North American Scientific Inc (Other)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-26670

NORTH AMERICAN SCIENTIFIC, INC.

(Exact name of registrant as specified in its charter)

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

20200 Sunburst Street, Chatsworth, CA 91311

(Address of principal executive offices)

(818) 734-8600

(Registrant's telephone number, including area code)

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 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 o Non-Accelerated Filer x

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

The number of shares of Registrant's Common Stock, $0.01 par value, outstanding as of August 31, 2007 was 29,511,912 shares.

NORTH AMERICAN SCIENTIFIC, INC.

Index

		Page

	Part I - Financial Information
Item 1.	Financial Statements

Consolidated Balance Sheets as of July 31, 2007 and October 31, 2006		3

Consolidated Statements of Operations for the three and nine months ended
July 31, 2007 and 2006		4

Consolidated Statements of Cash Flows for the nine months ended
July 31, 2007 and 2006		5

Condensed Notes to the Consolidated Financial Statements		7


Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36



	Part II - Other Information
Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 4.	Submission of Matters to a Vote of Security Holders	50

Item 5 .	Other Information	50

Item 6.	Exhibits	51

Signatures		52

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements


NORTH AMERICAN SCIENTIFIC, INC.
Consolidated Balance Sheets

	July 31,			October 31,
	2007			2006
	(Unaudited)
Assets

Current assets
Cash and cash equivalents	$	1,817,000		$	903,000
Marketable securities, held to maturity		---			8,420,000
Accounts receivable, net of reserves		1,911,000			2,618,000
Inventories, net of reserves		1,775,000			1,284,000
Prepaid expenses and other current assets		909,000			830,000
Assets held for sale		3,634,000			11,377,000
Total current assets		10,046,000			25,432,000
Equipment and leasehold improvements, net		1,047,000			1,318,000
Goodwill		---			---
Intangible assets, net		117,000			138,000
Other assets		59,000			310,000
Total assets	$	11,269,000		$	27,198,000

Liabilities and Stockholders’ Equity

Current liabilities
Line of Credit	$	1,363,000		$	---
Accounts payable		2,468,000			2,406,000
Accrued expenses		3,422,000			3,790,000
Deferred revenue		---			---
Liabilities held for sale		3,263,000			3,814,000
Total current liabilities		10,516,000			10,010,000

Commitments and contingencies

Stockholders’ Equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized; no shares
Issued		—			—
Common stock, $0.01 par value, 100,000,000 shares and 40,000,000 shares
authorized, 29,601,352 and 29,447,270 shares issued, 29,395,331 and 29,336,144 shares outstanding, as of July 31, 2007 and October 31, 2006, respectively		299,000			298,000
Additional paid-in capital		145,264,000			144,543,000
Treasury stock, at cost - 206,021 and 111,126 common shares as of July 31, 2007 and October 31, 2006, respectively		(227,000	)		(133,000	)
Accumulated deficit		(144,583,000	)		(127,520,000	)
Total stockholders’ equity		753,000			17,188,000
Total liabilities and stockholders’ equity	$	11,269,000		$	27,198,000

See condensed notes to the consolidated financial statements.

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Operations
(Unaudited)


	Three months ended July 31,						Nine months ended July 31,

	2007			2006			2007			2006
Revenue -
Product	$	3,438,000		$	3,166,000		$	11,140,000		$	9,245,000
Total revenue		3,438,000			3,166,000			11,140,000			9,245,000
Cost of revenue -
Product		2,688,000			2,172,000			7,792,000			6,700,000
Total cost of revenue		2,688,000			2.172,000			7,792,000			6,700,000
Gross profit		750,000			994,000			3,348,000			2,545,000
Operating expenses
Selling expenses		1,060,000			654,000			2,845,000			1,972,000
General and administrative expenses		2,073,000			2,605,000			6,516,000			6,302,000
Research and development		518,000			182,000			1,282,000			715,000
Total operating expenses		3,651,000			3,441,000			10,643,000			8,989,000
Loss from operations		(2,901,000	)		(2,447,000	)		(7,295,000	)		(6,444,000	)
Interest and other (expense) income, net		(69,000	)		(79,000	)		(98,000	)		(171,000	)
Loss before provision for income taxes		(2,970,000	)		(2,526,000	)		(7,393,000	)		(6,615,000	)
Loss from continuing operations		(2,970,000	)		(2,526,000	)		(7,393,000	)		(6,615,000	)
Loss from discontinued operations, net of tax benefits		(7,718,000	)		(2,107,000	)		(9,670,000	)		(4,388,000	)
Net loss	$	(10,688,000	)	$	(4,633,000	)	$	(17,063,000	)	$	(11,003,000	)
Basic and diluted loss per share:
Net loss per share from continuing operations	$	( 0.10	)	$	( 0.10	)	$	( 0.25	)	$	( 0.34	)
Net loss per share from discontinued operations	$	( 0.26	)	$	( 0.09	)	$	( 0.33	)	$	( 0.23	)
Net loss per share	$	( 0.36	)	$	( 0.19	)	$	( 0.58	)	$	( 0.57	)
Weighted average number of shares outstanding		29,317,056			23,954,948			29,327,062			19,327,230

See condensed notes to the consolidated financial statements.

NORTH AMERICAN SCIENTIFIC, INC.
Consolidated Statements of Cash Flows
(Unaudited)

	Nine months ended July 31,

	2007			2006
Cash flows from operating activities:
Net loss	$	(17,063,000	)	$	(11,003,000	)
Net loss from discontinued operations		(9,670,000	)		(4,388,000	)
Net loss from continuing operations		(7,393,000	)		(6,615,000	)
Depreciation and amortization		414,000			482,000
Amortization of warrants		238,000			142,000
Share-based compensation expense		490,000			645,000
Provision for doubtful accounts		(213,000	)		39,000
Provision for inventory adjustments		88,000			(88,000	)
Loss on sale of equipment		4,000			---
Changes in assets and liabilities, net of discontinued operations:
Accounts receivable		921,000			(659,000	)
Inventories		(581,000	)		(249,000	)
Prepaid and other current assets		(26,000	)		(439,000	)
Accounts payable		8,000			62,000
Accrued expenses		40,000			(159,000	)
Net cash used in continuing operations		(6,010,000	)		(6,839,000	)
Net cash used in discontinued operations		(2,675,000	)		(4,235,000	)
Net cash used in operating activities		(8,685,000	)		(11,074,000	)
Cash flows from investing activities:
Proceeds from maturity (purchase) of marketable securities		8,419,000			(8,956,000	)
Proceeds from sale of equipment		15,000			---
Capital expenditures		(139,000	)		(232,000	)
Net cash provided by (used in) investing activities - continuing operations		8,295,000			(9,188,000	)
Net cash used in investing activities - discontinued operations		(102,000	)		(75,000	)
Net cash provided (used in) by investing activities		8,193,000			(9,263,000	)
Cash flow from financing activities:
Net borrowings under line of credit		1,363,000			---
Proceeds from private placement of common stock and warrants, net		---			21,961,000
Proceeds from exercise of stock options and stock purchase plan		137,000			163,000
Purchase of stock for treasury		(94,000	)		---
Net cash provided by financing activities - continuing operations		1,406,000			22,124,000
Net cash provided (used in) by financing activities - discontinued operations		---			---
Net cash provided by financing activities		1,406,000			22,124,000
Net increase in cash and cash equivalents		914,000			1,787,000
Cash and cash equivalents at beginning of period		903,000			2,630,000
Cash and cash equivalents at end of period	$	1,817,000		$	4,417,000

Supplemental disclosure:

In the nine months ended July 31, 2006, the Company has issued warrants with an estimated fair value totaling $526,000 to a bank and a debt provider as consideration for entering into Loan and Security Agreements. See Note 8 to the Financial Statements.

