreement dated December 12, 2007 (the
“2007 Securities Purchase Agreement”), the Company completed a private placement
(the “2007 Private Placement”) of 12,601,628 shares of the Company’s common
stock on January 18, 2008 with Three Arch Partners IV, L.P. and affiliated funds
(“Three Arch Partners”), SF Capital Partners Ltd. (“SF Capital”) and CHL Medical
Partners III, L.P. and an affiliated fund (“CHL,” and together with Three Arch
Partners and SF Capital, the “Investors”) at a purchase price of $1.23 per share
as well as warrants to purchase an additional 630,081 shares of the Company’s
common stock (the “Warrants”) at an exercise price of $1.23 per share for an
aggregate consideration of approximately $15,500 (before cash commissions and
expenses of approximately $1,500). The purchase price represents a 40% discount
to the volume weighted average price of the common stock on the NASDAQ Global
Market, as reported by Bloomberg Financial Markets, for the 20 trading day
period ending on the trading day immediately preceding the date of the 2007
Securities Purchase Agreement.   The Investors purchased the following
amounts of securities in the offering:
  Investor
                    
                    Shares
                    
                    Warrants
                      (Shares issuable
                      upon exercise)Three
      Arch Partners
                    
                    
                    8,130,084
                    
                    406,504SF
      Capital
                    
                    
                    2,032,520
                    
                    101,626CHL
                    
                    
                    2,439,024
                    
                    121,951
 
 Prior to
the closing of the transaction, Three Arch Partners owned 1,024,327 shares of
common stock of the Company. After the transaction was consummated, Three Arch
Partners’ percentage ownership of the outstanding common stock increased from
approximately 17.3% to 49.5% (and 43.9% of the common stock on a fully diluted
basis).
 
 The
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 the accompanying consolidated balance sheets. 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 terms
of the 2007 Private Placement were approved by a committee of the Company’s
Board of Directors consisting only of disinterested directors. The Company
received approval of a majority of the Company’s stockholders on January 17,
2008 of the 2007 Private Placement and amendment of its Certificate of
Incorporation to increase the number of shares of common stock it is authorized
to issue to 150,000,000 shares.
 
 Holders
of the shares of common stock sold to the Investors (the “Shares”) and the
shares of common stock issuable upon the exercise of the Warrants (the “Warrant
Shares” and collectively, with the Shares, the “Registrable Securities”) are
entitled to certain registration rights as set forth in the 2007 Securities
Purchase Agreement. In accordance with the 2007 Securities Purchase Agreement,
the Company filed a registration statement on Form S-3 to register the resale of
the Registrable Securities on July 16, 2008, which was declared effective by the
SEC on July 24, 2008.
 
 Under the
2007 Securities Purchase Agreement, Three Arch Partners has the right to name
one member to the Board so long as Three Arch Partners beneficially owns greater
than 1,000,000 shares of common stock of the Company (including shares of common
stock issuable upon exercise of the Warrants, and as appropriately adjusted for
stock splits, stock dividends and recapitalizations). Two of the current members
of the Board, Dr. Wilfred E. Jaeger and Roderick A. Young, have been designated
by Three Arch Partners.
  80
  In
connection with the issuance of the Warrants and upon closing of the
transaction, the Company entered into warrant agreements with its transfer agent
relating to the Warrants. The warrant agreement relating to the Warrants issued
to SF Capital contains a non-waivable provision that provides that the number of
shares issuable upon exercise of the Warrants granted to SF Capital pursuant to
the 2007 Private Placement will be limited to the extent necessary to assure
that, following such exercise, the total number of shares of common stock of the
Company then beneficially owned by such holder and its affiliates does not
exceed 14.9% of the total number of issued and outstanding shares of common
stock of the Company (including for such purpose the shares of common stock
issuable upon such exercise of Warrants). The warrant agreement relating to the
Warrants issued to the other Investors does not contain this provision.
 
 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. Options vest in accordance with their terms over periods up
to four years and expire ten years from the date of grant. The 1996 Plan expired
on April 1, 2006. As of October 31, 2008, options underlying 68,519 shares of
common stock were outstanding under the 1996 Plan.
 
 On May 3,
2006, the Company’s stockholders approved the North American Scientific, Inc.
2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
340,000 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. Since its inception, 490,717 shares
have been transferred into the 2006 Plan from the 1996 Plan. On April 29, 2008,
the Company’s stockholders approved the adoption of Amendment No. 1 to the 2006
Plan (the “Amendment”) to (i) increase by 2,000,000 shares the number of shares
available to be issued under the 2006 Plan, (ii) increase by 35,000 the maximum
number of shares under the Plan that may be granted in any one fiscal year to an
individual participant from 60,000 to 95,000 and (iii) increase by 35,000 the
maximum number of shares under the Plan, in connection with a participant’s
initial service, such participant may be granted from 60,000 to 95,000 that will
not count against the limit set forth in (ii) above. The exercise price of an
option is equal to the fair market value of the Company’s stock on the date of
the grant. As of October 31, 2008, options underlying 1,452,141 shares of common
stock were available for grant in the 2006 Plan.
 
