10-K 1 v062603_10k.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2006

Commission File Number 0-26670

NORTH AMERICAN SCIENTIFIC, INC.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

51-0366422

(I.R.S. Employer

Identification No.)

20200 Sunburst Street, Chatsworth, CA 91311

(Address of principal executive offices)

(818) 734-8600

(Registrant's telephone number, including area code)

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

Title of Each Class

Common Stock, par value $0.01 per share

Name of Each Exchange on Which Registered

The NASDAQ Stock Market LLC

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

NORTH AMERICAN SCIENTIFIC, INC.

Table of Contents

Form 10-K

		Page
PART I
Item 1.	Business	3
Item 1A	Risk Factors	26
Item 1B	Unresolved Staff Comments	45
Item 2.	Properties	45
Item 3.	Legal Proceedings	45
Item 4.	Submission of Matters to a Vote of Security Holders	46
Item 4a.	Executive Officers of the Registrant	47
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	48
Item 6.	Selected Consolidated Financial Data	49
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	51
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 8.	Consolidated Financial Statements and Supplementary Data	67
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	67
Item 9A.	Controls and Procedures	67
Item 9B.	Other Information	69

PART III
Item 10.	Directors and Executive Officers of the Company	70
Item 11.	Executive Compensation	70
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
Item 13.	Certain Relationships and Related Transactions	70
Item 14.	Principal Accounting Fees and Services	70

PART IV
Item 15.	Exhibits, Financial Statement Schedules	71
	Signatures	114

Item 1. BUSINESS

INTRODUCTION

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

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

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

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

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

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

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

IMRT AND IGRT RADIATION TREATMENT OF CANCER

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

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

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

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

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

IMRT/IGRT Products

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

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

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

MIMiC. Our multileaf collimator, MIMiC, is primarily sold as a component of our integrated nomosSTAT system, but can also be sold to existing CORVUS customers. MIMiC is the first multileaf collimator on the market designed exclusively for IMRT delivery. MIMiC was also the first multileaf collimator specifically designed for dynamic or rotational mode treatment, where the head of the linear accelerator is moving during the delivery of radiation, called tomotherapy. MIMiC can deliver radiation from approximately 54 angles, which is significantly greater than the 5-9 angles of a typical commercial multileaf collimator. This contributes to MIMiC's ability to conform the radiation beams to the size and shape of a tumor in accordance with the treatment plan. Leakage refers to radiation that escapes from the linear accelerator, or is transmitted through or between the leaves of the multileaf collimator, and is unintentionally absorbed by the patient. A typical multileaf collimator has an average radiation leakage of between 1% and 3%. The actual leakage for MIMiC is typically less than 1%. Although MIMiC can be added on to many linear accelerators that come already equipped with a multi-leaf collimator, the primary market for MIMiC is for the older linear accelerators that do not have a multi-leaf collimator.

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

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

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

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

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

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

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

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

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

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

BRACHYTHERAPY TREATMENT OF CANCER

Prostate Cancer

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

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

The most widely used methods for treating prostate cancer are radical prostatectomy (“RP”), the surgical removal of the prostate; external beam radiation therapy (“EBRT”) 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

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

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

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

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

Our Brachytherapy Products

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

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

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

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

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

Other Prostate Cancer Treatment Modalities in addition to Brachytherapy and IMRT

Radical Prostatectomy

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

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

External Beam Radiation Therapy (“EBRT”)

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

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

Cryosurgery

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

Other Treatments.

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

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

Prospera® for Ocular Melanoma

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

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

Breast Cancer

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

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

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

Breast Brachytherapy

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

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

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

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

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

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

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

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

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

NON-THERAPEUTIC PRODUCTS

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

Radiation Calibration and Reference Source Products

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

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

Standards for Nuclear Medicine

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

Standards for Calibration and Control

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

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

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

INTELLECTUAL PROPERTY

Patents

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

IMRT/IGRT

Name with Patent Number	Subject	Date of Issuance and Expiration Date

Method and apparatus for performing stereotactic surgery (5,269,305)	A method and apparatus for performing stereotactic surgery upon a target within a skull establishes a first, predetermined geometric relationship between a skull mount fixture mounted on the skull and a scanning table surface upon which the skull is supported; and that geometric relationship is duplicated by a displacement bar mounted upon the skull mount fixture.	July 15, 1992 until July 15, 2012
Tissue compensation method and apparatus (5,242,372)	A tissue compensation system and method for making a tissue compensator utilizes a plurality of elongate rods, one end of which contact the treatment surface on the patient, and the other end of which contact and deform a flexible membrane containing a quantity of a material substantially equivalent to tissue of the patient.	September 7, 1993 until November 12, 2011

Tissue compensation method and apparatus (5,368,543)	A tissue compensation system and method for making a tissue compensator utilizes a plurality of elongate rods, one end of which contact the treatment surface on the patient, and the other end of which contact and deform a flexible membrane containing a quantity of a material substantially equivalent to tissue of the patient.	November 29, 1994 until June 17, 2013

Method and apparatus for target position verification (5,411,026)	A method and apparatus for verifying the position of a lesion in a patient's body compares the location of the lesion in CT slices with the position of the lesion in ultrasound images taken while the patient lays on the treatment table of a linear accelerator.	May 2, 1995 until October 8, 2013

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

Method and apparatus for patient positioning for radiation therapy (5,622,187)	A method and apparatus for positioning a patient upon a treatment table of a linear accelerator includes a camera secured to the gantry of the linear accelerator and a plurality of light emitting diodes mounted with respect to the patient which are viewed by the camera.	April 22, 1997 until September 30, 2014

Method and apparatus for conformal radiation therapy (5,802,136)	A method and apparatus for conformal radiation therapy, with a radiation beam having a predetermined, constant beam intensity, treats the entire tumor volume of a patient's tumor, and the beam intensity of the radiation beam is spatially modulated across the tumor, by separating the radiation into an array of at least 3x3 treatment beam segments and independently modulating the beam intensity of the plurality of radiation beam segments.	September 1, 1998 until April 19, 2016

Planning method and apparatus for radiation dosimetry (6,038,283)	A method and apparatus for determining an optimized radiation beam arrangement for applying radiation to a tumor target volume while minimizing radiation of a structure volume in a patient, which uses an iterative cost function based on a comparison of desired partial volume data, which may be represented by cumulative dose volume histograms and proposed partial volume data, which may be represented by cumulative dose volume histograms for target tumors and tissue structures for delivery of the optimized radiation beam arrangement to the patient by a conformal radiation therapy apparatus.	March 14, 2000 until October 24, 2017

Method and apparatus for target position verification

(6,325,758)

A method and apparatus for verifying the position of a target to be treated by a radiation therapy device may include an ultrasound probe used to generate ultrasound images of the target; a position sensing system for indicating the position of the ultrasound probe with respect to the radiation therapy device, whereby the location of the target with respect to the radiation therapy device is known; and the ultrasound image of the target may be aligned with radiation treatment data.