See condensed notes to the consolidated financial statements.

NORTH AMERICAN SCIENTIFIC, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of the Company are unaudited, other than the consolidated balance sheet at October 31, 2006, and reflect all material adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the current interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.

These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to these rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form 10-K, as filed with the SEC for the fiscal year ended October 31, 2006.

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

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 in the nine months ended July 31, 2007, and $17.1 million, $55.5 million and $36.3 million for the years ended October 31, 2006, 2005 and 2004, respectively. We have used cash in operations of $8.7 million in the nine months ended July 31, 2007, and $15.9 million, $11.9 million and $23.1 million for the years ended October 31, 2006, 2005 and 2004, respectively. As of July 31, 2007, we had an accumulated deficit of $144.6 million; cash and cash equivalents of $1.8 million; borrowings under a line of credit of $1.4 million and no long-term debt.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations, funds to be raised by the Company through an equity financing, as well as the Company’s anticipated available line of credit, will be sufficient to meet working capital and capital requirements through at least the next twelve months. In this regard, we must raise additional financing in fiscal 2007 to support launch and continued development of ClearPath and fund our continuing operations and other activities. However, there is no assurance that the Company will be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional financing, or the Company’s line of credit (which presently expires on October 3, 2007) is insufficient or not available, the Company will 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.

Management also expects that in future periods new products and services will provide additional cash flow, although no assurance can be given that such cash flow can be realized, and we are presently placing an emphasis on controlling expenses.

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.

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

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 and non-therapuetic sources used in calibration devices.

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.

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 nine months ended July 31, 2007 and 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 Consolidated Statement of Operations during the nine months ended July 31, 2007 and 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 subsequent to October 31, 2005. A total of 1,850,000, and 1,303,000 stock option grants were awarded to employees during the nine months ended July 31, 2007 and 2006, respectively, and a total of 115,000 and 150,000 stock option grants were awarded to directors during the nine months ended July 31, 2007 and 2006, respectively.

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. Note that the stock option grants on March 16, 2006 included a total of 650,500 stock options that contain certain market condition 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 market 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 market 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 market condition by the Company’s common stock, 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. As of July 31, 2007 the market condition for the vesting of the 2007 Premium Price Awards has not been met. Share-based compensation expense related to stock options and employee stock purchases, including the 2007 Premium Price Awards, of $176,000 and $209,000 for the three months ended July 31, 2007 and 2006, respectively, and $490,000 and $645,000 for the nine months ended July 31, 2007 and 2006, respectively, was recorded in the financial statements as a component of general and administrative expense. Share-based compensation expense of $33,000 and $41,000 for the three months ended July 31, 2007 and 2006, respectively and $94,000 and $85,000 for the nine months ended July 31, 2007 and 2006, respectively, was recorded as part of the discontinued operations of NOMOS Corporation.

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:

	Three months ended July 31,						Nine months ended July 31,
	2007			2006			2007			2006

Net loss from continuing operations	$	(2,970,000	)	$	(2,526,000	)	$	(7,393,000	)	$	(6,615,000	)
Net loss from discontinued operations	$	(7,718,000	)	$	(2,107,000	)	$	(9,670,000	)	$	(4,388,000	)
Net loss	$	(10,688,000	)	$	(4,633,000	)	$	(17,063,000	)	$	(11,003,000	)
Weighted average shares outstanding - basic		29,317,056			23,954,948			29,327,062			19,327,230
Dilutive effect of stock options and warrants		—			—			—			—
Weighted average shares outstanding -diluted		29,317,056			23,954,948			29,327,062			19,327,230
Basic and diluted net loss per share:
Net loss per share from continuing operation	$	(0.10	)	$	(0.10	)	$	(0.25	)	$	(0.34	)
Net loss per share from continuing operations	$	(0.26	)	$	(0.09	)	$	(0.33	)	$	(0.23	)
Net loss per share	$	(0.36	)	$	(0.19	)	$	(0.58	)	$	(0.57	)

Stock options to purchase 4,629,600 and 3,594,588 common shares for the three months ended July 31, 2007, and 2006, respectively, and 3,705,813 and 2,919,278 common shares for the nine months ended July 31, 2007 and 2006, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

Significant Concentrations

As of July 31, 2007, there were two customers that made up more than 10% of revenues and five customers that each made up more than 5% of accounts receivable, and one supplier that made up more than 10% of purchases. No vendors represented more than 5% of accounts payable.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the application of FIN 48 will have on its 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 is currently evaluating the effect that the application of SFAS No. 157 will have on its financial position, results of operations or cash flows.

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

NOTE 2 — DISCONTINUED OPERATIONS

On August 3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology business (“NOMOS”), which develops and markets IMRT/IGRT products used during external beam radiation therapy for the treatment of cancer. The Company expects that the divestiture of NOMOS will allow it to better utilize financial resources to benefit the marketing and development of innovative brachytherapy products for the treatment of cancer The Company has executed a purchase and sale agreement with Best Medical International, Inc. (hereinafter referred to as the “Best”) to purchase certain assets and to assume certain liabilities of NOMOS for $0.4 million, net of estimated closing costs. The closing was completed on September 17, 2007.

In connection with the divestiture of NOMOS, the Company determined that the carrying value of the NOMOS assets held for sale at July 31, 2007 exceeded their fair value, as determined by estimated future cash flows, and therefore, recorded a $6.7 million charge for the impairment of its net assets. These amounts have been recorded as part of the loss from discontinued operations.

Summarized statement of earnings data for NOMOS:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2007			2006			2007			2006
Net revenue	$	3,065,000		$	3,931,000		$	9,136,000		$	13,437,000
Loss from discontinued operations before income tax benefit	$	(7,718,000	)	$	(2,107,000	)	$	(9,670,000	)	$	(4,388,000	)
Income tax benefit, net of reserve		---			---			---			---
Loss from discontinued operations	$	(7,718,000	)	$	(2,107,000	)	$	(9,670,000	)	$	(4,388,000	)

Summarized balance sheet for NOMOS is as follows:
	July 31, 2007			October 31, 2006

Assets held for sale:
Accounts receivable	$	1,492,000		$	2,093,000
Inventories		2,714,000			2,918,000
Prepaid and other current assets		604,000			262,000
Equipment and leasehold improvements		898,000			1,082,000
Goodwill		2,564,000			2,564,000
Intangible assets		1,945,000			2,394,000
Other assets		71,000			71,000
Impairment charge		(6,654,000	)		---
Total assets held for sale	$	3,634,000		$	11,384,000
Liabilities held for sale:
Deferred Revenue		3,110,000			3,664,000
Other current liabilities		153,000			150,000
	$	3,263,000		$	3,814,000

Upon completion of the divestiture of the NOMOS related assets, the Company estimates NOMOS will incur payments for the retained obligations to its vendors, customers and former employees of approximately $1.9 million in accordance with their terms, which are included in accounts payable and accrued liabilities at July 31, 2007.

