Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2002
Commission File Number 0-26670

NORTH AMERICAN SCIENTIFIC, INC.
(Exact name of Registrant as specified in its charter)

20200 Sunburst Street, Chatsworth, CA 91311
(Address of principal executive offices)

(818) 734-8600
(Registrant's telephone number, including area code)

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

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

Common Stock, par value $0.01 per share
(Title of class)

        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.    ý Yes    o No

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

        As of January 24, 2003, approximately 10,263,418 shares of the Registrant's Common Stock, $.01 par value per share, were outstanding. The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $78,194,713 (based upon the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market for the last trading date prior to that date).

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    o Yes    ý No

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders to be held on or about March 28, 2003, are incorporated by reference into Part III of this Form 10-K.

NORTH AMERICAN SCIENTIFIC, INC.

Table of Contents

Form 10-K

Item 1.    BUSINESS

INTRODUCTION

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

        We design, develop and produce innovative radioisotopic products, including brachytherapy seeds and radiopharmaceuticals, for the treatment and diagnosis of disease. Since 1990, we have applied our expertise in radioisotopes to develop and market products for medical, environmental, research and industrial applications.

        In 1996, we began to focus our research and product development activities primarily on high value, high growth medical products that are useful in the diagnosis, management and treatment of diseases such as cancer and heart disease. This initiative resulted in the development of our first two therapeutic products, iodine-based and palladium-based implantable brachytherapy seeds for the treatment of prostate cancer. We began manufacturing our Iodine-125 seed for commercial use in 1998, and introduced our Palladium-103 seed the following year. These products were initially marketed under the trademarks IoGold® and PdGold®, respectively, by Mentor Corporation ("Mentor"). In connection with the termination of our exclusive marketing and distribution agreement with Mentor, we began to directly market and sell our Iodine-125 seeds under the trade name Prospera® I-125, and our Palladium-103 seeds under the trade name Prospera® Pd-103. Since introduction, our brachytherapy business has grown substantially. We believe that we are currently the third largest manufacturer in the world of brachytherapy seeds for the treatment of prostate cancer.

        Our primary radiopharmaceutical product candidate, Hynic-Annexin V, based on our Apomate™ technology platform, is an in vivo nuclear medicine imaging agent that targets cells undergoing apoptosis or necrosis, two common forms of cell death. Hynic-Annexin V is intended to be used for determining response to anti-cancer treatment within hours of the first dose of therapy. It also has been shown to image myocardial cell death due to heart attack and to provide early evidence of cardiac transplant rejection. We intend for this product candidate to provide information that would allow clinicians to make better therapeutic decisions for individual patients by monitoring a patient's response to treatment of disease with increased accuracy and timeliness.

        Our Hynic-Annexin V product candidate is currently in clinical trials in Europe for early detection of patient response to chemotherapy treatment in patients with lung cancer. We had submitted an Investigational New Drug, or IND, application to the Food and Drug Administration, or FDA, for U.S. studies intended to develop additional data on the use of Hynic-Annexin V for the early detection of patient response to chemotherapy treatment. However, following discussions with the FDA, we withdrew our IND application in January 2003 in order to provide additional data to the FDA. These discussions indicated that the FDA is now requiring development of an immunology assay and inclusion of the respective data in the IND submission. We expect to file a new IND upon completion of the required assay and other data before mid-2003.

1

BRACHYTHERAPY SEEDS FOR PROSTATE CANCER

        Prostate Cancer.    The prostate gland, found only in men, is a small walnut-sized gland surrounding the urethra, located under the bladder and in front of the rectum. According to the American Cancer Society, prostate cancer is considered a slow growing cancer relative to other types of cancer. Symptoms of prostate cancer are often not noticed until the cancer has progressed past its early stages. A digital rectal examination during a routine physical examination is the most commonly used test for identifying prostate cancer. Additionally, a blood test to detect a prostate specific antigen, or PSA, has become an accepted means of detecting early-stage prostate cancer. The PSA test, which is recommended for men over the age of 50, determines the amount of prostate specific antigen contained in an examinee's blood. Elevated levels of PSA can result from benign symptoms such as inflammation but can also be indicative of the presence of cancerous cells in the prostate. The emergence of PSA blood testing has greatly improved physicians' ability to diagnose and treat early stage prostate cancer.

        Prostate cancer is the second most prevalent form of cancer in men in the United States and is the second most common cause of cancer death in men. The American Cancer Society estimated that in 2002 more than 189,000 new cases of prostate cancer would be diagnosed in the U.S. and approximately 30,200 deaths of men in the U.S. would be attributable to the disease. The cost of medical treatment in the United States for patients with prostate cancer has been estimated at approximately $5 billion annually.

        There are several therapies available for the treatment of prostate cancer.

Prostate Brachytherapy

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

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

        The use of brachytherapy, the newest of the three primary techniques for the treatment of prostate cancer, has grown significantly over the past several years due to its advantages over the other primary therapies, which include radical prostatectomy, or RP, and external beam radiation therapy, or EBRT. In recent years, ten-year survival data has become available which demonstrates that the therapeutic results achieved by minimally invasive brachytherapy are comparable to those obtained with surgery. We believe that the increasing use of this technique reflects the growing acceptance in the medical community and among patients.

        Published data has shown that brachytherapy usually results in lower incidences of impotence and incontinence compared to other therapies, and faster recovery times than RP. Moreover, studies show that the disease free survival rates ten years after brachytherapy treatment are comparable to those after RP. Brachytherapy is most effective for localized tumors treated in the early stages of the disease. Therefore,

2

we believe that the growing use of PSA tests will help detect prostate cancer at an earlier stage and enhance the attractiveness of brachytherapy as a treatment alternative.