December 4, 2001 until October 27, 2018

Radiation Sources & Brachytherapy Accessories

Name with Patent Number	Subject	Date of Issuance and Expiration Date

Needle for Imaging and Sampling (5,647,374)	An instrument and method for the biopsy of tumors, such as breast lesions, are disclosed. A stylus comprises a tube having radioactive material in the tip capable of being imaged, the stylus contained within a needle. An image of the tip of the needle can be traced as it penetrates a human body, is guided toward an imaged tissue mass, and is placed within the tumor.	July 15, 1997 until December 30, 2014
Stepper apparatus for use in the imaging/treatment of internal organs using an ultrasound probe (5,871,448)	The stepper apparatus for use in imaging/treatment of prostate cancer with radioactive seeds includes a body portion, a support element for holding the ultrasound probe, a slide portion for moving the support element relative to the body portion, and a support element for holding a template which has a plurality of openings therethrough, through which radiation seed insertion needles may be positioned.	February 16, 1999 until October 14, 2017
Laser 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, 2018
Stabilizer assembly for stepper apparatus and ultrasound probe (6,179,262)	The stabilizer assembly is used to position a stepper assembly for an ultrasound probe. The stabilizer includes two spaced apart swivel assemblies, each swivel assembly including clamps at one end thereof locking the stabilizer to a table.	January 30, 2001 until October 23, 2018
Radioactive Seeds and Method for Using Same (6,440,058)	A system and method of treating an affected region of diseased tissue in a patient is described. A plurality of first radioactive seeds and a plurality of second radioactive seeds are implanted in the affected region.	August 27, 2002 until August 25, 2019
Radioactive Seed with Multiple Markers and Method for Using Same (6,503,186)	A radioactive seed which discloses the orientation and the location of the seed when the seed is exposed to X-ray photography is provided. The seed contains multiple X-ray detectable markers which will disclose the orientation and the location of the seed when the seed is exposed to X-ray photography. The seed can also have a single marker which wraps around the external surface of the seed or wraps around a carrier body within the seed. The single marker will also disclose the orientation as well as the location of the seed.	January 7, 2003 until March 29, 2020

Apparatus for loading radioactive seeds and spacing elements into a brachytherapy needle (6,582,354)	The loading apparatus includes a tray assembly which receives radioactive seeds and spacer elements from containers thereof.	June 24, 2003 until July 23, 2020
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 October 15, 2020
Thin Radiation Source and Method of Making the Same (6,787,786)	The present invention relates to radiation sources and a method for producing radiation sources. Embodiments of the present invention are directed to radiation sources that can be used to calibrate nuclear imaging equipment, such as flood sources. According to embodiments of the invention, the radiation source includes a outer housing that contains a substrate upon which a radioactive pattern is deposited. The radioactive deposit may be placed on the surface of the substrate in the form of a deposited solution and may be fixed to the surface of the substrate by, for example, a binding agent and/or a sealing layer. The deposited solution may also include a colorant to visually indicate the activity distribution of the radioactive deposit.	September 7, 2004 until June 12, 2021
Radioactive seed with multiple markers and method for using same (6,881,183)	A radioactive seed which discloses the orientation and the location of the seed when the seed is exposed to X-ray photography is provided. The seed contains multiple X-ray detectable markers which will disclose the orientation and the location of the seed when the seed is exposed to X-ray photography. The single marker will also disclose the orientation as well as the location of the seed.	October 23, 2003 until October 23, 2023

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

Third-Party License Agreements

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

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

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

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

University of Texas. In October 1998, we began to license specific patent rights from the Board of Regents of the University of Texas System pursuant to a royalty-bearing, exclusive license agreement for a period of three years. These patent rights are related to a device that forms a critical component used in our NOMOS CRANE family of products. Effective March 31, 2006, the term of this agreement was extended for an additional two years, until March 31, 2008. In addition, the license will terminate upon 30 days notice from the Board of Regents if we fail to make any scheduled royalty payments. Under this license agreement, we are required to pay a royalty of $6,000 for each NOMOS CRANE sold in conjunction with a PEACOCK, with aggregate minimum royalties of $50,000 per year.

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

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

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

COMPETITION

IMRT/IGRT Competitors

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

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

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

Brachytherapy Competitors

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

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

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

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

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

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

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

SALES AND MARKETING

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

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

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

GOVERNMENT REGULATION

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

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

United States Regulatory Process

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

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

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

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

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

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

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

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

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

Foreign Regulatory Process

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

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

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

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

MANUFACTURING

IMRT/IGRT

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

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

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

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

Radiation Sources

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

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

RESEARCH AND DEVELOPMENT

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

EMPLOYEES

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

AVAILABLE INFORMATION

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

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

Item 1A. Risk Factors

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

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

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

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

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

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Continued scientific progress in our discovery and research programs;

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

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Levels of inventory and accounts receivable that we maintain;

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Level of capital expenditures;

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Acquisition or development of other businesses, technologies or products;

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The time and costs involved in obtaining regulatory approvals;

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

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

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

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

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

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

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

·	Successful completion of the launch of this product;

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

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

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

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

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

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

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

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

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

• failure to prove feasibility;

• time required from proof of feasibility to routine production;

• timing and cost of regulatory approvals and clearances;

• competitors' response to new product developments;

• manufacturing, installation, warranty and maintenance cost overruns;

• failure to obtain customer acceptance and payment;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• fines, injunctions and civil penalties;

• the recall or seizure of our products;

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

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

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

• criminal prosecution.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• longer accounts receivable collection times;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

·	Unfavorable outcome of any litigation; and

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

Being a public company significantly increases our administrative costs.

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

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

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

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

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

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

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

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

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

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

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

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

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

Item 3. LEGAL PROCEEDINGS

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

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

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

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

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

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

None.

Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

PART II

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

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

	High		Low
Fiscal 2006
First Quarter		2.58		1.89
Second Quarter		2.49		1.96
Third Quarter		2.16		1.57
Fourth Quarter		1.85		1.03

Fiscal 2005
First Quarter		6.20		4.10
Second Quarter		5.94		2.55
Third Quarter		3.62		1.85
Fourth Quarter		4.13		1.90

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

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

Issuer Purchases of Equity Securities

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

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

August 1 - August 31, 2006		—		—		—	$	9,871,000.

September 1 - September 30, 2006		—		—		—	$	9,871,000.

October 1—October 31, 2006		3,100	$	1.04		3,100	$	9,867,000.