During the nine months ended July 31, 2006, the Company paid $0.1 million related to expenses accrued during the shut-down of its Theseus operation in 2004, and this amount is included in cash used in discontinued operations in the Consolidated Statements of Cash Flows. No cash was paid, and no amounts remain outstanding related to the Theseus discontinued operations as of July 31, 2007. There were no revenues or expenses relating to the Theseus discontinued operations for the three months ended and the nine months ended July 31, 2007 and 2006.

NOTE 3 — MARKETABLE SECURITIES

Marketable securities consist of the following:


	July 31, 2007		October 31, 2006
Securities held to maturity:
Corporate and government bonds	$	---	$	4,886,000
Commercial paper		---		2,947,000
Certificate of deposits and other		---		587,000
		---		8,420,000
Less: current portion		---		(8,420,000	)
Non-current portion	$	---	$	—

The amortized cost of all held to maturity securities approximates fair value.

NOTE 4—ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

	July 31, 2007			October 31, 2006
Accounts receivable - trade	$	2,135,000		$	3,392,000
Less: allowance for doubtful accounts		(224,000	)		(774,000	)
	$	1,911,000		$	2,618,000

The provision for doubtful accounts was $(103,000) and $95,000 for the three months ended July 31, 2007 and 2006, respectively, and $(213,000) and $281,000 for the nine months ended July 31, 2007 and 2006, respectively

NOTE 5—INVENTORIES

Inventories consist of the following:
	July 31, 2007			October 31, 2006
Raw materials	$	1,457,000		$	1,059,000
Work in process		128,000			140,000
Finished goods		328,000			135,000
Reserve for excess inventory		(138,000	)		(50,000	)
	$	1,775,000		$	1,284,000

Adjustments to the reserve for excess inventory included in cost of sales was $88,000 for the three months ended July 31, 2007,and $88,000 and $(88,000) for the nine months ended July 31, 2007 and 2006, respectively. No adjustments to the reserve were recorded for the three months ended July 31, 2006.

NOTE 6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:


	July 31, 2007			October 31, 2006
Furniture, fixtures and equipment	$	4,902,000		$	4,861,000
Leasehold improvements		2,194,000			2,134,000
		7,096,000			6,995,000
Less: accumulated depreciation		(6,049,000	)		(5,677,000	)
	$	1,047,000		$	1,318,000

Depreciation expense was $114,000 and $151,000 for the three months ended July 31, 2007 and 2006, respectively, and $392,000 and $461,000 for the nine months ended July 31, 2007 and 2006, respectively.

NOTE 7—INTANGIBLE ASSETS

	July 31, 2007			October 31, 2006
Amortizable intangible assets
Purchased technology	$	98,000		$	98,000
Existing customer relationships		11,000			11,000
Trademark		19,000			19,000
Patents and licenses		158,000			158,000
		286,000			286,000
Less: accumulated amortization		(169,000	)		(148,000	)
	$	117,000		$	138,000

Amortization expense was $7,000 for each three month period ended July 31, 2007 and 2006, and $21,000 for each nine month period ended July 31, 2007 and 2006. Estimated amortization expense for the subsequent years is $28,000 annually through the October, 2011.

NOTE 8 — 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 had 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 July 31, 2007, 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.

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.

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. $1.4 million was outstanding against the Line of Credit as of July 31, 2007 at an interest rate of 9.75% per annum.

Subordinated 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 supplemented an existing line of credit provided by Silicon Valley Bank. The line of credit had a term of eighteen months. Borrowings under the Loan Agreement were subject to a borrowing base formula. The Company has paid interest on the borrowings under the Loan Agreement at prime rate as quoted in the Wall Street Journal, which on July 31, 2007 was 8.25%. Amounts owing under the Loan Agreement 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 Loan Agreement 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, 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:

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 Loan Agreement as of July 31, 2007.

NOTE 9—STOCKHOLDERS' EQUITY

Preferred Stock

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

Authorized Shares of Common Stock

Pursuant to a consent solicitation dated April 5, 2007, a majority of the Company’s shareholders consented to amend the Company’s Certificate of Incorporation to increase the total number of authorized shares of common stock of the Company from 40,000,000 shares to 100,000,000 shares on April 20, 2007. The Company used some of the additional authorized shares to cover the grant of stock options to the Company’s President and Chief Executive Officer and the Company intends to use some of the shares for issuance in connection with the Company’s stock-based benefit plans, as well as for future equity financings and other corporate purposes.

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 January 31, 2007 and 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.

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.

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. As of July 31, 2007, 927,525 shares were terminated, expired unexercised or forfeited in the 1996 Plan and were transferred to the 2006 Plan. During the three months and nine months ended July 31, 2007, stock options for an aggregate 650,000 shares were granted to employees under the 2006 Plan, There were no equity awards granted under the 2006 Plan during the three months and nine months ended July 31, 2006. At July 31, 2007, there were 2,002,525 shares available for grant 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 on the anniversary date of grant. The options expire ten years from the date of grant. On June 5, 2007, the Board of Directors granted stock options underlying 115,000 shares of common stock to the elected non-employee Directors, of which 30,000 shares are pending approval of an increase in authorized shares for the Directors’ Plan by the shareholders at the next annual meeting.

On April 23, 2007 the Company granted stock options with respect to 1,800,000 shares of its common stock in connection with the employment by the Company of its new CEO. (See Note 10 - Commitments and Contingencies). Options with respect to 600,000 shares of the Company’s common stock were issued under the 2006 Plan. Options with respect to the remaining 1,200,000 shares of the Company’s common stock were issued as a stand-alone grant outside the 2006 Plan as approved by written consent of a majority of shareholders on April 20, 2007. The stock options have an exercise price of $1.16, which was equal to the fair market value per share of the Company’s common stock on the grant date. All of the options have a term of ten years and vest monthly over a four-year period. The options remain exercisable until the earlier of the expiration of the term of the option or (i) three months following Mr. Rush’s date of termination in the case of termination for reasons other than cause, death or disability (as such terms are defined in his employment agreement) or (ii) 12 months following Mr. Rush’s date of termination in the case of termination on account of death or disability. In the event that Mr. Rush is terminated for cause, all outstanding options, whether vested or not, will immediately lapse.