        Our Brachytherapy Products.    We were the first company to manufacture both iodine and palladium based brachytherapy seeds, the two most commonly used seeds for the treatment of prostate cancer. These two products differ in the time each takes to decay, and, consequently in the rate and intensity at which the radiation dose is delivered. Because some physicians may prefer iodine seeds and others prefer palladium seeds, we believe that it is advantageous to offer both in order to address the entire brachytherapy seed market. Both types of seeds previously have been marketed by Mentor under the trademarks IoGold® and PdGold® through Mentor's sales force. In connection with the January 2003 termination of our exclusive marketing and distribution agreement with Mentor, we are directly marketing and selling our Iodine-125 and Palladium-103 seeds under the trade names Prospera® I-125 and Prospera® Pd-103, respectively. Although our products have primarily been marketed in the U.S., in December 2000 we received a CE mark which allows sales of our seeds in Europe.

•

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



•

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

Other Treatment Modalities

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

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

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

        Studies have shown, however, that the ten-year disease free survival rates with treatment through EBRT are not comparable to the disease free survival rates after RP or brachytherapy treatment. In addition, because the radiation beam travels through the body, affecting both healthy and cancerous tissue

3

alike, other side effects are associated with EBRT. For instance, rectal wall damage caused by the radiation beam is a noted negative side effect. Data suggests that between 30% and 40% of the patients who undergo EBRT suffer problems with erectile dysfunction after treatment. While EBRT directs a single beam at the prostate, a newer technique, known as Intensity Modulated Radiation Therapy, or IMRT, is designed to spare healthy tissue by directing multiple beams from various angles to the cancerous tissue, with varying levels of intensity.

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

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

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

Mentor Relationship

        In June 1997, we executed an exclusive worldwide marketing and distribution agreement with Mentor which granted Mentor an exclusive license to market and sell our brachytherapy seeds for the treatment of prostate cancer. Sales under this agreement were initiated in January 1998. The Mentor agreement originally had a term of five years and covered Iodine-125 brachytherapy seeds. In February 1999, we amended the agreement to establish provisions providing to Mentor the exclusive worldwide marketing and distribution rights with regard to Palladium-103 seeds. The term of the agreement for both seed product lines was set to expire in January 2003. Mentor held a one-time option to extend the agreement for an additional three years; however, in August 2002, Mentor announced that it would not exercise its option to extend.

        Under the agreement, Mentor was responsible for all sales and marketing activities, including the education and support of urologists, radiation oncologists, medical physicists and other personnel involved in the use of brachytherapy seeds. The agreement also provided us the right to terminate Mentor's exclusivity with respect to either product for which Mentor failed to achieve minimum target market share requirements in designated geographic areas, subject to certain cure provisions by which Mentor could maintain exclusivity.

        We formally notified Mentor of our belief that Mentor did not meet its 2001 target market share with respect to sales of IoGold® or PdGold®. We additionally believe that Mentor did not attain its 2002 target market share for either product. As a result of Mentor's failure to attain the required market share for sales of PdGold® after our formal notification, Mentor's rights became "non-exclusive" under the agreement, which allowed us to begin selling our Prospera® Pd-103 product during fiscal 2002. Because of different criteria by which exclusivity is lost with respect to IoGold®, Mentor maintained exclusivity on that product through the end of the contract.

4

        In October 2002, Mentor sued us for alleged breach of contract, unfair competition, and misappropriation of purported trade secrets (this litigation is described further in Item 3, below). In November 2002, Mentor announced that it had reached an agreement to acquire an I-125 brachytherapy seed manufacturer, Mills Biopharmaceuticals, Inc. We believe that Mentor, by its actions during the term of the Mentor distribution agreement and through its agreement to acquire Mills Biopharmaceuticals, has materially breached the agreement. We also believe that Mentor has engaged in various acts of unfair competition, trade libel and misuse of our confidential information and trade secrets.

        The agreement contained a termination clause for a material breach of contract, upon 30 days notice of such breach. In December 2002, we formally notified Mentor of its multiple, material breaches mentioned above. Mentor did not cure the breaches we alleged in our December notification. Accordingly, the agreement formally terminated in mid-January 2003 with respect to both IoGold® and PdGold®. We are currently marketing and selling our Prospera® seed products through our internal sales force.

THE HYNIC-ANNEXIN V PROGRAM

        Our Hynic-Annexin V product candidate, based on the Apomate™ technology platform, is a kit consisting of multiple components for the preparation of Technetium Tc-99m labeled Annexin V. Tc-99m labeled Annexin V is administered intravenously and is intended for the in vivo imaging of apoptosis and necrosis, two common forms of cell death, using standard nuclear medicine imaging procedures. We are using Hynic (hydrazinonicotinamic acid) technology, licensed from AnorMed Inc., in our product as a linker to bind the Tc-99m atom to the annexin protein. The product is prepared just prior to patient administration.

        We had performed over 200 studies on patients using the initial Apomate™ technology kit to demonstrate proof-of-principle of our product. In the second fiscal quarter of 2002, we incorporated the current Hynic linker technology to improve reliability and ease-of-use for the end-user, and because the new formulation resulted in improved biodistribution. The Hynic-Annexin V formulation is cleared through the kidneys and makes possible abdominal imaging that was not possible with our initial Apomate™ product, which is cleared through the kidneys, liver, and bowel, thus obscuring abdominal scans.

Nuclear Medicine and Cell Death

        Nuclear medicine imaging involves injecting a radioisotope into the patient's body, detecting the signal emitted by the radioisotope with a gamma camera and then creating an image of the target area, usually through the use of a computer. A radioisotope, such as Technetium Tc-99m, is typically coupled with a carrier molecule that binds on a selective basis with targeted tissues. Because of the sensitivity of gamma cameras, only tiny amounts of radioisotopes are required to produce nuclear images. Nuclear medicine imaging is distinct in that it documents organ and cellular function, in contrast to most other diagnostic radiology procedures, which typically image anatomic structure. Nuclear medicine imaging procedures often identify abnormalities very early in the progression of a disease, long before some medical problems are detected using other diagnostic tests. The Society of Nuclear Medicine estimates that 10 to 12 million nuclear medicine imaging examinations or therapeutic procedures are performed in the United States each year.