Total		3,100	$	1.04		3,100

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

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

		Year Ended October 31,
		2006			2005			2004⁽¹⁾			2003⁽²⁾			2002
		(In thousands, except for per share amounts)
Statement of Operations:
Net sales	$	28,988		$	32,224		$	24,737		$	14,683		$	20,780
Cost of goods sold		19,102			20,056			15,818			6,944			7,581

Gross profit		9,886			12,168			8,919			7,739			13,199
Operating expenses		27,130			68,164			33,525			10,086			6,382

Income (loss) from operations		(17,244	)		(55,996	)		(24,606	)		(2,347	)		6,817
Interest and other income, net		(139	)		121			579			1,749			1,834

Income (loss) before provision (benefit) for income taxes		(17,383	)		(55,875	)		(24,027	)		(598	)		8,651
Provision (benefit) for income taxes		—			—			(257	)		—			2,087

Income (loss) from continuing operations		(17,383	)		(55,875	)		(23,770)	)		(598	)		6,564
Income (loss) from discontinued operations ⁽³⁾		253			362			(12,537)	)		(8,536	)		(11,808	)
Cumulative effect of change in accounting principle		—			—			—			(306	)		—

Net loss	$	(17,130	)	$	(55,513	)	$	(36,307	)	$	(9,440)	)	$	(5,244	)

Basic earnings (loss) per share:
Income (loss) from continuing operations	$	(0.79	)	$	(3.38	)	$	(1.81	)	$	(0.06	)	$	0.65
Income (loss) from discontinued operations⁽³⁾		0.01			0.02			(0.95	)		(0.83	)		(1.16	)
Cumulative effect of change in accounting principle		—			—			—			(0.03	)		—

Net loss	$	(0.78	)	$	(3.36	)	$	(2.76	)	$	(0.92	)	$	(0.51	)

Diluted earnings (loss) per share:
Income (loss) from continuing operations	$	(0.79	)	$	(3.38	)	$	(1.81	)	$	(0.06	)	$	0.57	)
Income (loss) from discontinued operations⁽³⁾		0.01			0.02			(0.95	)		(0.83	)		(1.02	)
Cumulative effect of change in accounting principle		—			—			—			(0.03	)		—

Net loss	$	(0.78	)	$	(3.36	)	$	(2.76	)	$	(0.92	)	$	(0.45	)

Shares used in per share calculation
Basic		21,956			16,502			13,139			10,258			10,210

Diluted		21,956			16,502			13,139			10,258			11,596

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

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

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

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

Overview

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

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

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

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

Critical Accounting Policies

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

Revenue Recognition

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

Product revenue

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

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

Software revenue

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

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

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

Service revenue

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

Allowance for Doubtful Accounts and Sales Returns

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

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

Inventory Reserves

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

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

Goodwill

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

Impairment of Long-lived Assets

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

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

($000)	Sept. 30, 2005 Carrying Value		Sept. 30, 2005 Fair Value		Impairment

NOMOS Goodwill	$	18,525	$	2,564	$	15,961

NOMOS Intangible Assets		27,103		3,180		23,923

TOTAL	$	45,628	$	5,744	$	39,884

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

Loss Contingencies

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

Income Taxes

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

Stock-based Compensation

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

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

Results of Operations

Fiscal 2006 vs. Fiscal 2005

Total Revenue

	Year Ended October 31,
	2006		2005		% Change
($ millions)
IMRT/IGRT Products	$	7.1	$	8.8		(19)	%
IMRT/IGRT Services		9.3		11.4		(19)	%

Total IMRT/IGRT	$	16.4	$	20.2		(19)	%
Radiation Sources		12.6		12.0		5	%

	$	29.0	$	32.2		(10)	%

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

Gross profit

	Year Ended October 31,
	2006		2005		% Change
($ millions)
IMRT/IGRT Products	$	0.5	$	1.3		(38)	%
IMRT/IGRT Services		5.8		7.0		(17)	%

Total IMRT/IGRT	$	6.3	$	8.3		(24)	%
Radiation Sources		3.6		3.9		(8)	%

	$	9.9	$	12.2		(19)	%

	Year Ended October 31,
	2006			2005			% Point Change
(% of Revenue)
IMRT/IGRT Products		7	%		15	%		(8	)%
IMRT/IGRT Services		62	%		61	%		1	%

Total IMRT/IGRT		38	%		41	%		(3)	%
Radiation Sources		29	%		32	%		(3)	%

		34	%		38	%		(4)	%

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

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

Selling expenses

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

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

General and administrative expenses ("G&A")

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

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

Research and development (“R&D”)

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

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

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

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

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

Fiscal 2005 vs. Fiscal 2004

Total Revenue

	Year Ended October 31,
	2005		2004		% Change
($ millions)
IMRT/IGRT Products	$	8.8	$	6.4		38	%
IMRT/IGRT Services		11.4		5.3		115	%

Total IMRT/IGRT	$	20.2	$	11.7		73	%
Radiation Sources		12.0		13.0		(8)	%

	$	32.2	$	24.7		30	%

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

Gross profit

		Year Ended October 31,
		2005		2004	% Change
($ millions)
IMRT/IGRT Products	$	1.3	$	0.5	160	%
IMRT/IGRT Services		7.0		2.9	141	%

Total IMRT/IGRT	$	8.3	$	3.4	144	%
Radiation Sources		3.9		5.5	(29)	%

	$	12.2	$	8.9	36	%

	Year Ended October 31,
	2005			2004			% Point Change
(% of Revenue)
IMRT/IGRT Products		15	%		8	%		7	%
IMRT/IGRT Services		61	%		56	%		5	%

Total IMRT/IGRT		41	%		29	%		12	%
Radiation Sources		32	%		43	%		(11)	%

		38	%		36	%		2	%

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

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

Selling expenses

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

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

General and administrative expenses ("G&A")

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

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

Research and development (“R&D”)

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

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

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

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

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

Provision (benefit) for income taxes. Results of operations for the year ended October 31, 2004 included a benefit for income taxes of $0.3 million for an income tax refund received during 2004. No benefits were recognized for losses incurred in 2005 and 2004 due to the uncertainty of our ability to realize the future benefit of our deferred tax assets.

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

Liquidity and Capital Resources

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

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

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

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

Balance Sheet and Cash Flows

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

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

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

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

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

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

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

Liquidity and Capital Resource Requirements

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

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

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

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

• Our future operating results;

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

• Market acceptance of our products;

• Levels of inventory and accounts receivable that we maintain;

• Competitors’ responses to our products;

• Level of capital expenditures; and

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

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

Recent Accounting Pronouncements

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

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

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

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

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

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

Related Party Transactions

In October 2003, we entered into a Secured Loan Agreement with Prostate Centers of America (“PCA”). Based on the terms of the agreement, we determined that PCA was a variable interest entity (“VIE”) as defined in Financial Accounting Standards Board Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51., and, therefore we were required to include the operations of PCA in our consolidated financial statements even though we did not have an equity interest in PCA (See Note 5).

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

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

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None

Item 9A. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures.