At July 31, 2007, a total of 6,618,978 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, 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
Granted		(1,965,000	)		1,965,000		$	0.93 - $1.50
Forfeited and expired		972,525			(776,852	)	$	0.70 - $24.54
Exercised		—			—			—
Additional shares reserved		1,200,000			—			—
Balance at July 31, 2007		1,992,525			4,626,453		$	0.03 - $23.50

There were 1,649,187, 1,878,663 and 1,873,220 options exercisable with weighted average exercise prices of $7.18, $8.57 and $8.79 at July 31, 2007, October 31, 2006 and 2005, respectively.

The following table summarizes options outstanding at July 31, 2007 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 - $1.12		118,945		4.58	$	1.02		98,800	$	1.03
$1.13 - $1.16		1,800,000		9.73		1.16		112,500		1.16
$1.17 - $3.18		994,500		7.13		2.28		246,879		2.44
$3.19 - $7.60		1,126,566		5.45		5.36		604,566		7.01
$7.61 - $23.50		586,442		4.18		11.54		586,442		11.54
		4,626,453		7.30	$	3.73		1,649,187	$	7.18

The average fair value for accounting purposes of options granted was $1.17, $1.09 and $2.47 for the nine months ended July 31, 2007 and for the years ended October 31, 2006 and 2005, 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 July 31, 2007 and October 31, 2006:

	Number of Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Life (Years)		Intrinsic Value
As of October 31, 2006:
Employee Options Outstanding		3,438,305	$	6.06		5.81	$	56,500
Employee Options Expected to Vest		1,559,642	$	2.68		7.14	$	—
Employee Options Exercisable		1,878,663	$	8.57		4.52	$	56,500

As of July 31, 2007
Employee Options Outstanding		4,626,453	$	3.73		7.30	$	24,640
Employee Options Expected to Vest		2,977,266	$	0.65		1.65	$	17,250
Employee Options Exercisable		1,649,187	$	7.18		5.05	$	7,840

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:

	Nine months ended July 31			Year Ended October 31,
	2007			2006			2005
Dividend yield		0	%		0	%		0	%
Expected volatility		61	%		63	%		82	%
Risk-free interest rate		4.8	%		4.9	%		3.9	%
Expected life		5 years			5 years			5 years

Stockholders' Rights Plan

In October 1998, the Board of Directors of the Company implemented a rights agreement to protect stockholders' rights in the event of a proposed takeover of the Company. In the case of a triggering event, each right entitles the Company's stockholders to buy, for $80, $160 worth of common stock for each share of common stock held. The rights will become exercisable only if a person or group acquires, or commences a tender offer to acquire, 15% or more of the Company's common stock. The rights, 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. On May 2, 2007, the Company entered into a Third Amendment to Rights Agreement, which amended the Rights Agreement to provide, among other things, that the Board of Directors of the Company may determine that a person who would otherwise become an Acquiring Person has become such inadvertently, and provided certain conditions are satisfied, that such person is not an Acquiring Person for any purposes of the Rights Agreement.

Employee Stock Purchase Plan

In March 2000, the Board of Directors authorized 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 the nine months ended July 31, 2007 and the years ended October 31, 2006 and 2005, the shares issued under the ESPP were 154,082, 96,489 and 59,742 shares, respectively. On June 5, 2007, the Board of Directors approved a 300,000 share increase to 600,000 authorized shares for the ESPP. At July 31, 2007 and October 31, 2006, 219,757 and 73,839 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. No shares were repurchased by the Company during the three months ended July 31, 2007. As of July 31, 2007 and October 31, 2006, a cumulative total of 116,995 and 22,100 shares had been repurchased by the Company at a cost of $227,000 and $133,000, respectively and are reflected as Treasury Stock on the Balance Sheet at the respective dates.

NOTE 10—COMMITMENTS AND CONTINGENCIES

Contract Commitments

The Company has entered into purchase commitments of $112,000 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 which renew annually at rates that are subject to annual adjustment for increases in the Consumer Price Index. Future minimum lease payments under these operating leases are $350,000 annually. Total rent expense was $87,000 and $98,000 for the three months ended July 31, 2007 and 2006, respectively, and $283,000 and $293,000, for the nine months ended July 31, 2007 and 2006, respectively.

Third Party License Agreements

We license from third parties some of the technologies used in our core products. The following are the minimum annual royalty amounts under each of the agreements:


IdeaMatrix, Inc.	$	125,000
University of South Florida Research Foundation, Inc.		50,000
	$	175,000

Employment Agreements

On March 22, 2007, the Company entered into an employment agreement (the “Agreement”) with John B. Rush in connection with his employment as the Company’s new President and Chief Executive Officer. Mr. Rush’s base salary will be $350,000. Mr. Rush will also be eligible to receive an annual bonus, if any, based upon performance goals approved by the Board or the Compensation Committee of the Board, in consultation with Mr. Rush, in an amount, not to exceed 60% of his base salary, to be determined by the Compensation Committee. For the period beginning on April 23,2007 and ending the last day of the Company’s fiscal year, October 31, 2007, Mr. Rush will receive a guaranteed, minimum, pro-rated bonus of 30% of his base salary.

On April 23, 2007, the Company granted stock options to Mr. Rush with respect to 1,800,000 shares of our common stock. The stock options have an exercise price of $1.16, which was equal to the fair market value per share of our common stock on the grant date. In addition, in the event that within 24 months of April 23, 2007, the Company issues additional shares of stock in connection with raising capital in a private placement transaction, the Company is required to grant options to Mr. Rush to acquire an additional number of shares of common stock equal to 3% of the number of shares issued in connection with such transaction (the “Additional Shares”).

All of the options have a term of ten years and vest monthly over a four-year period. The options remain exercisable until the earlier of the expiration of the term of the option or (i) three months following Mr. Rush’s date of termination in the case of termination for reasons other than cause, death or disability (as such terms are defined in his employment agreement) or (ii) 12 months following Mr. Rush’s date of termination in the case of termination on account of death or disability. In the event that Mr. Rush is terminated for cause, all outstanding options, whether vested or not, will immediately lapse.

In the event (a) Mr. Rush’s employment is terminated by the Company at any time after April 23, 2007 for any reason other than Mr. Rush’s death, disability or “cause” (as defined in the Agreement) or (b) Mr. Rush resigns for a “good reason” (as defined in the Agreement), Mr. Rush will receive his base salary in effect on the date of termination for a period ending 12 months following the date of termination.

In the event of a “Control Termination” (as defined in the Agreement), Mr. Rush will be entitled to receive his base salary in effect on the date of termination and group health benefits for a period ending 12 months following the date of termination and, in addition, Mr. Rush shall, as of the date of the Control Termination, become fully vested in any unvested options previously granted to him.

Mr. Rush’s employment agreement also provides that the Company will make a tax gross-up payment to Mr. Rush in the event that payments to Mr. Rush on account of a change in control constitute an excess parachute payment subject to an excise tax under Section 4999 of the Code. Similarly, the Company will make a tax gross-up payment to Mr. Rush for any excise tax in the event that amounts or benefits payable to Mr. Rush are determined to be subject to the excise tax on nonqualified deferred compensation under Section 409A of the Code.