        Apoptosis was once of interest only in a few specialized fields of biology, but is now recognized as a central feature of cancer treatment, heart attack, and organ transplant rejection. During apoptosis, several physiologic stimuli may trigger a cellular set of processes that result in an orderly self-destruction and disposal of the cell without breaking open the cell membrane. This process can be induced by disease, such as in transplant rejection or heart attack, or can be purposely induced as the result of certain forms of cancer therapy, including chemotherapy and radiotherapy. Unlike apoptosis, necrosis is a disorganized non-physiologic process characterized by physical disruption of the cell membrane. Necrosis can be caused

5

by mechanical, thermal, electrical or noxious chemical injury and by profound hypoxia (a deficiency in the amount of oxygen reaching body tissues), ischemia (a decrease in the blood supply to a bodily organ, tissue, or part caused by constriction or obstruction of the blood vessels), or respiratory poisons. In a normal healthy cell, membrane integrity is maintained by a series of controlled biochemical processes. The process of apoptosis is characterized by the maintenance of cell membrane integrity, while necrosis is accompanied by the breakdown and fragmentation of the cell membrane.

        During apoptosis, the inactivation of a particular enzyme, translocase, and the activation of another enzyme called scramblase, allows a molecule known as phosphatidylserine, or PS, which is normally only found on the inside of the cell membrane, to migrate to the outer surface of the cell membrane. Annexin V has a strong binding affinity for PS. As soon as PS is expressed on the surface of the cell it becomes accessible as a binding target site for Hynic-Annexin V.

        Cells dying from necrosis have membrane disruption, typically with cell swelling. Although PS may not migrate to the outer surface of the cell membrane during necrosis, the loss of membrane integrity is thought to allow Hynic-Annexin V to bind to PS on the inner leaflet of the cell membrane.

        Once Hynic-Annexin V binds to PS, standard nuclear medicine imaging techniques are used to produce an image of cell death associated with either apoptosis or necrosis. Our Hynic-Annexin V product candidate is currently in clinical trials in Europe for early detection of patient response to chemotherapy treatment in patients with lung cancer. We are in the process of obtaining and compiling data for an IND application to the FDA for U.S. studies intended to develop additional data on the use of Hynic-Annexin V for the early detection of patient response to chemotherapy treatment. We believe that Hynic-Annexin V will allow clinicians to make better therapeutic decisions for individual patients by monitoring the patient's response to treatment with greater sensitivity and speed.

Cancer Treatment

        Many cancer treatments, including radiotherapy, chemotherapy or immunotherapy, are intended to kill tumor cells. Technetium Tc-99m labeled Annexin V has been shown to image in vivo tumors responding to treatment by binding to apoptosis-specific membrane markers that appear as soon as a few hours after initial doses of effective treatment.

        Normally, it may take many weeks of repeated dosing with cancer drugs until response to treatment is evaluated by observation of tumor size changes. This long evaluation period can be troublesome in many respects. For example, although only approximately 25% to 30% of lung cancer patients respond to first-line cancer drug treatment, the side effects of the drugs are felt in nearly all of the treated population. Consequently, an imaging agent with the ability to quickly measure patient response to cancer therapy should be in great demand. Such an agent would allow for rapid identification of ineffective treatments, thereby allowing reassessment of patient management to identify new treatment options and potentially avoiding negative side effects of treatment from which the patient is unlikely to receive meaningful clinical benefit.

        We believe that Hynic-Annexin V, as a prognostic tool for individual response to cancer treatment, has the potential to provide several benefits to patients, physicians and pharmaceutical and biotechnology companies by:

•

improving patient care management



•

enabling evaluation of individual patient responses to cancer treatment, as soon as a few hours after initial administration of a chemotherapy agent



•

reducing unnecessary treatment costs



•

saving critical time by avoiding ineffective treatments

6

•

more efficiently stratifying cancer patients in clinical trials into responders and non-responders to therapeutic regimens



•

providing pharmaceutical and biotechnology companies with more timely information to facilitate quicker development of new therapeutic agents

        According to the National Cancer Institute, approximately 1.3 million individuals in the United States are diagnosed with cancer each year, of which approximately 400,000 will undergo chemotherapy. Many additional patients with recurrent disease enter chemotherapy programs each year. We believe that Hynic-Annexin V imaging will dramatically facilitate improved clinical outcomes, since no diagnostic tool in use today gives clinicians such rapid, direct and detailed evidence as to whether a particular treatment is effective.

        Clinical Trials.    Phase I studies of the Hynic-Annexin V kit have shown an improved biodistribution with the new formulation; and preliminary safety information obtained is very positive. In Europe, Phase II clinical trials for imaging patients with non-small cell lung cancer received ethics board and certain government required approvals, and patient enrollment in those studies has begun.

Cardiology

        Assessing Heart Attack Damage.    Tc-99m labeled Annexin V imaging in patients with known heart attacks has shown areas of increased uptake of the imaging agent in the areas of the heart known to have had a blockage of blood flow, consistent with localization of Hynic-Annexin V by apoptotic and necrotic cells. When a blockage occurs in a coronary blood vessel, a region of the heart normally supplied with blood by this vessel is injured and may die. Studies have shown that muscle cells in the heart can begin dying within 15 minutes of oxygen deprivation. Reflow injury also occurs in the first 15-30 minutes after the return of blood flow in patients whose clots are dissolved by drugs or who undergo emergency angioplasty to restore coronary blood flow. Hynic-Annexin V's ability to localize in areas of apoptosis and necrosis suggests that this imaging procedure may be useful in demonstrating the total volume of irreversibly damaged heart muscle. Hynic-Annexin V studies could define the diagnosis of the location and extent of the heart damage after a heart attack or after medical or surgical intervention to limit the damage associated with heart attack. Moreover, we believe that Hynic-Annexin V may distinguish previously damaged heart tissue from freshly injured tissue in patients with known cardiovascular disease. Current regional perfusion imaging agents such as Thallium Tl-201™ and Cardiolite™ cannot always distinguish past heart tissue damage from fresh injury.