 On April
23, 2007, the Company granted stock options with respect to 360,000 shares of
its common stock in connection with the employment by the Company of its new
CEO, John B. Rush. Options with respect to 150,000 shares of the Company’s
common stock were issued under the 2006 Plan. Options with respect to the
remaining 240,000 shares of the Company’s common stock were issued as a
stand-alone grant outside the 2006 Plan and approved by the written consent of a
majority of stockholders on April 20, 2007. The stock options have an exercise
price of $5.80, which is equal to the fair market value per share of the
Company’s common stock on the grant date. All of the options have a term of ten
years and vest monthly over a four-year period. The options remain exercisable
until the earlier of the expiration of the term of the option or (i) three
months following Mr. Rush’s date of termination in the case of termination for
reasons other than cause, death or disability (as such terms are defined in his
employment agreement) or (ii) 12 months following Mr. Rush’s date of termination
in the case of termination on account of death or disability. In the event that
Mr. Rush is terminated for cause, all outstanding options, whether vested or
not, will immediately lapse. Pursuant to his employment agreement, stock options
issued to Mr. Rush were subject to an anti-dilution clause, triggered in the
event the Company issued additional equity securities within the twenty-four
months immediately following March 22, 2007, the date of his employment, such
that the number of options granted to Mr. Rush under the employment agreement
remains equivalent to 3% of the outstanding common stock of the Company. At its
January 15, 2008 meeting, the Board of Directors, agreed to make an additional
award to Mr. Rush as part of his employment. As a result of the 2007 Private
Placement, the Company issued 190,000 and 376,094 options underlying common
stock from the 2006 Plan and outside the 2006 Plan, respectively, to Mr. Rush at
an exercise price of $1.40 per share, the closing price of the Company’s common
stock on January 15, 2008, the date the option grant was approved by the Board
of Directors. The stock options vest 25% upon the first anniversary of the grant
date, and then evenly over the remaining (36) thirty-six months, such that all
options are vested after four years, and have a term of ten
years.
  81
  In
addition, three members of the executive management team were granted
anti-dilution guarantees by the Board of Directors as consideration of their
employment. The Company issued 440,369 stock options to these executives from
the 2006 Plan, at an exercise price of $1.40 per share, the closing price of the
Company’s on January 15, 2008, the date the option grant was approved by the
Board of Directors. Also at the January 15, 2008 meeting, the Board of Directors
granted, from the 2006 Plan, stock options underlying 156,000 shares of the
Company’s common stock to certain management employees, at a $1.40 exercise
price. The stock options vest 25% after a one year cliff, and then evenly over
the remaining (36) thirty-six months, such that all options are vested after
four years, and have a term of ten years.
 
 On
February 15, 2008, the Company’s Board of Directors approved, subject to the
approval of the Company’s stockholders, a plan to re-price all existing employee
stock options at $2.05 per share, the closing price of the Company’s common
stock on February 15, 2008, except for the 2006 Premium Price Awards, which were
re-priced to $3.25 per share, which is equal to 159% of the re-priced fair value
of the Company’s common stock. The re-pricing applies to all stock options
outstanding as of February 15, 2008 held by all persons who are currently
employed or actively engaged by the Company, including its executive officers,
and to certain other persons for which the Board determined that re-pricing was
appropriate (collectively, the “Eligible Participants”). The number of shares
subject to the new stock options was determined based on a Black-Scholes
valuation of the existing stock option such that the Black-Scholes value of the
new stock option will approximately equal the Black-Scholes value of the
existing stock option, using the following variables.
 
 Dividend
      yield
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        72
                        %Risk-free
      interest rate
                        
                        
                        3.4
                        %Expected
      life
                        
                        5
      Years
 
 All new
stock options continue to vest in accordance with the vesting terms of the
existing stock options. All new stock options, to the extent such option are
vested, will be exercisable for a period of seven years. The Company’s
stockholders approved the re-pricing at their annual meeting on April 29, 2008.
As a result of the re-pricing exercise, options underlying 691,852 shares of
common stock, with an exercise price ranging from $4.65 to $83.75, were replaced
by options underlying 535,257 shares of common stock, with and exercise price of
$2.05 or $3.25 for the 2006 Premium Awards.
 
 The
following table summarizes the re-pricing activity approved by the Board of
Directors and stockholders as of October 31, 2008:
 
 Employee Options Cancelled and Re-priced
                                                    
                                                    Re-priced Options GrantedPlan
                                                    
                                                    Shares
                                                    
                                                    Range of Exercise Price
                                                    
                                                    Shares
                                                    
                                                    Weighted
                                                      Avg.
                                                      Exercise
                                                      Price1996 Plan
                                                    
                                                    179,060
                                                    
                                                    $
                                                    11.15
                                                    
                                                    —
                                                    
                                                    $
                                                    83.75
                                                    
                                                    41,595
                                                    
                                                    $
                                                    2.05Premium Price
                                                    
                                                    49,900
                                                    
                                                    
                                                    16.75
                                                    
                                                    —
                                                    
                                                    
                                                    16.75
                                                    
                                                    22,658
                                                    
                                                    
                                                    3.252006
      Plan
                                                    
                                                    222,892
                                                    
                                                    
                                                    4.65
                                                    
                                                    —
                                                    
                                                    
                                                    5.80
                                                    
                                                    231,004
                                                    
                                                    
                                                    2.05CEO
      Options
                                                    
                                                    240,000
                                                    
                                                    
                                                    5.80
                                                    
                                                    —
                                                    
                                                    
                                                    5.80
                                                    
                                                    240,000
                                                    
                                                    
                                                    2.05691,852
                                                    
                                                    $
                                                    4.65
                                                    
                                                    
                                                    