In the event that any amount payable upon Mr. Rush’s termination would be determined to be “non-qualified deferred compensation” subject to Section 409A of the Code, the Company may delay payment for six months, in order to comply with Section 409A of the Code.

On November 2, 2006, the Company announced that Mr. Cutrer will transition from the position of President and Chief Executive Officer to become the Company’s Executive Vice President and Chief Technology Officer upon his successor being identified and joining the Company. As part of this transition process, on December 21, 2006, the Company and Mr. Cutrer entered into a First Amended and Restated Employment Agreement (the “Amended Agreement”), which became effective with the employment of Mr. Rush (the “Effective Date”). Under the Amended Agreement, Mr. Cutrer’s annual base salary will be $280,000. In addition, Mr. Cutrer will be eligible to receive an annual bonus, if any, based upon performance goals approved by the Compensation Committee or the Board in an amount to be determined in the sole discretion of the Compensation Committee or the Board. If Mr. Cutrer meets or exceeds the performance goals for a particular measuring year, the annual bonus may not be less than 25% of his base salary.

In the event Mr. Cutrer’s employment terminates on or before October 31, 2007 for (a) any reason other than Mr. Cutrer ’s death, disability or “cause” (as defined in the Amended Agreement) or (b) Mr. Cutrer resigns for “good reason” (as defined in the Amended Agreement), Mr. Cutrer will continue to receive his base salary in effect on the termination date through October 31, 2007.

In the event Mr. Cutrer’s employment terminates at any time after the Effective Date for any reason, except for a “Control Termination” (as defined in the Amended Agreement), and in addition to any payment that may be due if he is terminated on or before October 31, 2007 as noted above, Mr. Cutrer will be entitled to receive (a) severance pay equal to three times (3x) his highest base salary during his employment by the Company payable over a three year period in accordance with the Company’s standard payroll practices for salaried employees, and (b) any unvested stock options shall immediately vest as of the termination date. In addition, the exercise date of all stock options that, on the termination date, have an exercise price greater than the fair market value of the Company’s common stock will be extended to the later of (i) the last day of the year in which the stock option would otherwise have expired or (ii) two and a half months after the date on which the stock option would otherwise have expired (or such later date as may be permitted by final regulations issued pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), but in no event later than the date on which the stock option would have expired had Mr. Cutrer’s employment not been terminated).

In the event of a “Control Termination” (as defined in the Amended Agreement), Mr. Cutrer will be entitled to a “Control Severance Payment” in the gross amount equal to the total of: (a) three (3) years’ base salary; (b) the highest annual bonus paid to Mr. Cutrer in the three years prior to such termination multiplied by three (3); (c) the Black/Scholes valuation of the stock options received by Mr. Cutrer during the one year prior to such termination multiplied by three (3); and (d) a tax gross-up payment if any severance payment constitutes an excess parachute payment subject to the excise tax imposed by Section 4999 of the Code. The Control Severance Payment will be paid as salary continuation ratably over a one year period. In addition, any unvested stock options will immediately vest as of the termination date.

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

Litigation

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 former Vice President of New Product Development) owned certain patent rights and that we began trying to inappropriately gain property rights by hiring him away from WWMT. 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 moved the state court claim against Mr. Terwilliger to federal court and the cases have been consolidated. The defendants have answered both complaints and discovery has commenced in each matter. In April 2006, WWMT had its hearing for a preliminary injunction against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned that portion of their application for preliminary injunction that was based on an alleged misappropriation of trade secrets shortly before the hearing. On August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering that what remained of plaintiffs' motion be denied. Specifically, the Magistrate Judge found that plaintiffs do not have a reasonable likelihood of success on the merits of their claim for declaratory judgment that some or all of plaintiffs are the sole owners of the intellectual property at issues, and she further found that there do not exist sufficiently serious questions going to the merits of that claim to make them a fair ground for litigation. 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.

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.

As of this filing, the Company does not meet the $10 million stockholders’ equity requirement under Maintenance Standard 1 for continued listing on the Nasdaq Global Market set forth in Marketplace Rule 4450(a)(3). As a result of the Company’s non-compliance, The Nasdaq Stock Market may send the Company a notice that the Company’s stock is subject to delisting from the The Nasdaq Global Market unless the Company requests a hearing with a Nasdaq Listing Qualifications Panel to appeal such delisting. A request for a hearing will stay the delisting action pending the issuance of a written determination by a Nasdaq Listing Qualifications Panel. While the Company is working diligently to meet the minimum stockholders’ equity requirement as promptly as possible, the Company can provide no assurances that a Nasdaq Listing Qualifications Panel will grant the Company’s request for continued listing on The Nasdaq Global Market.

NOTE 11 — SUBSEQUENT EVENTS

On August 24, 2007, North American Scientific, Inc. (“NASI”) and two of its subsidiaries, NOMOS Corporation (“NOMOS”) and North American Scientific, Inc., a California corporation (“NASI-California” and collectively, with NASI and NOMOS, the “Company”), entered into a Third Amendment to Loan and Security Agreement (the “Third Amendment”) with Silicon Valley Bank (“Silicon Valley”). The Third Amendment amended that certain Loan and Security Agreement dated October 5, 2005 (the “Loan Agreement”).

The Third Amendment added a Bridge Loan Sub-limit to the Loan Agreement of up to $1,500,000 at an interest rate of prime plus 4.0%, subject to a borrowing base formula, and decreased the minimum tangible net worth that must be maintained by the Company from $5 million to $2 million. The maturity date of the Bridge Loan Sublimit shall be the earlier of October 3, 2007 or the date NASI closes a private investment public equity transaction. Concurrent with the Third Amendment, NASI issued Silicon Valley a warrant for 300,000 shares of NASI common stock at an exercise price of $0.98, the closing price of NASI common stock on August 24, 2007.

On August 30, 2007 the Company terminated the Loan and Security Agreement (the “PFG Loan Agreement”) with Partners For Growth II, L.P. (“PFG”) by mutual consent. The PFG Loan Agreement was entered into on March 28, 2006 and was scheduled to expire on September 28, 2007. As a result of the termination, PFG released all liens on the Company’s assets. There were no outstanding borrowings under the PFG Loan Agreement at the date of termination.

On September 12, 2007 NASI announced that it had executed a purchase and sale agreement with Best Medical International, Inc. to purchase certain assets and to assume certain liabilities of our NOMOS Radiation Oncology business, which we previously had reported as our IMRT/IGRT business segment (“NOMOS Transaction”). The purchase price is $500,000 cash at closing, plus assumption of certain obligations and liabilities, including approximately $3.1 million of liabilities for warranty and maintenance agreements, $0.2 million of other accrued liabilities, as well as the NOMOS facility lease in Cranberry Township, Pennsylvania. NOMOS is retaining certain other liabilities, including certain trade accounts payable and certain employee obligations. The closing was completed on September 17, 2007. As a result, we have reported the results of the NOMOS Radiation Oncology business as a discontinued operation in our financial statements for the three and nine months ended July 31, 2007 and 2006.