        Clinical Trials.    Phase II clinical trials of the initial Apomate™ technology in patients with acute myocardial infarction were conducted in 2000-2001. More than 60 patients with known heart attacks were imaged in Phase II trials which compared Tc-99m labeled Annexin V imaging to standard enzyme and ECG tests as well as to Thallium Tl-201™ imaging. Follow-up studies demonstrated that some patients with positive Tc-99m labeled Annexin V cardiac uptake may continue to show cardiac update two to four weeks after an acute injury. Patients with larger heart attacks were found to sometimes show prolonged cardiac uptake of the imaging agent. It is possible that such uptakes identify a subset of individuals with ongoing myocardial damage and cellular stress. We intend to continue our discussions with cardiologists to explore the clinical and commercial value of these findings; and to collaborate with cardiologists interested in studying the potential clinical applications of these findings. We plan to make Hynic-Annexin V kits available to physicians for such studies.

        Heart Transplant Rejection.    Transplant patients are monitored for signs of rejection by repeated heart catheterization during which a small piece of heart tissue is biopsied and examined in the laboratory under a microscope for signs of rejection, a procedure known as histopathological examination. This biopsy procedure is invasive and can be painful, involving advancement of a catheter through a vein to the heart and the "snipping off" of a piece of tissue for microscopic examination. Based on the results of the biopsy,

7

a physician may adjust the prescribed level of immunosuppressive drugs. In initial human trials with the initial Apomate™ technology kit, Tc-99m labeled Annexin V has been found to concentrate in areas of cell death, thus providing an early warning of this rejection.

        There are approximately 2,200 heart transplants performed annually in the United States. Each heart transplant recipient may undergo up to 15 biopsy procedures in the first year after the transplant in order to assess the adequacy of immunosuppression medication required to prevent rejection of the new heart. After the first year, biopsies are typically performed one to four times annually.

        Clinical Trials.    In patients experiencing heart transplant rejection, the cells of the new heart are dying as a result of the apoptotic process. Preclinical results have demonstrated the ability of Tc-99m labeled Annexin V to bind to dying heart cells in rejecting heart transplant recipients. Nuclear medicine images obtained using standard instrumentation available in U.S. hospitals clearly demonstrated localization of Tc-99m labeled Annexin V in patients with biopsy-confirmed transplant rejection in Phase I clinical trials. Some of this data has been published as a peer-reviewed article in Nature Medicine, a leading medical journal. This demonstrates the potential for non-invasive nuclear medicine imaging of early signs of rejection.

        We have presented peer-reviewed data to the Society of Nuclear Medicine from our Phase I trial of Tc-99m labeled Annexin V in heart transplant rejection which was conducted in 27 patients who were undergoing routine surveillance heart biopsies, the standard diagnostic test for post-transplant patients. While we intend to focus on cancer indications for our product in Company-sponsored studies in the near future, we intend to make Hynic-Annexin V kits available to physicians interested in studying the Tc-99m labeled Annexin V technology for this indication under physician INDs.

OTHER PRODUCTS

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

Radiation Calibration and Reference Source Products

        Radioactivity is a natural physical property. Each radioisotope radiates energy characteristic to that specific isotope. Radiation detection instruments monitor the emitted radiation from a given sample (i.e., soil, air, water, etc.) to identify and quantify the radioisotopes present in that sample. In order to determine a particular instrument's efficiency, an accurately measured and contained amount of a radioactive isotope is required to serve as a calibration reference standard. Each type of sample being monitored by an instrument typically requires a radiation source standard of identical form and geometry to the sample.

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

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

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

8

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

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

Prospera® for Ocular Melanoma

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

        Our line of high activity brachytherapy seeds is also marketed and sold under the trademark Prospera® for use in the treatment of ocular melanoma and other solid tumor applications. Our Prospera® ocular melanoma seed is used with the ultimate goal of destroying the tumor while preserving the eye. Our ocular melanoma seeds are available in both Iodine-125 seeds and Palladium-103 seeds, and are directly marketed by us to ophthalmologists and medical physicists. The number of cases occurring annually will limit Prospera® ocular melanoma sales for this application, but we view it as a natural extension of our brachytherapy business and as a service to the oncology community.

SALES AND MARKETING

        We have developed, and are in the process of expanding, an internal sales force to directly market and sell our Iodine-125 and Palladium-103 brachytherapy seeds under the trade name Prospera®. The sales staff currently consists of approximately nine full-time dedicated brachytherapy representatives; however, in the near future we intend to further expand our staff.

        Each of our sales representatives sells products and services customers within an assigned territory. The sales representatives promote customer satisfaction with periodic service calls in addition to scheduled follow-up visits. While we have obtained necessary approvals to sell our brachytherapy seeds in Europe and Latin America, sales efforts are primarily concentrated on the U.S. market. Our products are principally marketed directly to the end-user physicians and purchasing groups that act on their behalf.

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

INTELLECTUAL PROPERTY

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

        We currently hold two U.S. patents relating to brachytherapy. In December 1999, we received a patent for a laser welded closure device which will expire in 2018. Additionally, we have applied to extend our patent protection internationally with the European Patent Office. We also filed an application for patent protection in August 1997 on our radioactive brachytherapy source design. In October 2002, the United States Patent and Trademark Office issued a patent on several of our claims, related to the use of multiple markers to designate seed characteristics. The remaining portion of the application is still pending. No

9

patent protection is afforded while the application is pending before the United States Patent and Trademark Office.

        We have exclusively licensed intellectual property which covers Technetium Tc-99m labeled Annexin V technology for in vivo imaging of cell death from certain entities that hold issued and pending patents with respect to this technology. The United States Patent and Trademark Office has granted full patent rights to our licensor, Stanford University, for a patent for "Imaging Cell Death In Vivo" which we believe is a key patent providing strong protection for the Apomate™ technology platform and use in our Hynic-Annexin V product candidate.