                                                    $
                                                    83.75
                                                    
                                                    535,257
                                                    
                                                    $
                                                    2.05
  82
  On April
29, 2008, the Company’s stockholders approved the 2008 Non-Employee Directors’
Equity Compensation Plan (the “2008 Director Plan”). The 2008 Directors Plan
supersedes the 2003 Non-Employee Directors' Equity Compensation Plan. Under the
2008 Director Plan, the Company may issue up to 1,500,000 shares to eligible
non-employee directors of the Company through non-qualified options and/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 in accordance with the terms set forth at the time of the grant, and will
become exercisable provided that the holder is a non-employee director of the
Company on any such vesting date. The options expire ten years from the date of
grant. Pursuant to the terms of the 2008 Director Plan, the Board of Directors
and the stockholders approved a one-time non-statutory stock option grant to
each non-employee director, to purchase 30,000 shares of the Company’s common
stock, and to the Chairman of the Board, a non-statutory stock option grant to
purchase 45,000 shares of the Company’s common stock, in exchange for all of
such director’s and the Chairman’s outstanding stock options. As a result, the
Company cancelled 68,000 stock options, with a range of exercise price between
$6.15 and $44.00 from the 2003 Non-Employee Director Equity Compensation Plan,
and issued 195,000 stock options, from the 2008 Director Plan, at an exercise
price of $2.10 per share, the closing price of the Company’s common stock on the
NASDAQ Capital Market on February 13, 2008, which is the date the Company’s
Compensation Committee approved the exchange. The Company’s stockholders
approved the exchange on April 29, 2008.
 
 In
addition, under the terms of the 2008 Director Plan, each non-employee director
elected to serve on the Board at the annual meeting is granted a non-statutory
stock option to purchase 10,000 shares of the Company’s common stock. On the
date of such meeting, the non-employee director elected or appointed Chairman of
the Board shall be granted an additional 10,000 stock options. Each individual
who is first elected or appointed as a non-employee director shall be granted,
on the date of such initial election or appointment, a stock option to purchase
30,000 shares of common stock. Pursuant to these terms, and subsequent to its
annual meeting on April 29, 2008, the Company issued 100,000 stock options at a
$1.65 exercise price, the closing price of the Company’s common stock on April
29, 2008 to its non-employee Directors appointed at the annual meeting. The
options vest one year from the date of grant and have a seven-year term from the
date of grant.
 
 At
October 31, 2008, a total 2,657,141 shares of the Company’s common stock were
reserved for issuance. The following table summarizes stock option activity for
both plans:
 
 Options OutstandingOptions
                                Available
                                for Grant
                              
                              
                              Number
                                Outstanding
                              
                              
                              Exercise PriceBalance at October 31, 2005
                              
                              
                              346,488
                              
                              
                              
                              482,822
                              
                              
                              $
                              0.15 - $122.70Granted
                              
                              
                              (290,600
                              )
                              
                              
                              290,600
                              
                              
                              $
                              9.60 - $16.75Forfeited and expired
                              
                              
                              (38,888
                              )
                              
                              
                              (85,324
                              )
                              
                              $
                              5.55 - $83.75Exercised
                              
                              
                              —
                              
                              
                              
                              (437
                              )
                              
                              $
                              5.55 - $5.60Additional shares reserved
                              
                              
                              340,000
                              
                              
                              
                              —
                              
                              
                              
                              —Balance at October 31, 2006
                              
                              
                              357,000
                              
                              
                              
                              687,661
                              
                              
                              $
                              0.15 - $122.70Granted
                              
                              
                              (492,894
                              )
                              
                              
                              492,894
                              
                              
                              $
                              4.65 - $6.15Forfeited and expired
                              
                              
                              296,255
                              
                              
                              
                              (279,132
                              )
                              
                              $
                              3.50 - $122.70Exercised
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Additional shares reserved
                              
                              
                              240,000
                              
                              
                              
                              —
                              
                              
                              
                              —Balance at October 31, 2007
                              
                              
                              400,361
                              
                              
                              
                              901,423
                              
                              
                              $
                              0.15 - $117.50Granted
                              
                              
                              (1,957,480
                              )
                              
                              
                              1,957,480
                              
                              
                              $
                              0.30 - $2.10Forfeited and expired
                              
                              
                              262,797
                              
                              
                              
                              (373,397
                              )
                              
                              $
                              1.40 -$117.50Exercised
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Additional shares reserved
                              
                              
                              3,921,868
                              
                              
                              
                              —
                              
                              
                              
                              —Shares cancelled for re-pricing
                              
                              
                              691,852
                              
                              
                              
                              (691,852
                              )
                              
                              $
                              4.65 – $83.75Shares cancelled for exchange
                              
                              
                              68,000
                              
                              
                              
                              (68,000
                              )
                              
                              $
                              6.15 – $44.00Shares issued for re-pricing
                              
                              
                              (535,257
                              )
                              
                              
                              535,257
                              
                              
                              $
                              2.05 – $3.25Shares issued in exchange
                              
                              
                              (195,000
                              )
                              
                              
                              195,000
                              
                              
                              $
                              2.10Balance at October 31, 2008
                              
                              
                              2,657,141
                              
                              
                              