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

Management's Report on Internal Control Over Financial Reporting

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

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

·	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·	provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and

·	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the consolidated financial statements.

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

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

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

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

·	Documentation of entity-wide controls establishing the culture and "tone-at-the-top" of the organization, in support of the Company’s Control Environment, Risk Assessment Process, Information and Communication policies and the ongoing Monitoring of these control processes and systems.

·	An evaluation of Control Activities by work process. Key controls and compensating controls were documented and tested by each work process within the Company, including controls over all relevant financial statement assertions related to all significant accounts and disclosures. Internal control deficiencies were identified and prioritized, and appropriate remediation action plans were defined, implemented and retested.

·	A centralized review and analysis of all internal control deficiencies across the enterprise to determine whether such deficiencies, either separately or in the aggregate, represented a significant deficiency or material weakness.

·	An evaluation of any changes in work processes, systems, organization or policy that could materially impact internal control over financial reporting.

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

(b) Changes in internal controls.

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

Item 9B. OTHER INFORMATION.

None.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

Item 11. EXECUTIVE COMPENSATION

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

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

			Page
1.	Financial Statements of the Company
		Report of Independent Registered Public Accounting Firm - Singer Lewak Greenbaum & Goldstein LLP	74
		Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP	77
		Consolidated Balance Sheets	78
		Consolidated Statements of Operations	79
		Consolidated Statements of Changes in Stockholders' Equity	80
		Consolidated Statements of Cash Flows	81
		Notes to Consolidated Financial Statements	83
2.	Financial Statement Schedule
		Report of Independent Registered Public Accounting Firm - Singer Lewak Greenbaum & Goldstein LLP	112
		Schedule II—Valuation and Qualifying Accounts	113
	All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.	Exhibits.
	Reference is made to Item 15(b) of this Annual Report on Form 10-K.

(b) Exhibits

Exhibit No.		Description
3.1		Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) of the Registrant's Registration Statement on Form 10-SB, filed August 22, 1995.
3.2		Certificate of Amendment of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant's Form 10-QSB for the quarterly period ended July 31, 1998.
3.3		Certificate of Domestication of the Registrant, incorporated by reference to Exhibit 3(i)(a) of the Registrant's Registration Statement on Form 10-SB, filed August 22, 1995.
3.4		Bylaws of the Registrant, incorporated by reference to Exhibit 3(ii) of the Registrant's Registration Statement on Form 10-SB, filed August 22, 1995.
10.1		Lease Agreement dated November 30, 1995 between Registrant and Abraham Stricks, incorporated by reference to Exhibit 10.2 of the Registrant's Form 10- KSB, filed January 29, 1998.
10.2+		North American Scientific, Inc. Amended and Restated 1996 Stock Option Plan (as amended through April 6, 2001), incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-8 (Registration No. 333-61688), filed May 25, 2001.
10.3+		The North American Scientific, Inc. 2000 Employee Stock Purchase Plan, incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-8 (Registration No. 333-34200), filed April 6, 2000.
10.4+		The Theseus 1998 Employee, Director and Consultant Stock Plan, incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-8 (Registration No. 333-64892), filed July 11, 2001.
10.5		Rights Agreement, incorporated by reference to Exhibit 99.1 of the Registrant's Form 8-A, filed October 16, 1998.
10.6		Restated Agreement and Plan of Merger, dated as of September 22, 2000, among the Registrant, NASI Acquisition Corp., a wholly-owned subsidiary of the Registrant, Theseus Imaging Corporation, Dr. Allan M.Green, Robert Bender, Sally Hansen and Irwin Gruverman, incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K filed October 19, 2000.

10.7		License Agreement, effective as of April 1, 1998, by and between The Board of Trustees of Leland Stanford Junior University and Theseus Imaging Corporation, a wholly-owned subsidiary of the Registrant (confidential treatment granted for certain portions thereof), incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K filed January 29, 2001.
10.8		License Agreement, effective as of July 20, 2001, by and between AnorMED Inc. and North American Scientific, Inc. (confidential treatment granted for certain portions thereof), incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q, filed March 5, 2002.
10.9+		Employment Agreement, dated October 13, 2000, by and between Dr. Allan M. Green and the Company, incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K filed January 17, 2002.
10.10+		Employment Agreement, dated April 1, 2002, by and between L. Michael Cutrer and the Company, incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q filed August 28, 2002.
10.11+		Employment Agreement, dated April 7, 1998, by and between Alan I. Edrick and the Company, as amended on September 29, 1999, incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K filed January 17, 2002.
10.12+		Employment Agreement, dated February 20, 2003, by and between Elliot Lebowitz, Ph.D. and the Company, incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q filed March 7, 2003.
10.13+		The North American Scientific, Inc. 2003 Non-Employee Directors' Equity Compensation Plan, incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-106197), filed June 17, 2003.
10.14		Agreement and Plan of Merger by and among the Registrant, AM Capital, Inc. and NOMOS Corporation, dated as of October 26, 2003, incorporated by reference to Exhibit 2 to the Registrant's Form 8-K filed October 27, 2003.
10.15		First Amendment to Agreement and Plan of Merger by and among the Registrant, AM Capital I, Inc. and NOMOS Corporation, incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-110766), filed November 26, 2003.
10.16+		Employment Agreement dated May 5, 2004, by and between John W. Manzetti. and the Company, incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration #333-110766), filed November 26, 2003.
10.17		Second Amendment to Agreement and Plan of Merger by and among the Registrant, AM Capital I, Inc. and NOMOS Corporation, incorporated by reference to Exhibit 2 to the Registrant's Form 8-K filed March 5, 2004.
10.18		The First Amendment dated as of April 28, 2004, to the Rights Agreement, dated as of October 12, 1998 by and between the Registrant and U.S. Stock Transfer Corporation, incorporated by reference to Exhibit 10 to the Registrant’s Form 8-K filed April 30, 2004.
10.19		Agency Agreement dated as of March 17, 2004, by and between the Registrant and NOMOS Corporation, incorporated by reference to Exhibit 10 to the Registrant’s Form 8-K filed March 22, 2004.
10.20		Lease Agreement dated August 22, 2002, by and between NOMOS Corporation and Cranberry 200 Venture, L.P., incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K filed March 11, 2005.
10.21		Amendment to Lease Agreement dated August 22, 2002, by and between NOMOS Corporation and Cranberry 200 Venture, L.P., incorporated by reference to Exhibit 10.21 to the Registrant’s Form 10-K filed March 11, 2005
10.22		Secured Loan Agreement dated as of October 15, 2003 by and between the Registrant and Prostate Centers of America, incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K filed March 11, 2005
10.23		Settlement Agreement dated as of August 4, 2004, by and among the Registrant, NOMOS Corporation and Parker/Hunter, Incorporated, incorporated by reference to Exhibit 10.23 to the Registrant’s Form 10-K filed March 11, 2005
10.24		Loan Agreement and Security Agreement, dated October 5, 2005, between NASI, the Subsidiaries and Silicon Valley Bank., incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed October 11, 2005.