        The Technetium Tc-99m labeled Annexin V technology is licensed to us under the following arrangements:

•

We have a license agreement with Stanford University ("Stanford") dated April 1, 1998, and amended June 1, 1999, relating to the license of a patent for techniques for imaging cell death in vivo. The patent, containing 75 claims for the use of annexin for imaging cell death, was issued by the United States Patent and Trademark Office in March 2001. The agreement does not contain a predetermined termination date, but may be terminated by us at any time upon 30 days written notice to Stanford. Stanford may terminate the license agreement if we are in breach of the terms of the agreement, subject to a 30-day cure period following notice of the breach. We have agreed to pay Stanford a royalty based upon the amount of licensed product sold. Additionally, we have agreed to certain predetermined milestone payments over the life of the agreement, including $150,000 upon filing our Biologic License Application, or BLA, in the U.S. and $250,000 upon receipt of marketing approval in either the U.S. or European Union. Our obligation to pay royalties continues for so long as we, by our activities, would infringe a valid claim of an unexpired licensed patent of Stanford.



•

In July 2001, we entered into a license agreement with AnorMed Inc., for the rights to use its patented linker technology relating to the modification of proteins with a chemical compound and with other compounds useful in protein labeling to prepare Technetium Tc-99m labeled Annexin V, among other uses. The agreement runs until the last of the licensed patents expires. The termination provisions of this agreement provide that if a material default remains uncured for 90 days, then the non-defaulting party has the right to terminate the agreement by written notice to the defaulting party. As consideration for the license, we have agreed to pay AnorMed royalties based upon the amount of licensed product sold, and such obligation continues in effect for the duration of the agreement. Furthermore, we are obligated to make a $500,000 milestone payment upon receipt of the first regulatory approval to market a product using AnorMed technology.

        In addition, we have licensed additional technology governing composition of matter and use of Technetium Tc-99m labeled Annexin V. In 2002, we ceased the development efforts of our initial Apomate™ technology utilizing the linking agent licensed from NeoRx Corporation. We notified NeoRx of this change, and we believe that we have no further payment obligations arising from this license agreement.

        In July 1997, we were granted a patent on a radioisotope-based device for site localization during biopsy procedures, which expires in 2014.

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

10

COMPETITION

        Our brachytherapy business is subject to intense competition. Our primary competitors in the brachytherapy seed business include Nycomed Amersham PLC, which manufactures and sells Iodine-125 brachytherapy seeds, and Theragenics Corporation, which manufacturers and sells Palladium-103 brachytherapy seeds directly and through marketing relationships with third parties, including Prostate Services of America, Inc., Nycomed Amersham PLC, C.R. Bard, Inc. and Imagyn Medical Technologies. Several additional companies currently sell brachytherapy seeds and a number of others have announced their intention to market brachytherapy seeds. Additionally, Mentor announced in November 2002 that it intends to complete an acquisition of Mills Biopharmaceuticals, Inc., a manufacturer of I-125 seeds. Mentor stated that it believes it will complete that acquisition by February 1, 2003, and in January announced a non-exclusive agreement to distribute a Palladium-103 seed manufactured by Best Medical International, Inc. As a result, Mentor is a direct competitor to us as well.

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

        For the indications currently being evaluated in clinical trials for our Hynic-Annexin V product candidate, established methods of patient evaluation exist and must be considered "gold standards" of treatment. To our knowledge, no radiopharmaceutical product comparable to our product candidate currently exists. The challenges which Hynic-Annexin V could potentially encounter include physician acceptance and adoption of a new diagnostic and management tool designed to replace well-established procedures. It is also possible that Positron Emission Tomography, or PET, techniques or magnetic resonance imaging, or MRI, techniques could be used to study patient response to anti-tumor treatment or heart tissue damage. Early changes in PET images have been described soon after successful treatment of certain hematologic tumors with Novartis' Gleevec™ product. Radiopharmaceuticals, such as Thallium Tl-201 and Bristol-Myers Squibb Medical Imaging, Inc.'s Cardiolite™, are used to show abnormalities of blood flow to heart tissue. However, such agents do not directly image damage to heart tissue and are not indicated for differentiating old injury from new injury.

        The radiation reference source business is also subject to intense competition. Our primary competitors in this industry include AEA Technology PLC, Eckert & Ziegler AG, and Analytics, Inc.

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

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

        In addition to the competition from the procedures and companies noted above, many companies, both public and private, are researching new and innovative methods of preventing and treating cancer and heart disease. In addition, many companies, including many large, well-known pharmaceutical, medical device and chemical companies that have significant resources available to them, are engaged in radiological pharmaceutical and device research. These companies are located in the United States,

11

Europe and throughout the world. Significant developments by any of these companies could have a material adverse effect on the demand for our products.

GOVERNMENT REGULATION

        Our research and development activities and the manufacturing and marketing of our radioisotope products are subject to the laws, regulations, guidelines and regulatory clearances and approvals of governmental authorities in the United States and other countries in which our products are or will be marketed. Specifically, in the United States, the FDA regulates, among other things, new product clearances and approvals to establish the safety and efficacy of these products. Governments in other countries have similar requirements for testing and marketing. In the United States, in addition to FDA regulations, we are also subject to other federal laws, including the Occupational Safety and Health Act and the Environmental Protection Act, and we are also subject to certain state laws.

U.S. Regulatory Process

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

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

        In October 1997, we received 510(k) clearance from the FDA to market Iodine-125 seeds. In July 1998, we received 510(k) clearance from the FDA to market Palladium-103 seeds.

        In order to commence clinical trials for Hynic-Annexin V in the United States, an IND must be reviewed and cleared by the FDA. We are in the process of obtaining and compiling data for an IND application to the FDA for studies on the use of Hynic-Annexin V for the early detection of patient response to chemotherapy treatment. Studies are currently being undertaken in Europe in accordance with applicable laws.