                              2,455,911
                              
                              
                              $
                              0.15 - $83.75
 
 There were 333,969, options, 333,904 options and 375,733 options exercisable with weighted
average exercise prices of $13.78, $34.70 and $42.85 at October 31, 2008,
October 31, 2007 and 2006, respectively.
  83





The
following table summarizes options outstanding at October 31, 2008 and the
related weighted average exercise price and remaining contractual life
information:




Employee Options Outstanding
                                                                                                          
                                                                                                          
                                                                                                          Employee Options ExercisableRange of
                                                                                                            Exercise Prices
                                                                                                          
                                                                                                          
                                                                                                          Shares
                                                                                                          
                                                                                                          
                                                                                                          Weighted Avg.
                                                                                                            Remaining
                                                                                                            Contractual
                                                                                                            Life (Years)
                                                                                                          
                                                                                                          
                                                                                                          Weighted
                                                                                                            Avg.
                                                                                                            Exercise
                                                                                                            Price
                                                                                                          
                                                                                                          
                                                                                                          Shares
                                                                                                          
                                                                                                          
                                                                                                          Weighted
                                                                                                            Avg.
                                                                                                            Exercise
                                                                                                            Price$0.15 - $1.35
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          508,413
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          8.23
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          0.80
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          8,170
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          0.39$1.40
      - $1.40
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          934,530
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          9.21
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          1.40
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          —$1.60
      - $2.05
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          708,033
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7.60
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          1.87
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          194,987
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          2.02$2.05
      - $44.00
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          285,055
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          3.07
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          10.33
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          110,932
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          22.91$83.75
      - $83.75
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          19,880
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1.57
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          83.75
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          19,880
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          83.752,455,911
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          333,969





The
average fair value for accounting purposes of options granted was $0.85, $3.14
and $5.43 for the years ended October 31, 2008, 2007 and 2006,
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, 2008 and 2007:





Number of
                          Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Weighted
                          Avg.
                          Remaining
                          Contractual
                          Life (Years)
                        
                        
                        Intrinsic
                          Value
                          (in
      whole $)As of October 31,
      2007:Employee
      Options Outstanding
                        
                        
                        901,423
                        
                        
                        $
                        3.52
                        
                        
                        
                        7.54
                        
                        
                        $
                        3,710Employee
      Options Expected to Vest
                        
                        
                        567,519
                        
                        
                        $
                        0.56
                        
                        
                        
                        2.82
                        
                        
                        $
                        —Employee
      Options Exercisable
                        
                        
                        333,904
                        
                        
                        $
                        6.94
                        
                        
                        
                        5.26
                        
                        
                        $
                        3,710As of October 31,
      2008:Employee
      Options Outstanding
                        
                        
                        2,455,911
                        
                        
                        $
                        3.12
                        
                        
                        
                        7.77
                        
                        
                        $
                        140Employee
      Options Expected to Vest
                        
                        
                        2,121,942
                        
                        
                        $
                        10.46
                        
                        
                        
                        6.61
                        
                        
                        $
                        —Employee
      Options Exercisable
                        
                        
                        333,969
                        
                        
                        $
                        13.78
                        
                        
                        
                        6.22
                        
                        
                        $
                        140





As of
October 31, 2008, there was $2,189 of unrecognized compensation expense related
to non-vested share-based compensation arrangements granted under share-based
compensation plans using the fair value method of SFAS 123 (R).  As of
October 31, 2008, the cost was expected to be recognized over a weighted average
period of 4 years, using the straight line method.




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:


84





Year Ended October 31,2008
                
                
                2007
                
                
                2006Dividend
      yield
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %Expected
      volatility
                
                
                72
                %
                
                
                61
                %
                
                
                63
                %Risk-free
      interest rate
                
                
                3.4
                %
                
                
                4.8
                %
                
                
                4.9
                %Expected
      life
                
                5
      years
                
                
                5
      years
                
                
                5
      years





Stockholders' Rights
Plan





In
October 1998, the Board of Directors of the Company implemented a rights
agreement to protect stockholders' rights in the event of a proposed takeover of
the Company. In the case of a triggering event, each right entitles the
Company's stockholders to buy, for $80, $160 worth of common stock for each
share of common stock held. The rights will become exercisable only if a person
or group acquires, or commences a tender offer to acquire, 15% or more of the
Company's common stock. The rights expired pursuant to their terms in October
2008.





Employee
Stock Purchase Plan





In March
2000, the Board of Directors authorized an Employee Stock Purchase Plan (the
“ESPP") under which 60,000 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. On June 5, 2007,
the Board of Directors approved a 60,000 share increase to 120,000 authorized
shares for the ESPP. For the years ended October 31, 2008, 2007 and 2006, the
shares issued under the ESPP were 21,455, 30,816 and 19,296 shares,
respectively. At October 31, 2008 and 2007, 21,257 and 43,951 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 $10,000 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,
2008 and 2007, a cumulative total of 23,399 shares had been repurchased by the
Company at a cost of $227, and are reflected as Treasury Stock on the Balance
Sheet at the respective dates.