10.25		Amendment to Loan Agreement and Security Agreement, dated January 12, 2006, between NASI, the Subsidiaries and Silicon Valley Bank, incorporated by reference to Exhibit 10.25 of Form 10-K filed on January 18, 2006.
10.26		Loan and Security Agreement, dated March 28, 2006, by and among NASI, certain subsidiaries and Partners for Growth II, L.P., incorporated by reference to the Company’s Current Report on Form 8-K filed on April 3, 2006.
10.27		North American Scientific, Inc. 2006 Stock Plan, incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed on April 5, 2006.
10.28		Securities Purchase Agreement dated June 6, 2006 between the Company and the investors, incorporated by reference to the Company’s Current Report on Form 8-K filed on June 7, 2006.
10.29		Form of Warrant Agreement between the Company and Three Arch Partners, incorporated by reference to the Company’s Current Report on Form 8-K filed on June 7, 2006.
10.30		Form of Warrant Agreement between the Company and certain other investors, incorporated by reference to the Company’s Current Report on Form 8-K filed on June 7, 2006.
10.31		Second Amendment to Rights Agreement, dated June 5, 2006 by and between the Company and U.S. Stock Transfer Corporation, incorporated by reference to the Company’s Current Report on Form 8-K filed on June 7, 2006.
10.32		Second Amendment to Loan Agreement and Security Agreement, dated October 31, 2006, between NASI, the Subsidiaries and Silicon Valley Bank incorporated by reference to the Company’s Current Report on Form 8-K filed on November 3, 2006.
10.33+		First Amended and Restated Employment Agreement between the Company and L. Michael Cutrer dated December 21, 2006, incorporated by reference to the Company’s Current Report on Form 8-K filed on December 28, 2006.
14		Code of Ethics incorporated by reference to Exhibit 14 to the Registrant’s Form 10-K filed January 23, 2004.
21.1*		Subsidiaries of the Registrant.
23.1*		Consent of Singer Lewak Greenbaum & Goldstein LLP.
23.2*		Consent of PricewaterhouseCoopers LLP.
31.1*		Certification of Chief Executive Officer.
31.2*		Certification of Chief Financial Officer.
32.1*		Certification pursuant to Rule 13a-14b under the Exchange Act and 18 U.S.C -1350.

+ Compensation plan or agreement

* Filed herewith

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

North American Scientific, Inc.

Chatsworth, California

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

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

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

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

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

January 10, 2007

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

North American Scientific, Inc.

Chatsworth, California

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

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

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

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

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

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

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

January 10, 2007

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

and Stockholders of

North American Scientific, Inc.

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

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

February 25, 2005

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Balance Sheets

		October 31,
		2006			2005
Assets
Current assets
Cash and cash equivalents	$	903,000		$	2,630,000
Marketable securities, held to maturity		8,420,000			993,000
Accounts receivable, net of reserves		4,711,000			5,521,000
Inventories, net of reserves		4,202,000			3,731,000
Prepaid expenses and other current assets		1,085,000			794,000

Total current assets		19,321,000			13,669,000
Equipment and leasehold improvements, net		2,400,000			2,836,000
Goodwill		2,564,000			2,564,000
Intangible assets, net		2,532,000			3,158,000
Other assets		381,000			106,000

Total assets	$	27,198,000		$	22,333,000

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	2,406,000		$	2,164,000
Accrued expenses		3,940,000			4,706,000
Deferred revenue		3,664,000			4,662,000

Total liabilities		10,010,000			11,532,000

Commitments and contingencies (Note 16)

Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares issued		—			—
Common stock, $.01 par value, 40,000,000 shares authorized; 29,447,270 (2006) and 17,056,669 (2005) shares issued; and 29,336,144 (2006) and 16,948,643 (2005) shares outstanding		298,000			173,000
Additional paid-in capital		144,543,000			121,147,000
Treasury stock, at cost - 111,126 (2006) and 108,026 (2005) common shares		(133,000	)		(129,000	)
Accumulated deficit		(127,520,000	)		(110,390,000	)

Total stockholders' equity		17,188,000			10,801,000

Total liabilities and stockholders' equity	$	27,198,000		$	22,333,000

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

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Operations

	For the Years Ended October 31,
	2006			2005			2004
Revenue
Product	$	19,667,000		$	20,780,000		$	19,486,000
Service		9,321,000			11,444,000			5,251,000

Total revenue		28,988,000			32,224,000			24,737,000

Cost of revenues
Product		15,563,000			15,597,000			13,482,000
Service		3,539,000			4,459,000			2,336,000

Total cost of revenue		19,102,000			20,056,000			15,818,000

Gross profit		9,886,000			12,168,000			8,919,000

Selling expenses		8,603,000			8,874,000			6,709,000
General and administrative expenses		12,116,000			10,442,000			12,179,000
Research and development		5,785,000			6,334,000			3,209,000
Amortization of intangible assets		626,000			2,300,000			1,172,000
Writedown of goodwill and intangible assets		—			40,214,000			—
In-process research and development		—			—			9,200,000
Merger and integration costs		—			—			1,056,000

Total operating expenses		27,130,000			68,164,000			33,525,000

Loss from operations		(17,244,000	)		(55,996,000	)		(24,606,000	)
Interest and other (expense) income, net		(139,000	)		121,000			579,000

Income (loss) before provision (benefit) for income taxes		(17,383,000	)		(55,875,000	)		(24,027,000	)
Provision (benefit) for income taxes		—			—			(257,000

Loss from continuing operations		(17,383,000	)		(55,875,000	)		(23,770,000	)
Income (loss) from discontinued operation (including a loss on disposal of $5,231,000 in 2004)		253,000			362,000			(12,537,000	)

Net loss	$	(17,130,000	)	$	(55,513,000	)	$	(36,307,000	)

Basic and diluted loss per share:
Continuing operations	$	(0.79	)	$	(3.38	)	$	(1.81	)
Discontinued operations		0.01			0.02			(0.95	)

Net loss	$	(0.78	)	$	(3.36	)	$	(2.76	)

Weighted average number of common shares outstanding
Basic and diluted		21,956,565			16,502,071			13,138,721

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

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Changes in Stockholders' Equity

	Common Stock						Treasury Stock
	Shares		Amount		Additional Paid-in Capital		Shares		Amount			Accumulated Deficit			Total Stockholders' Equity