On September 14, 2007, NASI and NASI-California entered into a Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”) with Silicon Valley. The Fourth Amendment further amended the Loan Agreement.

The Fourth Amendment included: (i) a forbearance by Silicon Valley from exercising its rights and remedies against the Company, until such time as Silicon Valley determines in its discretion to cease such forbearance, due to the default under the Loan Agreement resulting from the Company failing to comply with the tangible net worth covenant in the Loan Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a subordinated debt facility of up to $750,000 with Agility Capital LLC. In connection with the Fourth Amendment, Silicon Valley consented to the NOMOS Transaction and released its lien on the NOMOS assets,

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information, which our management believes 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 Form 10-Q, 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: (i) the Private Securities Litigation Reform Act of 1995 (the "1995 Act") and (ii) releases issued by the Securities and Exchange Commission (“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 or detailed from time to time in our other filings with the SEC including our most recent report on Form 10-K. We are not undertaking any obligation to update publicly any forward-looking statements. Readers should not place undue reliance on these forward-looking statements.

Subsequent Events

Overview

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

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 begin the commercial launch our ClearPath product during fiscal year 2007, with an initial focus on ClearPath-HDR, to be followed by release of our ClearPath-CR.

As stated in Subsequent Events above, effective as of the end of our fiscal third quarter ended July 31, 2007, our NOMOS Radiation Oncology business has been treated as a discontinued operation in our financial statements. This business was sold on September 17, 2007.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations, funds to be raised by the Company through an equity financing, as well as the Company’s anticipated available line of credit, will be sufficient to meet working capital and capital requirements through at least the next twelve months. In this regard, we must raise additional financing in fiscal 2007 to support launch and future development of ClearPath and fund our continuing operations and other activities. However, there is no assurance that the Company will be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional financing, or the Company’s line of credit (which presently expires on October 3, 2007) is insufficient or not available, the Company will 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.

Management also expects that in future periods new products and services will provide additional cash flow, although no assurances can be given that such cash flow will be realized, and we are presently placing an emphasis on controlling expenses.

Results of Operations

Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006

Total Revenue
	Three Months Ended July 31 ,
	2007		2006		% Change
($ millions)
Radiation Sources	$	3.4	$	3.2		8.6	%

Total revenue increased 9% to $3.4 million for the three months ended July 31, 2007 from $3.2 million for the three months ended July 31, 2006. The increase in revenue is due to a 17% increase in sales of our brachytherapy seeds and accessories, with increased product sales partially offset by a decline in average selling prices, and a 14% decrease in sales of our non-therapeutic products.

Gross profit

	Three Months Ended July 31,
	2007			2006			% Change
($ millions)
Radiation Sources	$	0.8		$	1.0			(24.5)	%
(% of Revenue)
Radiation Sources		21.8	%		31.4	%		(9.6)	%

Gross profit decreased $0.2 million, or 25%, to $0.8 million for the three months ended July 31, 2007 from $1.0 million for the three months ended July 31, 2006. Gross profit as a percent of sales decreased from 31% in the three months ended July 31, 2006 to 22% in three months ended July 31, 2007. The decrease in our gross profit and gross profit as a percent of sales is primarily due to increased material usage costs in brachytherapy seeds and non-therapeutic products, partially offset by increased gross profit on higher product sales and reduced cost of outside stranding.

Selling and marketing expenses

	Three Months Ended July 31,
	2007			2006			% Chang e
($ millions)
Selling and marketing expenses	$	1.1		$	0.7			62.1	%
As a percent of total revenue		30.8	%		20.7	%

Selling and marketing expenses, comprised primarily of salaries, commissions, and marketing costs, increased $0.4 million, or 62%, to $1.1 million for the three months ended July 31, 2007, from $0.7 million for the three months ended July 31, 2006. The increase in selling and marketing expenses is primarily attributed to higher sales commissions related to the increased sales of brachytherapy products, and increased marketing spending on our ClearPath device.

General and administrative expenses ("G&A")

	Three Months Ended July 31
	2007			2006			% Change
($ millions)
General and administrative expenses	$	2.1		$	2.6			(20.4	)%
As a percent of total revenue		60.3	%		82.3	%

G&A decreased $0.5 million, or 20%, to $2.1 million for the three months ended July 31, 2007, from $2.6 million for the three months ended July 31, 2006. The decrease in G&A is primarily attributed to a reduction in professional fees and a decrease in the allowance for bad debts resulting from improved collections of receivables.

Research and development (“R&D”)

	Three Months Ended July 31
	2007			2006			% Change
($ millions)
Research and development expenses	$	0.5		$	0.2			184.6	%
As a percent of total revenue		15.1	%		5.7	%

R&D increased $0.3 million or 185%, to $0.5 million for the three months ended July 31, 2007, from $0.2 million for the three months ended July 31, 2006. The increase in R&D spending is primarily due to increased spending on product development for our ClearPath™ breast brachytherapy device.

Nine Months Ended July 31, 2007 Compared to Nine Months Ended July 31, 2006

Total Revenue
	Nine Months Ended July 31
	2007		2006		% Change
($ millions)
Radiation Sources	$	11.1	$	9.2		20.5	%

Total revenue increased 21% to $11.1 million for the nine months ended July 31, 2007 from $9.2 million for the nine months ended July 31, 2006. The increase in our Radiation Sources business reflects a 21% increase in sales of our brachytherapy seeds and accessories, with increased product sales partially offset by a decline in average selling prices, and a 18% increase in sales of our non-therapeutic products.

Gross profit

	Nine Months Ended July 31,
	2007			2006			% Change
($ millions)
Radiation Sources	$	3.3		$	2.5			31.5	%
(% of Revenue)
Radiation Sources		30.0	%		27.5	%		2.5	%

Gross profit increased $0.8 million, or 32%, to $3.3 million for the nine months ended July 31, 2007 from $2.5 million for the nine months ended July 31, 2006. Gross profit as a percent of sales increased from 28% in the nine months ended July 31, 2006 to 30% in nine months ended July 31, 2007. The increase in our gross profit and our gross profit as a percent of sales is primarily due to increased product sales and reduced cost of outside stranding in our brachytherapy business, and increased sales of our non-therapeutic products.

Selling and marketing expenses

	Nine Months Ended July 31,
	2007			2006			% Change
($ millions)
Selling and marketing expenses	$	2.8		$	2.0			44.3	%
As a percent of total revenue		25.5	%		21.3	%

Selling and marketing expenses, comprised primarily of salaries, commissions, and marketing costs, increased $0.8 million, or 44%, to $2.8 million for the nine months ended July 31, 2007, from $2.0 million for the nine months ended July 31, 2006. The increase in selling and marketing expenses is primarily attributed to higher sales commissions related to the increased sales of brachytherapy products, and increased marketing expenses related to our ClearPath device and trade show expenses.