NOTE
12—INCOME TAXES





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


Year Ended October 31,2008
                
                
                2007
                
                
                2006Current:Federal
                
                $
                —
                
                
                $
                —
                
                
                $
                —State
                
                
                —
                
                
                
                —
                
                
                
                ——
                
                
                
                —
                
                
                
                —Deferred:Federal
                
                
                47,285
                
                
                
                (6,037
                )
                
                
                (5,100
                )State
                
                
                7,196
                
                
                
                (1,567
                )
                
                
                (1,273
                )Valuation
      Allowance
                
                
                (54,481
                )
                
                
                7,604
                
                
                
                6,373—
                
                
                
                —
                
                
                
                —$
                —
                
                
                $
                —
                
                
                $
                —




85




The
Company did not recognize a benefit for the loss during the years ended October
31, 2008, 2007, and 2006. 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 31,2008
                
                
                2007Deferred
      tax assets :Accrued
      liabilities
                
                $
                622
                
                
                $
                465Allowance
      for doubtful accounts
                
                
                59
                
                
                
                192Inventory
      reserve and capitalized inventory
                
                
                138
                
                
                
                163Other
                
                
                7
                
                
                
                10Depreciation
      and amortization
                
                
                1,247
                
                
                
                1,004Tax
      credits
                
                
                —
                
                
                
                4,814Theseus
      impairment
                
                
                1,850
                
                
                
                1,850Net
      operating loss carryforwards
                
                
                9,267
                
                
                
                59,17313,190
                
                
                
                67,671Deferred
      tax liabilities:Purchased
      intangible assets
                
                
                —Other
                
                
                ——Net
      deferred tax assets
                
                
                13,190
                
                
                
                67,671Less:
      valuation allowance
                
                
                (13,190
                )
                
                
                (67,671
                )$
                —
                
                
                $
                —





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.





The
activity in the deferred tax asset valuation allowance is as follows (in
thousands):




Year Ended October 31,2008
                
                
                2007
                
                
                2006Balance,
      beginning of year
                
                $
                67,671
                
                
                $
                60,067
                
                
                $
                53,694Charged
      to other accounts
                
                
                5,440
                
                
                
                7,604
                
                
                
                6,373FIN48
      adoption
                
                
                (59,921
                )
                
                
                —
                
                
                
                —Deductions
                
                
                —
                
                
                
                —
                
                
                
                —Balance,
      end of year
                
                $
                13,190
                
                
                $
                67,671
                
                
                $
                60,067




86






Year Ended October 31,2008
                  
                  
                  2007
                  
                  
                  2006Federal
      tax provision at U.S. statutory rate
                  
                  
                  (34
                  )%
                  
                  
                  (34
                  )%
                  
                  
                  (34
                  )%State
      income taxes, net of federal tax benefit
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Other
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1Other
      non-deductible expenses
                  
                  
                  3
                  
                  
                  
                  2
                  
                  
                  
                  —Valuation
      allowance
                  
                  
                  31
                  
                  
                  
                  32
                  
                  
                  
                  33—
                  %
                  
                  
                  —
                  %
                  
                  
                  —
                  %





FIN48
adoption





On
November 1, 2007, the Company adopted FASB 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 by prescribing the recognition threshold a tax position is required to
meet before being recognized in the financial statements and also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. As a result of the adoption of
FIN 48, the Company reduced the liability for net unrecognized tax
benefits, classified in accrued liabilities, by $592 and accounted for this as a
cumulative effect of a change in accounting principle that was recorded as an
increase to retained deficit. In implementing FIN 48, the Company has
classified $120 as current income taxes payable, and, reduced to zero, both its
short-term and long-term income tax receivable and long-term income tax payable.
At October 31, 2008, the $120 current income tax reserve remained unchanged and
is included in Accrued Expenses on the Balance Sheet.




Upon
adoption of FIN 48, the Company recognizes interest expense and penalty
within Interest and Other Expenses and penalties within General and
Administrative expenses accrued on unrecognized tax benefits. As of the date of
adoption of FIN 48, the Company had accrued a nominal amount for interest
and penalties, and there was not a material change to this amount as of October
31, 2008.




Recognition
of any portion of the unrecognized tax benefits arising from the Company’s
uncertain tax position would not have a significant effect on the Company’s
effective tax rate.




The
Company files tax returns in the U.S on a federal basis and in a number of U.S.
state jurisdictions. The Company is subject to examination of its tax returns by
these jurisdictions, and is subject to challenges of tax liability by other
jurisdictions in which the Company currently does not file tax returns. The
Company believes it is subject to challenges by the taxing jurisdictions in
which it files for tax years from 2004 through 2008, and for other taxing
jurisdictions for any periods for which the statute of limitations has not
expired. The Company does not expect any significant changes to the amount of
its unrecognized tax benefits within the next twelve months.




As of
October 31, 2007, the Company had generated approximately $141,367 and $116,000
of Federal and state Net Operating Loss Carry-forwards (“NOL”), respectively,
and $4,813 of Federal Research & Development Credits (“R&D Credits”)
through its recurring operating losses, and its acquisitions of Theseus
Corporation in 2000 and NOMOS Corporation in 2004. The tax effect of the Federal
and state NOL and R&D Credits have been carried as a component of its
deferred tax assets, and completely offset by a valuation allowance. The Federal
NOL and R&D Credits are subject to certain statutory limitations, imposed
upon a change of control, which reduce the value of the Federal NOL and R&D
Credits that can be used to offset future income under Internal Revenue Service
Code Section 382 and Section 383, collectively the “Code”. As a result of the
Company’s January 2008 PIPE transaction (See Note 11—Stockholders’ Equity) the
Company has experienced a change in ownership as defined by the Code. Federal
statutory limitations under the sections are generally accepted as limitations
by the states in which the Company currently files state returns. The effect of
the change of ownership has been to reduce to $10,199 the combined statutory
limit on the Federal and State NOL and R&D Credits available to the Company,
as determined under the Code. Based on its effective tax rate 40%, the Company
recorded a $59,921 decrease to its deferred tax assets and its valuation
allowance at January 31, 2008 as a result of the limitation.