Balance at October 31, 2003		10,298,241	$	103,000	$	74,343,000		19,000	$	(129,000	)	$	(18,571,000	)	$	55,746,000
Common stock issued upon exercise of stock options		717,864		7,000		3,509,000		—		—			—			3,516,000
Common stock issued under employee stock purchase plan		24,285		—		167,000		—		—			—			167,000
Modification of stock options issued to an employee		—		—		351,000		—		—			—			351,000
Shares issued for NOMOS acquisition		5,268,097		53,000		37,257,000		—		—			—			37,310,000
Shares returned relating to NOMOS acquisition		—		—		—		89,026		—			—			—
Options assumed upon acquisition		—		—		4,593,000		—								4,593,000
Net loss		—		—		—		—		—			(36,307,000	)		(36,307,000	)

Balance at October 31, 2004		16,308,487		163,000		120,220,000		108,026		(129,000	)		(54,877,000	)		65,377,000
Common stock issued upon exercise of stock options		687,013		9,000		755,000		—		—			—			764,000
Common stock issued under employee stock purchase plan		59,742		1,000		172,000		—		—			—			173,000
Shares issued for NOMOS acquisition		1,427		—		—		—		—			—			—
Net loss		—		—		—		—		—			(55,513,000	)		(55,513,000	)

Balance at October 31, 2005		17,056,669		173,000		121,147,000		108,026		(129,000	)		(110,390,000	)		10,801,000
Common stock issued upon exercise of stock options		2,186		—		2,000		—		—			—			2,000
Common stock issued under employee stock purchase plan		96,481		2,000		161,000		—		—			—			163,000
Common stock issued in private placement		12,291,934		123,000		21,811,000		—		—			—			21,934,000
Purchase of treasury stock		—		—		—		3,100		(4,000	)		—			(4,000	)
Issuance of warrants		—		—		526,000		—		—			—			526,000
Stock compensation expense		—		—		896,000		—		—			—			896,000
Net loss		—		—		—		—		—			(17,130,000	)		(17,130,000	)

Balance at October 31, 2006		29,447,270	$	298,000	$	144,543,000		111,126	$	(133,000	)	$	(127,520,000	)	$	17,188,000

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

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Cash Flows

		For the Years Ended October 31,
		2006			2005			2004
Cash flows from operating activities:
Net loss	$	(17,130,000	)	$	(55,513,000	)	$	(36,307,000	)
Loss (gain) from discontinued operations		(253,000	)		(362,000	)		12,537,000
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Write-off intangibles		—			40,214,000			—
Write-off in-process research and development		—			—			9,200,000
Depreciation and amortization		1,535,000			3,371,000			2,139,000
Amortization of warrants		237,000			—			—
Provision for doubtful accounts		(230,000	)		709,000			522,000
Provision for inventory reserve		(332,000	)		767,000			—
Share-based compensation expense		896,000			—			351,000
Changes in assets and liabilities, net of acquisitions and discontinued operations:
Accounts receivable		1,040,000			903,000			(2,579,000	)
Inventories		(139,000	)		373,000			414,000
Income taxes		—			—			496,000
Prepaid expenses and other assets		(275,000	)		110,000			2,081,000
Accounts payable		242,000			148,000			(1,310,000	)
Accrued expenses		(421,000	)		(470,000	)		(3,965,000	)
Deferred revenue		(998,000	)		(1,631,000	)		1,552,000

Net cash used in continuing operations		(15,828,000	)		(11,381,000	)		(14,869,000	)
Net cash used in discontinued operations		(93,000	)		(578,000	)		(8,214,000	)

Net cash used in operating activities		(15,921,000	)		(11,959,000	)		(23,083,000	)

Cash flows from investing activities:
Proceeds from sale of marketable securities		2,573,000			11,653,000			52,108,000
Purchases of marketable securities		(10,000,000	)		—			(17,400,000	)
Acquisitions, net of cash acquired		—			—			(13,248,000	)
Capital expenditures		(474,000	)		(335,000	)		(1,308,000	)

Net cash provided by (used in) continuing operations		(7,901,000	)		11,318,000			20,152,000
Net cash used in discontinued operations		—			—			(179,000	)

Net cash provided by (used in) investing activities		(7,901,000	)		11,318,000			19,973,000

Cash flows from financing activities:
Net proceeds from stock options and stock purchase plan		165,000			937,000			3,683,000
Net proceeds from sale of common stock		21,934,000			—			—
Purchase of common stock as treasury stock		(4,000	)		—			—

Net cash provided by financing activities		22,095,000			937,000			3,683,000

Net increase (decrease) in cash and cash equivalents		(1,727,000	)		296,000			573,000
Cash and cash equivalents at beginning of period		2,630,000			2,334,000			1,761,000

Cash and cash equivalents at end of period	$	903,000		$	2,630,000		$	2,334,000

Supplemental disclosure:

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

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

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

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

NORTH AMERICAN SCIENTIFIC, INC.

Notes to Consolidated Financial Statements

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

North American Scientific, Inc. (the “Company”), a Delaware corporation, designs, develops and manufactures and sells products for radiation therapy, including brachytherapy, and planning and delivery technology for intensity modulated radiation therapy (“IMRT”) and image guided radiation therapy (“IGRT”). In May 2004, the Company acquired NOMOS Corporation (“NOMOS”), which develops and markets products used during external beam radiation therapy for the treatment of cancer (See Note 4). The Radiation Sources segment develops and markets radioisotopic products including brachytherapy seeds and accessories used in the treatment of cancer and non-therapeutic products used in medical, environmental, research and industrial applications. The Company’s Theseus operation had been developing a radiopharmaceutical imaging agent for various medical diagnostic and monitoring functions, including the management of chemotherapy treatment. In September 2004, the Company discontinued its operations of Theseus (See Note 3).

Management’s Plans

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

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

Principles of Consolidation

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

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

Use of Estimates

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

Cash and Cash Equivalents

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

Inventories

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

Fair Value of Financial Instruments

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

Marketable Securities

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

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

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

Accounts Receivable and Allowance for Doubtful Accounts

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

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 years
Leasehold improvements	Lesser of the useful life or term of lease

Goodwill

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

Intangible Assets

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

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

Revenue Recognition

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

Product revenue

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

Software revenue

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

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

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

Service revenue

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

Research and Development Costs

Research and development ("R&D") expenses are comprised primarily of the following types of costs incurred in performing R&D activities: salaries and benefits, allocated overhead, occupancy costs, clinical trial and related clinical manufacturing costs, contract services and other outside costs, and costs to acquire in-process research and development projects and technologies which have no alternative future use. Research and development costs are expensed as incurred.

Stock-based Compensation

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

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

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

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

		Year Ended October 31,
		2005			2004
Net loss, as reported	$	(55,513,000	)	$	(36,307,000	)
Add: stock-based compensation recognized		—			351,000
Less: total stock-based compensation (1)		(1,318,000	)		(2,561,000	)

Net loss, as adjusted	$	(56,831,000	)	$	(38,517,000	)


Basic loss per share, as reported	$	(3.36	)	$	(2.76	)
Diluted loss per share, as reported	$	(3.36	)	$	(2.76	)
Basic loss per share, as adjusted	$	(3.44	)	$	(2.93	)
Diluted loss per share, as adjusted	$	(3.44	)	$	(2.93	)

(1) As determined under the fair value method.