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

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

12

promotional activities are regulated by the FDA and, in some circumstances, by the Federal Trade Commission.

        For our radiopharmaceutical products under development which are regulated as biologics, the FDA requires:

•

preclinical laboratory and animal testing



•

submission to the FDA of an IND application which must be reviewed and cleared by the FDA prior to the initiation of human clinical studies



•

adequate and well-controlled clinical trials to establish the safety and efficacy of the product for its intended use



•

preparation and submission to the FDA of a marketing application known as a BLA



•

review and approval of the BLA as well as inspections of the manufacturing facility by the FDA prior to commercial marketing of the product

        The FDA's IND and post-approval report regulations require that we provide information to the FDA on deaths or serious injuries alleged to be associated with the use of our products, as well as increases in the frequency or severity of the occurrence of adverse effects. Labeling and promotional activities are regulated by the FDA and, in some circumstances, by the Federal Trade Commission.

Foreign Regulatory Process

        In order to sell our medical device products within the European Union, we must comply with the European Commission's medical device directive. We received a CE mark on our brachytherapy products for prostate cancer in December 2000. The CE mark is recognized worldwide as an essential European regulatory approval and will enable us to expand our sales and distribution of the products throughout the European Union. In order to perform clinical studies of our Hynic-Annexin V product candidate in Europe, we have met with governmental drug regulatory oversight bodies in several countries to identify potential rapporteurs for our projected E.U. marketing application. We also have pursued and received ethics board and certain required government approvals in several countries, and individuals are presently enrolling in studies for imaging patients with lung cancer.

Other Regulation

        In addition to FDA regulation, certain of our activities are regulated by, and require approvals from, other federal and state agencies in the United States. For example, we operate under a license issued by the California Department of Health which allows us to manufacture and process radioactive materials. Our licenses for our North Hollywood and Chatsworth facilities expire in 2007 and 2008, respectively. We are also subject to a routine inspection by the California Department of Health Services for compliance with good manufacturing practices, health and safety requirements, and other applicable regulations. Violation or alleged violation of these regulations may result in government action ranging from warning letters to criminal prosecution. Companies that violate these regulations are also subject to large civil penalties. Moreover, our use, management and disposal of certain radioactive substances and wastes are subject to regulation by several federal and state agencies depending on the nature of the substance or waste material. We believe that we are in compliance with all federal and state regulations for this purpose.

        We also occupy laboratory space in Worcester, Massachusetts for the purposes of research and development for our Hynic-Annexin V product candidate. We operate using radioactive materials under a license issued by the Commonwealth of Massachusetts, Executive Office of Health and Human Services. The license expires in October 2007.

13

MANUFACTURING

        We manufacture all of our brachytherapy products at our North Hollywood and Chatsworth, California facilities. We manufacture our calibration and reference source products in our North Hollywood facility. The equipment used to manufacture our products is purchased from a variety of suppliers. Additionally, we have developed an in-house capability to both build and repair certain equipment used in the manufacturing of our products. We consider our manufacturing equipment to be in good condition.

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

        The components of the Hynic-Annexin V kit are manufactured by third parties. We conduct audits of our third party manufacturers to ensure they comply with the FDA's cGMP regulations.

RESEARCH AND DEVELOPMENT

        Research and development expenses totaled $8,951,000 during the year ended October 31, 2002, which relate primarily to the ongoing clinical trial and development costs related to the Hynic-Annexin V development program. We expect to continue to incur additional significant clinical trial and development costs related to Hynic-Annexin V over the next several years.

EMPLOYEES

        As of October 31, 2002, we had a total of 75 full-time employees. None of our employees are represented by a labor union. We have not experienced a work stoppage in our history, and we believe that our employee relations are good.

14

Risk Factors

We presently have limited marketing and sales experience and will be required to further develop our sales and marketing team in order to maintain and improve revenues from the sale of our products.

        We have relied almost exclusively on our marketing and distribution agreement with Mentor for marketing and sales of our brachytherapy products, including Iodine-125 and Palladium-103 seeds. In connection with the termination of this agreement, we are developing an internal sales and marketing force to directly market and sell these products. We have limited experience, however, marketing and selling our brachytherapy products, which in fiscal 2002 accounted for approximately 80% of our revenue, and we have no experience directly marketing and selling those products in commercial quantities.

        Our sales staff currently consists of nine representatives. In order to maintain and improve revenues from the sale of our brachytherapy products, we must expand our sales and marketing capabilities. We may not be able to do this successfully. We expect to incur significant additional expense in attracting, establishing and maintaining a marketing and sales force.

        There can be no assurance that our direct sales and marketing efforts will be successful. If we are not successful in our direct sales and marketing, our sales revenue and results of operations are likely to be materially adversely affected.

Development of our Hynic-Annexin V product candidate involves considerable risk and could threaten our future profitability.

        Our anticipated expenditures in the development of Hynic-Annexin V are expected to have a significant negative impact on our earnings over the next several years. Development of this product presents considerable risks including:

•

The use of radiopharmaceuticals for imaging cell death is a new and unproven technology and may not receive acceptance among healthcare providers, payers or patients.



•

The production of Hynic-Annexin V kits depends on successful manufacturing and testing of stable Hynic-Annexin V conjugate and other materials by contract manufacturers under cGMP standards. Delays in this process could adversely impact the timing of clinical studies.



•

Initiation of clinical trials under FDA jurisdiction and marketing of Hynic-Annexin V requires the development of a novel immunology assay. Delays in development of this assay could adversely impact our ability to initiate clinical trials.



•

Clinical trials with respect to this product may not be successful and we may not receive government approvals in a timely manner or at all. We do not expect to submit our BLA for Hynic-Annexin V to the FDA for marketing approval until 2005 at the earliest. FDA review of a BLA typically takes a minimum of one year. Our BLA filing date could be extended for a number of reasons, including changes in the regulatory landscape or changes in our strategic initiatives.