87





NOTE
13—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 $102, $85,
and $78, for the years ended October 31, 2008, 2007, and 2006,
respectively.





NOTE
14—COMMITMENTS AND CONTINGENCIES





Contract
Commitments





The
Company has entered into purchase commitments of $98 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, 2008, 2007 and 2006 was $402, $379 and $373,
respectively.





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





For the Years Ended October
    31,2009
                  
                  $
                  2682010
                  
                  
                  302011
                  
                  
                  302012
                  
                  
                  252013
      and thereafter
                  
                  
                  11$
                  364





Related
Parties and License Agreements





On
February 17, 2006, the Company entered an exclusive license agreement with
IdeaMatrix, Inc. (a company wholly owned by our former Vice President of New
Product Development (Brachytherapy), Richard Terwilliger) for certain
brachytherapy technology pertaining to needles and strands, used in the
brachytherapy manufacturing process.  This technology is critical to
our SurTRAK line of products, sold in connection with our brachytherapy
seeds.  Under this exclusive license agreement, the Company paid $125
upon execution of the license agreement on February 17, 2006, and is required to
pay $125 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, the Company has 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.





$375
remains payable through 2011 under the IdeaMatrix license
agreement.





A license
agreement with the University of South Florida Research Foundation, Inc.,
covering certain patent processes was terminated on November 9, 2007 by mutual
consent of both parties.


88




Outsourcing




On April
20, 2008, the Company entered into an administrative management agreement with
third-party administrator (the “Administrator”). Under the terms of the
agreement, all of the Company’s employees became employees of the Administrator,
and the Administrator assumed the cost all employee-related health benefit
costs, workers’ compensation insurance and the payroll and human resource
functions of the Company. The Company pays a monthly fee to the Administrator
equal to the monthly payroll for its former employees, plus a fixed fee as a
percentage of the payroll costs, to cover the costs of the employee’s
participation in the Administrator’s benefit plans, net of employee
contributions, workers’ compensation costs, and the payroll and human resource
management costs.




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
November 2005, we were served with a complaint filed in U.S. District Court in
Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s six
count complaint alleges breach of a confidentiality agreement, fraud, patent
infringement, wrongful interference with contractual relations, violation of the
Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
Practices Act. WWMT alleges that we fraudulently obtained WWMT’s confidential
information during negotiations to purchase WWMT in 2004 and that once we
acquired that information, we allegedly learned that Richard Terwilliger, (our
former Vice President of New Product Development) owned certain patent rights
and that we began trying to inappropriately gain property rights by hiring him
away from WWMT. We were served with this matter at approximately the same time
Mr. Terwilliger was served with a lawsuit in state court and with an
application seeking a preliminary injunction declaring plaintiffs to
be the sole owners of the intellectual property at issue and preventing Mr.
Terwilliger from effectively serving as our Vice President of New Product
Development. We have agreed to defend Mr. Terwilliger. We have moved 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.  On March 12, 2007, the
Court administratively dismissed the action. On or about April 30, 2007, the
parties filed a Joint Motion to Reopen the Case after Administrative Dismissal,
which the court subsequently denied without prejudice. The parties re-filed the
Joint Motion to Reopen the Case, and the Court issued an order reopening the
case on July 3, 2008. On August 22, 2008, the Court set a scheduling order in
this matter. On September 24, 2008, plaintiffs filed a Motion for an Extension
of Time to File a Motion For Leave to Amend.  Subsequently, on
September 29, 2008, plaintiffs filed a Motion for Leave to Amend the Complaint,
seeking to add additional claims to the action and remove other
claims.  On December 5, 2008, the Court denied both of plaintiffs’
motions.  The Court ordered plaintiffs to file a request to dismiss
any claims they intend to withdraw voluntarily by December 22, 2008. On
December 22, 2008, the plaintiffs filed a request to dismiss without prejudice
certain claims. On January 12, 2009, the defendants opposed that motion arguing,
inter alia, that those claims should be dismissed with prejudice. The plaintiffs
have not yet responded. We deny liability and intend to vigorously
defend this litigation as it progresses.


89





In
October 2007, we were served with a demand for arbitration by AnazaoHealth
Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading services for
our Prospera brachytherapy products pursuant to a Services Agreement dated as of
June 1, 2005, as amended (the “Services Agreement”). In its demand for
arbitration, AnazaoHealth is seeking indemnification from us under the Services
Agreement for damages arising out of a litigation filed against AnazaoHealth in
the U.S. District Court for the District of Connecticut (the “Connecticut
Litigation”) by Richard Terwilliger, Gary Lamoureux, World Wide Medical
Technologies, LLC, IdeaMatrix, Inc., Advanced Care Pharmacy, LLC, Advanced Care
Pharmacy, Inc., and Advanced Care Medical, Inc. In September 2008, AnazaoHealth
filed an Amended Arbitration Demand to which we filed an
Objection.  On or about October 7, 2008, the parties agreed to toll
the issues in the Amended Arbitration Demand and the matter was taken off
calendar.  The plaintiffs in the Connecticut Litigation claim that
AnazaoHealth’s provision of services in the brachytherapy field infringes their
patent rights, and certain of the plaintiffs claim that our Prospera products
infringe their patent rights. We deny liability and intend to vigorously defend
this arbitration should it recommence.