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

Net Loss per Share

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

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

		Year Ended October 31,
		2006			2005			2004
Net loss, as reported	$	(17,130,000	)	$	(55,513,000	)	$	(36,307,000	)


Weighted average shares outstanding—Basic		21,956,565			16,502,071			13,138,721
Dilutive effect of stock options and warrants		150,000			—			—

Weighted average shares outstanding—Diluted		22,106,565			16,502,071			13,138,721


Basic loss per share	$	(0.78	)	$	(3.36	)	$	(2.76	)
Diluted loss per share	$	(0.77	)	$	(3.36	)	$	(2.76	)

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

Income Taxes

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

Diversification of Credit Risk

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

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

Significant Concentrations

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

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

Recent Accounting Pronouncements

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

NOTE 2 - SEGMENT INFORMATION

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

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

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

	Year Ended October 31,
	2006			2005			2004
Net sales
IMRT/IGRT	$	16,394,000		$	20,192,000		$	11,759,000
Radiation Sources		12,594,000			12,032,000			12,978,000
	$	28,988,000		$	32,224,000		$	24,737,000

Income (loss) from operations
IMRT/IGRT	$	(10,081,000	)	$	(51,271,000	)	$	(17,766,000	)
Radiation Sources		(7,163,000	)		(4,725,000	)		(6,840,000	)
	$	(17,244,000	)	$	(55,996,000	)	$	(24,606,000	)

	Year Ended October 31,
	2006			2005		2004
Depreciation and amortization
IMRT/IGRT	$	907,000		$	2,561,000	$	1,281,000
Radiation Sources		628,000			810,000		858,000
	$	1,535,000		$	3,371,000	$	2,139,000

Interest Income (Expense)
IMRT/IGRT	$	(58,000	)	$	73,000	$	384,000
Radiation Sources		(47,000	)		37,000		245,000
	$	(105,000	)	$	110,000	$	629,000

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

NOTE 3 - DISCONTINUED OPERATION

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

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

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

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

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

NOTE 4—ACQUISITIONS

NOMOS

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

The purchase price of approximately $58 million consisted of $11.5 million in cash, the issuance of 5.2 million shares of the Company’s common stock with a fair value of approximately $37.3 million, the assumption of 1.4 million of stock options and warrants with a fair value of $4.6 million, direct transaction costs of $3.0 million and the assumption of acquisition related liabilities of $1.6 million. The fair value of the common stock used in determining the purchase price was $7.21 per share based on the average of the closing price of the common stock for the period two days before and after the October 27, 2003 merger agreement announcement date. The stock options and warrants, which fully vested at the acquisition date, were valued using a Black-Scholes valuation model with the following assumptions: risk-free interest rate of 4.5%, volatility factor of 60%, expected term of 1.5 years for stock options, contractual term of 0.5 years for warrants and no dividend yield. The acquisition was accomplished through a reverse triangular merger into a wholly owned subsidiary of the Company, and is reflected in the Company’s financial statements, including the footnotes thereto, as the IMRT/IGRT operating segment.

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

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

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

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

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

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

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

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

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

Total	$	30,300,000

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

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

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

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

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

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

NOTE 5—VARIABLE INTEREST ENTITY

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

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

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

NOTE 6—MARKETABLE SECURITIES

Marketable securities consist of the following:

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

Non-current portion	$	—		$	—

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

NOTE 7—ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

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

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

NOTE 8—INVENTORIES

Inventories consist of the following:

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

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

NOTE 9—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

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

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

NOTE 10—GOODWILL AND INTANGIBLE ASSETS

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

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

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

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

		IMRT/IGRT			Radiation Sources			Theseus			Total
Balance at October 31, 2002	$	—		$	—		$	3,659,000		$	3,659,000
Addition due to acquisition of RTP		—			207,000			—			207,000

Balance at October 31, 2003		—			207,000			3,659,000			3,866,000
Addition due to acquisition of NOMOS (See Note 4)		18,525,000			—						18,525,000
Impairment due to discontinued operation (See Note 3)		—			—			(3,659,000	)		(3,659,000	)

Balance at October 31, 2004		18,525,000			207,000			—			18,732,000
Impairment charge		(15,961,000	)		(207,000	)					(16,168,000	)

Balance at October 31, 2005	$	2,564,000		$	—		$	—		$	2,564,000

Balance at October 31, 2006	$	2,564,000		$	—		$	—		$	2,564,000

NOTE 11—INTANGIBLE ASSETS

		October 31, 2006			October 31, 2005
Amortizable intangible assets
Purchased technology	$	3,129,000		$	24,232,000
Existing customer relationships		1,770,000			1,952,000
Trademark		1,666,000			4,426,000
Patents and licenses		98,000			98,000
		6,663,000			30,708,000
Less: accumulated amortization		(4,131,000	)		(3,505,000	)
Less: write-down of intangible assets
Purchased technology		—			(21,103,000	)
Existing customer relationships		—			(182,000	)
Trademark		—			(2,760,000	)
Patents and licenses		—			—
		4,131,000			(24,045,000	)
	$	2,532,000		$	3,158,000

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

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

For the Years Ended October 31,
2007	$	633,000
2008		633,000
2009		633,000
2010		633,000
	$	2,532,000

NOTE 12 - Borrowings

LINE OF CREDIT

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

100

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

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

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

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

Long-Term Debt

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

101

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

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

NOTE 13—STOCKHOLDERS' EQUITY

Preferred Stock

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

Sale of Common Stock and Warrants

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

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

102

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

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

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

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

103

Stock Options

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

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

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

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

				Options Outstanding
		Options Available for Grant		Number Outstanding		Exercise Price
Balance at October 31, 2003		549,188		2,678,954		$0.03 - $24.54
Granted		(306,000	)	306,000		$7.49 - $10.01
Replacement options		(1,362,589	)	1,362,589		$1.10 - $4.42
Forfeited and expired		375,858		(375,858	)	$1.11 - $22.11
Exercised		—		(717,864	)	$1.11 - $7.94
Additional shares reserved		2,323,285		—

Balance at October 31, 2004		1,579,742		3,253,821		$0.03 - $24.54
Granted	(275,000		)	275,000		$2.25 - $3.66
Forfeited and expired	427,699			(427,699	)	$1.11 - $16.75
Exercised	—			(687,013	)	$1.11 - $1.96