General and administrative expenses ("G&A")

	Nine Months Ended July 31,
	2007			2006			% Change
($ millions)
General and administrative expenses	$	6.5		$	6.3			3.4	%
As a percent of total revenue		58.6	%		68.5	%

G&A increased $0.2 million, or 3%, to $6.5 million for the nine months ended July 31, 2007, from $6.3 million for the nine months ended July 31, 2006. The increase in G&A is primarily attributed to $0.7 million increase in professional fees, partially offset by $0.5 million decrease in the allowance for bad debts resulting from improved collections of accounts receivable

Research and development (“R&D”)

	Nine Months Ended July 31,
	2007			2006			% Change
($ millions)
Research and development expenses	$	1.3		$	0.7			79.3	%
As a percent of total revenue		11.5	%		7.7	%

R&D increased $0.6 million or 79%, to $1.3 million for the nine months ended July 31, 2007, from $0.7 million for the nine months ended July 31, 2006. The increase in R&D spending is primarily due to increased spending on product development for our ClearPath™ breast brachytherapy device.

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, public offerings and private placements of our common stock and borrowings from lenders. 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, issuance of our common stock, and our anticipated available line 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. However, the Company has continued to incur substantial net losses and used substantial amounts of cash. As of July 31, 2007, the Company has an accumulated deficit of $144.6 million; cash and cash equivalents of $1.8 million, borrowings under a line of credit of $1.4 million, and no long-term debt.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations, funds to be raised by the Company through an equity financing, as well as the Company’s anticipated available line of credit, will be sufficient to meet working capital and capital requirements through at least the next twelve months. In this regard, we expect that we will raise additional financing in fiscal 2007 to fund our continuing operations, support the further development and launch of ClearPath and other activities. However, there is no assurance that the Company will be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional financing, or the Company’s line of credit (which presently expires on October 3, 2007) is insufficient or not available, 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.

Management also expects that in future periods new products and services will provide additional cash flow, although no assurance can be given that such cash flow will be realized, and we are presently placing an emphasis on controlling expenses.

At July 31, 2007, we had cash and cash equivalents aggregating approximately $1.8 million, a decrease of approximately $7.5 million from $9.3 million at October 31, 2006. The decrease was primarily attributed to $8.7 million used in operations and $0.1 million used for capital expenditures, partially offset by borrowings under the line of credit of $1.4 million.

Cash flows used in operating activities decreased $2.4 million, or 22%, to $8.7 million for the nine months ended July 31, 2007 from $11.1 million for the nine months ended July 31, 2006, primarily due to improved collections of accounts receivable ($1.8 million), and a decrease in the allowance for doubtful accounts of $0.2 million compared to an increase of $0.3 million in the prior year. 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.

Cash flows provided by investing activities increased $17.5 million to $8.2 million for the nine months ended July 31, 2007, from $9.3 million cash used in investing activities for the nine months ended July 31, 2006. The increase reflects the additional draw down of our balance of marketable securities to fund operations in 2007 compared to investments in marketable securities in 2006.

Cash provided by financing activities decreased $20.7 million to $1.4 million for the nine months ended July 31, 2007 from $22.1 million for the nine months ended July 31, 2006. The decrease is due to a drawdown on the lines of credit of $1.4 million in 2007 and proceeds from the sale of stock in 2006.

We have $0.3 million in operating lease obligations for facilities and equipment under non-cancelable operating lease agreements. We have also entered into purchase commitments to suppliers under blanket purchase orders in the amount of $0.1 million.

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 included in the Company’s Form 10-K for the year ended October 31, 2006, 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

The Company sells products for radiation therapy treatment, including brachytherapy seeds used in the treatment of cancer and non-therapuetic sources used in calibration devices.

Product revenue

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 was 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 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 and Other Intangible Assets

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (September 30) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

Research and Development Costs

We account for research and development costs in accordance with several accounting pronouncements, including SFAS 2, Accounting for Research and Development Costs, and SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. SFAS 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, we expense all research and development costs when incurred.

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 our existing legal matters will have a material adverse effect on our financial condition or results of operations.

Income Taxes

We account for income taxes using the liability method. 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.

Recent Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information about market risks for the three months ended July 31, 2007, does not differ materially from that discussed under Item 7A of the registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 2006.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (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 fiscal quarter 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 fiscal quarter, 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 and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to all timely decisions regarding required disclosure.

(b) Changes in Internal Controls

There has been no change in our internal control over financial reporting during the quarter ended July 31, 2007, that has materially affected or is reasonably like to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

The Company was not required to report the information pursuant to Items 1 through 6 of Part II of Form 10-Q except as follows:

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. In addition to other information in this Form 10-Q, you should carefully consider the risks described below before investing in our securities. This discussion highlights some of the risks that may affect future operating results. The risks described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

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. We will need to raise additional financing in fiscal 2007 to fund our continuing operations, support the further development and launch of ClearPath and other activities. 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 in the nine months ended July 31, 2007, and $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 $1.8 million at July 31, 2007. In addition, our subordinated line of credit with Partners For Growth was teminated by mutual consent on August 30, 2007, and although our line of credit with Silicon Valley Bank was expanded by $1.5 million with a bridge loan sublimit on August 24, 2007, the line of credit expires on October 3, 2007, and there is no assurance that it will be renewed.

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 taken and continues to take actions intended 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 additional financing, our ability to increase revenues and to reduce further our losses from operations, economic cycles, market acceptance of our products, competitors’ responses to our products, the intensity of competition in our markets, and the level of demand for our products.

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

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

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Continued scientific progress in our discovery and research programs;

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

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Structuring our businesses in alignment with their revenues to reduce operating losses;

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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.

We will need to raise additional equity financing, reduce operations and take other steps to achieve positive cash flow. We also may be required to curtail our expenses or to take steps that could hurt our future performance, including but not limited to, the termination of major portions of our research and development activities, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms or the cessation of operations. We cannot assure you that we will be successful in these efforts or that any or some of the above factors will not negatively impact us. We believe that we will be able to raise sufficient cash to sustain us at least through the next twelve months.

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

In June 2006, the Company completed a private placement of shares of its common stock that also includes 6,145,967 shares of common stock issuable upon exercise of warrants. This financing resulted in significant dilution of the Company’s current shareholders. In fiscal 2007, the Company will endeavor to issue and sell additional equity 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.

We currently do not meet the continued listing requirements of the Nasdaq Global Market. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from The Nasdaq Global Market.

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. As of this filing, we do not meet the minimum $2.5 million stockholders’ equity requirement or the $1.00 minimum bid price requirement for listing on the Nasdaq Capital Market.

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 could adversely affect our ability to raise additional financing through the public or private sale of equity securities. We need to raise additional financing in fiscal 2007 to fund our continuing operations, support the launch and further development of ClearPath, and other activities. Delisting from Nasdaq also would make trading our common stock more difficult for investors, potentially leading to further declines in our share price. It would also make it more difficult for us to raise additional capital.