In
February 2008, an individual plaintiff, Richard Hodge, filed a complaint in the
Multnomah 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. Hodge to receive excessive radiation
during the course of his IMRT treatment, as a result of a manufacturing and/or
design defect(s) in our former CORVUS and BAT products. The plaintiff dismissed
this complaint with prejudice on October 28, 2008.





In
November 2008, Denise M. Black and Lon Black, filed a complaint in the State of
New York, Supreme Court, County of Ontario against Clifton Springs Hospital
& Clinic, Charles H. Albrecht Radiation Oncology, Dana P. Hansen, M.D.,
Charles H. Albrecht, M.D., Matthew Pacella, MS, DABR, Dustin A. Gress, MS,
Upstate Medical Physics, Inc., Sandy K.S. Perry, M.D., Finger Lakes Women’s
Health LLC, NOMOS Corporation, n/k/a Best Nomos and North American Scientific,
Inc. alleging the defendants caused Mrs. Black to sustain personal injuries,
increased pain and suffering and additional medical expense due to negligence
and deviation from accepted medical practice.  We deny liability and
intend to vigorously defend this litigation as it progresses.  No
trial date has yet been set.





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





NOTE
15—NASDAQ LISTING





We
received a NASDAQ Stock Market (“NASDAQ”) Staff Deficiency Letter dated
September 21, 2007 indicating that, based on the Quarterly Report on Form 10-Q
for the period ended July 31, 2007, NASDAQ had determined that we were not in
compliance with the minimum $10 million stockholders’ equity requirement for
continued listing on the NASDAQ Global Market set forth in Marketplace Rule
4450(a)(3). On December 11, 2007, we received formal notice that a NASDAQ
Listing Qualifications Panel (the “Panel”) had granted our request for a
transfer from the NASDAQ Global Market to the NASDAQ Capital Market, and
continued listing on the NASDAQ Capital Market, subject to the following
exception:





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





§
            On
      or before January 31, 2008, we were required to file our Annual Report on
      Form 10-K for the fiscal year ended October 31, 2007, which shall
      demonstrate proforma shareholder’s equity of $2.5 million or greater.
      We  filed our Annual Report on Form 10-K on January 29,
      2008.




90





Further,
on October 5, 2007, we received a notice from NASDAQ, dated October 5, 2007
indicating that for the last 30 consecutive business days, the bid price of our
common stock had closed below the minimum $1.00 per share requirement for
continued inclusion under Marketplace Rule 4450(a)(5) (the “Rule”). Therefore,
in accordance with Marketplace Rule 4450(e)(2), we had 180 calendar days, or
until April 2, 2008, to regain compliance. We did not regain compliance with the
Rule by April 2, 2008, and on April 4, 2008, NASDAQ notified us that our common
stock would be delisted on April 15, 2008. On April 10, 2008, we appealed the
delisting decision pursuant to the procedures set forth in the NASDAQ
Marketplace Rule 4800 Series, and were granted a hearing with a NASDAQ Listing
Panel on May 22, 2008.  Our common stock continued to trade on the
NASDAQ Capital Market pending the outcome of such hearing.




On
February 5, 2008, the Company received a letter from NASDAQ dated February 4,
2008 providing notice that the Company has demonstrated compliance with NASDAQ
Marketplace Rules, and that the NASDAQ Listing Qualifications Panel has
determined to continue the listing of the Company’s securities on NASDAQ. In
addition, the Staff has approved the Company’s application to list its common
stock on The NASDAQ Capital Market. The Company’s common stock was transferred
from The NASDAQ Global Market to The NASDAQ Capital Market effective February 6,
2008.





On April
29, 2008, our stockholders approved a 1 share for 5 share reverse split to
regain compliance with the minimum bid price rule. The reverse split became
effective on May 1, 2008. Our common stock traded at or above the $1.00 minimum
bid price for the period May 1, 2008 through May 14, 2008, which marked 10
consecutive trading days in which the closing bid price exceeded the $1.00
minimum. On May 15, 2008, we were notified by NASDAQ that we had regained
compliance with the minimum bid price requirements and no further action was
required.





On August
20, 2008, we received another letter from NASDAQ indicating that for the last 30
consecutive business days, the bid price of our common stock closed below the
minimum $1.00 per share requirement for continued inclusion under the Rule. The
Company had 180 calendar days, or until February 17, 2009, to regain compliance
with the minimum bid price level. However, given the current extraordinary
market conditions, NASDAQ has decided to suspend the bid price and market value
of publicly held shares requirements through Monday, April 20,
2009.  On October 16, 2008, NASDAQ filed an immediately effective rule
change with the SEC, and this rule change was extended in December 2008, such
that companies will not be cited for any new concerns related to bid price or
market value of publicly held shares deficiencies.  We are currently
in a bid price compliance period and as a result of this rule suspension and
extension, we will have until August 28, 2009 to regain compliance by achieving
a $1.00 closing bid price for a minimum of 10 consecutive trading
days.  If, at anytime before August 28, 2009, the bid price of the
Company’s common stock closes at $1.00 per share or more for a minimum of 10
consecutive business days, the Company understands that NASDAQ’s Staff will
provide written notification that the Company has achieved compliance with the
Rule. If the Company does not regain compliance with the Rule by August 28,
2009, the Company understands that NASDAQ’s Staff will provide written
notification that the Company’s common stock will be delisted. At that time, the
Company may appeal the Staff’s determination to delist its common stock to a
NASDAQ Listing Qualifications Panel.