Balance at October 31, 2005	1,732,441			2,414,109		$0.03 - $24.54
Granted	(1,453,000		)	1,453,000		$1.92 - $3.35
Forfeited and expired	(194,441)			(426,618	)	$1.11 - $16.75
Exercised	—			(2,186	)	$1.11 - $1.12
Additional shares reserved	1,700,000			—

Balance at October 31, 2006	1,785,000			3,438,305		$0.03 - $24.54

104

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

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

	Employee Options Outstanding				Employee Options Exercisable
Range of Exercise Prices	Shares	Weighted Avg. Remaining Contractual Life (Years)		Weighted Avg. Exercise Price	Shares		Weighted Avg. Exercise Price
$0.03 - $2.23	1,004,700	5.69	$	1.82	267,055	$	0.85
$3.18 - $3.35	813,500	7.77		3.30	68,752		3.18
$3.94 - $7.60	701,695	5.26		7.01	676,445		6.99
$7.94 - $12.89	690,900	5.23		9.91	638,901		9.98
$16.75 - $24.54	227,510	2.79		20.01	227,510		20.01
	3,438,305	5.81	$	6.06	1,878,663	$	8.57

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

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

	Number of Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Life (Years)		Intrinsic Value as of October 31, 2006
As of October 31, 2005:
Employee Options Outstanding		2,414,109	$	8.13		6.09	$	464,000
Employee Options Expected to Vest		540,889	$	5.67		8.91	$	4,000
Employee Options Exercisable		1,873,220	$	8.79		5.25	$	460,000

As of October 31, 2006
Employee Options Outstanding		3,438,305	$	6.06		5.81	$	56,500
Employee Options Expected to Vest		1,691,925	$	2.68		7.14	$	—
Employee Options Exercisable		1,746,380	$	8.57		4.52	$	56,500

105

Modification of Stock Options

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

Fair Value Disclosures

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

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

Stockholders' Rights Plan

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

Employee Stock Purchase Plan

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

Common Stock Repurchase Program

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

106

NOTE 14—INCOME TAXES

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

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

Deferred:
Federal		—		—		—
State		—		—		—
		—		—		—
	$	—	$	—	$	(257,000	)

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

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

		October 31,
		2006			2005
Deferred tax assets:
Accrued liabilities	$	586,000		$	552,000
Accrued decommissioning		158,000			158,000
Allowance for doubtful accounts and write-offs from NOMOS acquisition		614,000			828,000
Inventory reserve and capitalized inventory		1,898,000			2,015,000
Other		19,000			426,000
Depreciation and amortization		2,091,000			1,607,000
Tax credits		4,814,000			4,814,000
Theseus impairment		1,850,000			2,160,000
Net operating loss carryforwards		50,497,000			43,616,000
		62,527,000			56,176,000
Deferred tax liabilities:
Purchased intangible assets		(2,248,000	)		(2,248,000	)
Other		(212,000	)		(234,000	)
		(2,460,000	)		(2,482,000	)
Net deferred tax assets		60,067,000			53,694,000
Less: valuation allowance		(60,067,000	)		(53,694,000	)
	$	—		$	—

107

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

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

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

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

NOTE 15—RETIREMENT PLAN

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

108

NOTE 16—COMMITMENTS AND CONTINGENCIES

Contract Commitments

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

Lease Commitments

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

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

For the Years Ended October 31,
2007	$	909,000
2008		538,000
2009		538,000
2010		538,000
2011		527,000
Thereafter		656,000
	$	3,706,000

Third Party License Agreements

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

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

Employment Agreements

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

Litigation

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

109

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

110

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

RELATED PARTIES

NOTE 17—SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

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

		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Fiscal 2006
Net sales	$	7,527		$	8,057		$	7,097		$	6,307
Gross profit		2,851			2,926			2,484			1,625
Net loss		(2,675	)		(3,695	)		(4,633	)		(6,127	)
Diluted loss per share	$	(0.16	)	$	(0.22	)	$	(0.19	)	$	(0.21	)

Fiscal 2005
Net sales	$	8,164		$	9,141		$	8,060		$	6,859
Gross profit		2,930			3,658			3,383			2,197
Net loss		(3,649	)		(3,928	)		(3,302	)		(44,635	)
Diluted loss per share	$	(0.22	)	$	(0.24	)	$	(0.20	)	$	(2.70	)

111

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

North American Scientific, Inc.

Chatsworth, California

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

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

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

January 10, 2007

112

SCHEDULE II

NORTH AMERICAN SCIENTIFIC, INC.

VALUATION AND QUALIFYING ACCOUNTS

			Additions
Description	Balance at beginning of period		Charged to cost and expenses		Charged to other accounts		Deductions			Balance at end of Period
Fiscal 2006
Allowance for doubtful accounts	$	1,334,000	$	591,000	$	—	$	(821,000	)	$	1,104,000
Deferred tax asset valuation allowance	$	53,694,000	$	—	$	6,373,000	$	—		$	60,067,00

Fiscal 2005
Allowance for doubtful accounts	$	625,000	$	709,000	$	—	$	—		$	1,334.000
Deferred tax asset valuation allowance	$	38,203,000	$	—	$	15,491,000	$	—		$	53,694,000

Fiscal 2004
Allowance for doubtful accounts and returns	$	103,000	$	522,000	$	—	$	—		$	625,000
Deferred tax asset valuation allowance	$	9,587,000	$	—	$	28,616,000	$	—		$	38,203,000

113

SIGNATURES

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

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

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

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

114

Planning method and apparatus for radiation dosimetry

(6,393,096)

A method and apparatus for determining an optimized radiation beam arrangement for applying radiation to a tumor target volume while minimizing radiation of a structure volume in a patient, comprising: using a computer to computationally obtain a proposed radiation beam arrangement; using the computer to computationally change the proposed radiation beam arrangement iteratively, incorporating a cost function at each iteration to approach correspondence of a CDVH associated with the proposed radiation beam arrangement to a CDVH associated with a pre-determined desired dose prescription; comparing the dose distribution to a prescribed dose for the tumor volume and surrounding tissue structures; and increasing or decreasing radiation beam intensity if the change of the proposed beam arrangement leads to a greater correspondence to the desired dose prescription to obtain an optimized radiation beam arrangement.

May 21, 2002 until May 27, 2019

Method and apparatus for target position verification

(6,961,405)

A system and method for aligning the position of a target within a body of a patient to a predetermined position used in the development of a radiation treatment plan can include an ultrasound probe used for generating live ultrasound images, a position sensing system for indicating the position of the ultrasound probe with respect to the radiation therapy device, and a computer system.

October 7, 2003 until

October 7, 2023

Method and apparatus for optimization of collimator angles in intensity modulated radiation therapy

(7,015,490)

A method and apparatus to determine an optimum collimator angel of a multi-leaf collimator having an opening and multiple leaf pairs for closing portions of the opening to form a radiation beam arrangement having multiple beam segments.

August 11, 2004 until August 11, 2024