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

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

Successful further development of a commercially marketable device;

Successful launch of a marketing and sales program for this device;

Our ability to protect our intellectual property through patents and licenses and avoid infringement of intellectual property of others;

Successful completion of technical improvements to the device;

Our ability to successfully manufacture production quantities of the device;

The acceptance of the device by physicians and health professionals as an alternative to other approaches to delivering radiation to a cancer patient’s breast tissue or to other products using a similar approach but employing different competitive technologies; and

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

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

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

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 cost overruns;

• failure to obtain customer acceptance and payment; and

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

The high cost of technological innovation is coupled with rapid and significant change in the regulations governing the products that compete in our market, by industry standards that could change on short notice, and by the introduction of new products and technologies that could render existing products and technologies uncompetitive. We 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, as competition erodes average selling prices. Even if customers accept new or enhanced products, the costs associated with making these products available to customers, as well as our ability to obtain capital to finance such costs, could reduce or prevent us from increasing our operating margins.

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, larger more experienced sales forces or otherwise be able to compete against us more effectively. If we fail to maintain our competitive position in key product areas, we may lose significant sources of revenue.

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

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); Core Oncology, 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.

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

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. Also, we will need to hire and train additional sales representatives to sell our ClearPath device. Any failure to build, manage and maintain our direct sales organization could negatively affect our revenues.

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

As a result of our relatively small sales force the need to hire and train additional sales representatives to sell our ClearPath device, and the intense competition for skilled sales and marketing employees, 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.

Our 2005 agreement with Oncura for distribution of our Palladium-103 brachytherapy seeds is be an important component of that business. In addition, 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 Palladium-103 brachytherapy seeds and our non-therapeutic radiation source products.

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

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

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

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

Our success is materially dependent on a limited number of key employees, and, in particular, the continued services of John B. Rush, our president and chief executive officer, L. Michael Cutrer, our executive vice president and chief technology officer, Troy A. Barring, our chief operating officer, and James W. Klingler, our chief financial officer. Our future business and financial results could be adversely affected if the services of Messrs. Rush, Cutrer, Barring 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, which may require us to withdraw certain products from the market.

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

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

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 2006, we licensed intellectual property which was later 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 was previously 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 licenses for our North Hollywood and Chatsworth facilities in 2007. California is one of the "Agreement States," which are so named because the Nuclear Regulatory Commission, or NRC, has granted such states regulatory authority over radioactive materials, provided such states have regulatory standards meeting or exceeding the standards imposed by the NRC. Most users of our products must obtain licenses issued by the state in which they reside (if they are Agreement States) or the NRC. Use licenses are also required by some of the foreign jurisdictions in which we may seek to market our products.

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

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

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

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

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

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

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

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

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.

Our future growth depends, in part, on our ability to penetrate foreign markets, particularly in Asia and Europe. However, we have encountered 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 future sales growth is highly dependent on the successful introduction of our ClearPath device;

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.

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.

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

The market price of our common stock has historically been, and we expect it to continue to be, volatile. The price of our common stock has ranged between $0.85 and $2.00 in the fifty-two week period ended July 31, 2007. 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 connection with our June 2006 sale of common stock and accompanying warrants, we filed 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

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. No shares were repurchased by the Company for the three months ended July 31, 2007. As of July 31, 2007 and October 31, 2006, a cumulative total of 116,995 shares and 22,100 shares had been repurchased by the Company at a cost of $227,000 and $133,000, 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 4. Submission of Matters to a Vote of Security Holders

On June 5, 2007 the Company, at its Annual Meeting of Stockholders, elected nine directors to hold office until the 2008 Annual Meeting.

The following table includes those persons nominated and elected as directors to hold office until the 2008 Annual Meeting of Stockholders, including the number of shares cast for, withheld, abstained and broker non-votes with respect to each of the nominees:

Description	For	Withheld	Abstained	Broker Non-Votes
L. Michael Cutrer	22,198,438	360,118	---	---
John A. Friede	22,279,911	278,645	---	---
Dr. Wilfred E. Jaeger	22,314,953	243,603	---	---
John B. Rush	22,299,953	258,603	---	---
John M. Sabin	22,291,879	266,677	---	---
Richard A. Sandberg	22,116,899	441,657	---	---
Dr. Gary N. Wilner	22,307,129	152,427	---	---
Nancy J. Wysenski	22,120,903	437,653	---	---
Roderick A. Young	22,305,929	252,627	---	---

Item 5. Other Information

Completion of Disposition of Assets

On September 17, 2007 North American Scientific, Inc. (“NASI”) completed the disposition of its NOMOS Radiation Oncology business (the “NOMOS Transaction”). In connection with the NOMOS Transaction, NOMOS Corporation (“NOMOS”) sold substantially all of its assets, including accounts receivable, contract rights, inventory, equipment and intellectual property, but excluding cash and certain other assets, to Best Medical International, Inc. (“Best”). The purchase price was $500,000 cash at closing, plus assumption of certain obligations and liabilities of NOMOS by Best, including approximately $3.1 million of liabilities for warranty and maintenance agreements, $0.2 million of other accrued liabilities, as well as the NOMOS facility lease in Cranberry Township, Pennsylvania. NOMOS retained certain other liabilities, including certain trade accounts payable and certain employee obligations.

Entry into a Material Definitive Agreement

On September 14, 2007, NASI and its wholly-owned subsidiary, North American Scientific, Inc., a California corporation (collectively, the “Company”), entered into a Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”) with Silicon Valley Bank (“Silicon Valley”). The Fourth Amendment amended the Loan and Security Agreement dated October 5, 2005 (the “Loan Agreement”). The Fourth Amendment included: (i) a forbearance by Silicon Valley from exercising its rights and remedies against the Company, until such time as Silicon Valley determines in its discretion to cease such forbearance, due to the defaults under the Loan Agreement resulting from the Company failing to comply with the tangible net worth covenant in the Loan Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a subordinated debt facility of up to $750,000 with Agility Capital LLC. In connection with the Fourth Amendment, Silicon Valley consented to the NOMOS Transaction and released its lien on the NOMOS assets. A copy of the Fourth Amendment is attached hereto as Exhibit 10.3.

Item 6. Exhibits

(a) Exhibits.

Exhibits No.	Title

10.1	Third Amendment to Loan and Security Agreement dated August 24, 2007, between Silicon Valley Bank, North American Scientific, Inc., a Delaware corporation, North American Scientific, Inc., a California corporation, and NOMOS Corporation.

10.2	Agreement among North American Scientific, Inc., NOMOS corporation, and Best Medical International, Inc., dated as of September 11, 2007, incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed September 14, 2007.

10.3	Fourth Amendment and Forbearance to Loan and Security Agreement dated September 14, 2007, between Silicon Valley Bank, North American Scientific, Inc., a Delaware corporation, and North American Scientific, Inc., a California corporation.

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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.

September 19, 2007	By:	/s/ John B. Rush
		Name: John B. Rush
		Title : President and Chief Executive Officer (Principal Executive Officer)




September 19, 2007	By:	/s/ James W. Klingler
		Name: James W. Klingler
		Title : Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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