Beyond
the risk of delisting arising from the $1.00 minimum closing bid price
requirement, the Company is subject to a number of other requirements under
Maintenance Standards for continued listing on the NASDAQ Capital Market,
including but not limited to, a $2.5 million minimum stockholders’ equity under
Maintenance Standard 1, as set forth in Marketplace Rule
4310(c)(3).





NOTE
16—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)





The
following table presents summarized quarterly financial data (in thousands,
except per share data).  All periods have been restated for
discontinued operations (See Note 2).


91





First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  QuarterFiscal
      2008Net
      sales
                
                $
                3,466
                
                
                $
                3,704
                
                
                $
                3,418
                
                
                $
                3,339Gross
      profit
                
                
                1,131
                
                
                
                1,270
                
                
                
                1,174
                
                
                
                1,024Net
      loss from continuing operations
                
                
                (4,646
                )
                
                
                (4,618
                )
                
                
                (4,140
                )
                
                
                (2,760
                )Net
      income from discontinued operations
                
                
                251
                
                
                
                267
                
                
                
                162
                
                
                
                4,539Net
      income ( loss)
                
                
                (4,395
                )
                
                
                (4,351
                )
                
                
                (3,978
                )
                
                
                1,779Basic
      and diluted loss per share – continuing operations
                
                $
                (0.61
                )
                
                $
                (0.25
                )
                
                $
                (0.22
                )
                
                $
                (0.15
                )Basic
      and diluted income per share – discontinued operations
                
                $
                0.03
                
                
                $
                0.01
                
                
                $
                0.00
                
                
                $
                0.25Basic
      and diluted income (loss) per share
                
                $
                (0.57
                )
                
                $
                (0.24
                )
                
                $
                (0.22
                )
                
                $
                0.10Fiscal
      2007Net
      sales
                
                $
                2,678
                
                
                $
                2,776
                
                
                $
                2,702
                
                
                $
                3,272Gross
      profit
                
                
                699
                
                
                
                736
                
                
                
                604
                
                
                
                857Net
      loss from continuing operations
                
                
                (2,989
                )
                
                
                (2,536
                )
                
                
                (3,040
                )
                
                
                (3,538
                )Net
      loss from discontinued operations
                
                
                (206
                )
                
                
                (643
                )
                
                
                (7,648
                )
                
                
                (398
                )Net
      loss
                
                
                (3,195
                )
                
                
                (3,179
                )
                
                
                (10,688
                )
                
                
                (3,936
                )Basic
      and diluted loss per share – continuing operations
                
                $
                (0.51
                )
                
                $
                (0.43
                )
                
                $
                (0.52
                )
                
                $
                (0.60
                )Basic
      and diluted loss per share – discontinued operations
                
                $
                (0.04
                )
                
                $
                (0.11
                )
                
                $
                (1.30
                )
                
                $
                (0.07
                )Basic
      and diluted loss per share
                
                $
                (0.54
                )
                
                $
                (0.54
                )
                
                $
                (1.82
                )
                
                $
                (0.67
                )





NOTE
17—SUBSEQUENT EVENTS





Line
of Credit





On
November 1, 2008, the Company began drawing down on the outstanding line of
credit with the Bank, and as of January 2009, the outstanding balance was
approximately $900. In addition, in January 2009, the Company was notified by
the Bank that the Company did not meet the $2.0 million Minimum Tangible Net
Worth Covenant required by the line of credit agreement. The Company has opened
discussions with the Bank to seek a waiver of compliance with the covenant. The
Bank has continued to allow the Company access to the available funds on the
line of credit.




The
Company began paying the outstanding principal balance on the Growth Capital
Loan with the Bank in January 2009.


92


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/JOHN
      B. RUSHJanuary
      29, 2009
              By:
              John
      B. Rush
                President
      and Chief Executive Officer





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





Signature
              
              Title
              
              Date/s/GARY
      N. WILNERDr. Gary
      N. Wilner
              
              Chairman
      of the Board of Directors
              
              January
      29, 2009/s/JOHN
      B. RUSHJohn
      B. Rush
              
              President,
      Chief Executive Officer and Director
                (Principal
      Executive Officer)
              
              January
      29, 2009/s/BRETT
      L. SCOTTBrett
      L. Scott
              
              Senior
      Vice President and Chief Financial Officer
                (Principal
      Financial and Accounting Officer)
              
              January
      29, 2009/s/WILFRED
      E. JAEGER, M.D.Wilfred
      E. Jaeger
              
              Director
              
              January
      29, 2009/s/JOHN
      M. SABINJohn
      M. Sabin
              
              Director
              
              January
      29, 2009/s/RICHARD
      A. SANDBERGRichard
      A. Sandberg
              
              Director
              
              January
      29, 2009/s/ROBERT
      TONIRobert
      Toni
              
              Director
              
              January
      29, 2009/s/RODERICK
      A. YOUNGRoderick
      A. Young
              
              Director
              
              January
      29, 2009


93