•

There is no assurance that any products resulting from our development of Hynic-Annexin V will achieve market acceptance or compete successfully against existing or future diagnostic products intended for similar purposes.

A significant percentage of our revenues comes primarily from the sale of our brachytherapy products.

        We expect to continue to derive a substantial percentage of our revenues for the next several years from sales of our Iodine-125 and our Palladium-103 brachytherapy seeds. Our failure to maintain and improve the revenues from these products would have a material adverse effect on our business, financial condition and results of operations. We do not expect that commercialization of other new products will be feasible without a substantial, continuing commitment to research and development for an extended period of time or acquisitions of new businesses, or both. Furthermore, any new products that we develop

15

may be subject to clinical trials and regulatory clearance or approval before commercialization. There can be no assurance as to whether or when commercialization of other products might begin or as to the likelihood that any such initiative would be successful.

Our ability to commercialize product candidates is subject to uncertainty related to clinical trials.

        Before obtaining regulatory approval for the commercial sale of our Hynic-Annexin V product candidate, or any other product candidates, we must demonstrate through pre-clinical studies and clinical trials that such product candidates are safe and efficacious for use in each indication and are clinically useful. The results from pre-clinical testing and early clinical trials may not predict results that will be obtained in large-scale clinical trials, and there can be no assurance that our clinical trials will demonstrate the safety and efficacy of any of our product candidates or will lead to marketable products. A number of companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. We, the FDA or other regulatory authorities may suspend or terminate clinical trials at any time. In addition, there can be no assurance that any of our product candidates will obtain FDA or other regulatory approval for any indication or that an approved product will be capable of being produced in commercial quantities at reasonable cost and successfully marketed.

        In particular, if we are delayed or unable to develop a commercially viable Hynic-Annexin V product formulation to take to market, we may be unable to proceed on schedule with further clinical trials for any indications. In addition, the FDA has indicated that clinical trial data we present from an adequate and well-controlled study suitable for supporting a marketing application, often referred to as a pivotal study, for any indication may not be accepted if Hynic-Annexin V's composition changes significantly. As a result, any delay caused by implementing the final design of, or the manufacturing process for, Hynic-Annexin V may delay commercialization.

        In addition, the rate at which we complete clinical trials depends upon, among other things, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs, program delays, or both.

        There can be no assurance that any of our clinical trials will be completed successfully within any specified time period, or at all. There also can be no assurance that the results from any of these clinical trials will warrant commencing further clinical trials or taking a product candidate to market.

If we fail to maintain our competitive position in key product areas, we may lose significant sources of revenue.

        Our brachytherapy business is subject to intense competition. Our primary competitors in the brachytherapy seed business include Nycomed Amersham PLC, which manufactures and sells Iodine-125 brachytherapy seeds, and Theragenics Corporation, which manufacturers and sells Palladium-103 brachytherapy seeds directly and through marketing relationships with third parties, including Prostate Services of America, Inc., Nycomed Amersham PLC, C.R. Bard, Inc. and Imagyn Medical Technologies. Several additional companies have begun to sell brachytherapy seeds and a number of others have announced their intention to market brachytherapy seeds. Additionally, Mentor announced in November 2002 that it intends to complete an acquisition of Mills Biopharmaceuticals, Inc., a manufacturer of I-125 seeds. Mentor stated that it believes it will complete that acquisition by February 1, 2003, and in January announced a non-exclusive agreement to distribute a Palladium-103 seed manufactured by Best Medical International, Inc. As a result, Mentor is a direct competitor to us as well. In addition, other products using alternative technologies may be developed which would compete with our brachytherapy products. For example, if treatment methods such as cryosurgery or hormone therapy gain increased acceptance among healthcare providers, patients and payers, or if new technologies such as gene modification emerge to become leading treatment standards as alternatives to traditional therapies,

16

we may lose market share for our brachytherapy seeds or may find that our products are rendered non-competitive or obsolete by such market shifts and technological developments.

        Our radiation reference source business also is subject to intense competition. Our primary competitors in this industry include AEA Technology PLC, Eckert & Ziegler AG, and Analytics, Inc.

        Currently, the leading imaging technologies include computer tomography, or CT, scanning and magnetic resonance imaging, or MRI, both of which image changes in the anatomy of organs and other tissue. Our Hynic-Annexin V product candidate images apoptosis and necrosis at the cellular level; however, there can be no assurance that alternative technologies will not be developed which have equivalent or superior imaging capabilities to Hynic-Annexin V and which may become more widely accepted as imaging standards.

        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 than us, as well as more extensive experience in research and development, the regulatory approval process, manufacturing and marketing, may be in a better position than we are to seize market opportunities created by technological advances in our industry.

The innovative nature of Hynic-Annexin V raises questions as to whether the market will accept such a product.

        The success of our products will depend on our ability to foster and maintain favorable perceptions among patients, doctors, healthcare payers and medical researchers regarding the safety, efficacy utility and cost effectiveness of these products. This is particularly true with respect to Hynic-Annexin V. Healthcare providers and payers may not accept gamma imaging of cell death through the use of Hynic-Annexin V as a viable alternative to traditional methods for assessing response to cancer, heart attack and heart transplant rejection, or the effects of other diseases involving cellular death. If and when we receive regulatory approval, we may not receive acceptance among physicians, patients and healthcare payers in the United States or elsewhere, and we may be unable to market and sell these products.

If we are unable to acquire sufficient supplies from key suppliers that in some cases may be the only source of raw materials, our ability to deliver our products to the market may be impeded.

        We depend upon a limited number of outside unaffiliated suppliers for our radioisotopes. Our principal suppliers are Nordion International, Inc. and a company in Russia. We also utilize other commercial isotope manufacturers located in the United States and overseas. To date, we have been able to obtain the required radioisotopes for our products without any significant delays or interruptions. Currently, we rely exclusively upon Nordion International for our supply of the Palladium-103 isotope; if Nordion International ceases to supply isotopes in sufficient quantity to meet our needs, there may not be adequate alternative sources of supply.

We depend on several key licenses for our Hynic-Annexin V product candidate. If we lose our rights under any of these licenses, our ability to market and sell Hynic-Annexin V may be jeopardized.

        We license certain technology rights related to Hynic-Annexin V from several entities. We are obligated to pay such entities royalties, milestone payments and other payments in exchange for such licenses and we rely on such parties' intellectual property rights to protect our proprietary interests in Hynic-Annexin V. If we or our licensors breach any of the terms of these license agreements, or if we are unable to pay amounts owed to our licensors when they become due, we may lose the right to use such technology. If such an event occurs, we may be unable to market and sell Hynic-Annexin V.

17

        In addition, we are aware of other third party rights relating to Tc-99m labeled Annexin V technology. We believe we have good and sufficient defenses against any possible infringement claims. Nevertheless, should a court rule against us, we may be prohibited from marketing Hynic-Annexin V unless we obtain a license from such third party which, if available at all, may require us to make substantial royalty or other payments.

        If we are unable to obtain a license from such third party or if we lose rights to use technology related to Hynic-Annexin V under any of our current license agreements, we may be unable to market and sell Hynic-Annexin V.

If we fail to protect our intellectual property rights, other companies may take advantage of our ideas and compete directly against us.

        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 also have licensed patents and technology for which patents are issued and pending related to Hynic-Annexin V. Furthermore, we hold rights to issued U.S. patents on a radioisotope-based device for site localization during breast biopsy procedures and a laser welded closure method for our brachytherapy seeds. The patents expire in 2014 and 2018, respectively. We have also filed for patent protection on our radioactive brachytherapy seed design, several claims for which were recently issued, which expire in 2019. The scope and extent of patent protection for our products is uncertain and frequently involves complex legal and factual questions. The breadth of the claims allowed in patents relating to biotechnology applications or their enforceability cannot be predicted, and patent litigation can be expensive and time consuming. No assurance can be given that pending patent applications will be approved. If patents are issued, however, questions which arise regarding the validity and scope of the patents may not be resolved in our favor. In addition, our current or future patents, trade secrets, or know-how may not protect us against competitors with similar technologies or processes. Furthermore, others may infringe any patents issued to us and other companies may develop independently proprietary technologies or processes which are the same as or substantially equivalent to our proprietary technologies and processes. Costly litigation might be necessary to protect our patents or to determine the scope and validity of third-party proprietary rights, and it is possible that we will not have the required resources to pursue such litigation or to protect our patent rights. An adverse outcome in litigation with respect to the validity of any of our patents could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using a product or technology.

        In addition, there can be no assurance that patents have not been issued or will not be issued in the future that conflict with our patent rights or prevent us from marketing our products. Such conflicts could result in a rejection of our licensors' patent applications or the invalidation of patents. Furthermore, if patents that contain dominating or conflicting claims have been or are subsequently issued to others, and such claims are ultimately determined to be valid, we may be required to obtain licenses under patents or other proprietary rights of others. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, or at all. If we do not obtain such licenses, we could encounter delays or find that we are unable to develop, manufacture or sell products requiring such licenses.

        We also rely on trade secrets, proprietary know-how and other proprietary information that we seek to protect, in part, through confidentiality agreements with our collaborators, customers, employees and consultants. It is possible that these agreements will be breached or that they will not be enforceable in every instance, and that we will not have adequate remedies for any such breach. Furthermore, enforcing a claim alleging the infringement of trade secrets would be expensive and time consuming, making the outcome uncertain. It is also possible that our trade secrets will become known or independently developed by competitors. There can be no assurance that these confidentiality agreements will provide

18

meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information.

Extensive government regulation of our industry has had, and will continue to have, a significant impact on our business.

        The manufacture and sale of our brachytherapy and other products are subject to stringent government regulation in the United States and other countries. Our products are subject to FDA and other governmental approval and continual review, and future discovery of previously unknown problems may result in restrictions on a product's marketing or withdrawal of the product from the market. The commercial distribution in the United States of any new products we develop will depend upon obtaining the prior approval or clearance of the FDA, which can take many years and entail significant costs, and we have limited experience in filing or pursuing applications necessary to gain regulatory approvals. In countries where our products are not currently approved, the use or sale of our products may require approval by local government agencies with missions comparable to the FDA's. The process of obtaining any such approval may be lengthy, expensive and uncertain. We are also required to adhere to applicable FDA regulations for current Good Manufacturing Practices, including extensive record keeping and reporting and periodic inspections of our manufacturing facilities. Similar requirements are imposed by foreign governmental agencies.

Reimbursement policies by Medicare and other third-party payers have a significant impact on our business.

        A substantial percentage of the patients treated for prostate cancer in the United States are covered by Medicare and, consequently, the costs of prostate cancer treatment are subject to Medicare's prescribed rates of reimbursement. 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. There can be no assurance that:

•

current or future limitations on, or requirements for reimbursement by, Medicare or other third-party payers for prostate cancer treatment will not materially adversely affect the market for our products



•

health administration authorities outside the United States will provide reimbursement at acceptable levels or at all



•

any such reimbursement will continue at rates that enable us to maintain prices at levels sufficient to realize an appropriate return

        Also, we, our distributors and healthcare providers performing brachytherapy seeding 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.

        In addition, from time to time, significant attention is placed on reforming the healthcare system in the United States. Any future changes in Medicare and other third-party payer reimbursement which may result from healthcare reform or deficit reduction legislation would likely place downward pressure on prices. Future reimbursement policies may also affect the commercial acceptance of products we develop, including Hynic-Annexin V. A number of legislative proposals have been introduced in Congress and state legislatures in recent years that would affect major reforms of the healthcare system and otherwise reduce healthcare spending. Because of the uncertainties surrounding the nature, timing and extent of any such reimbursement changes, audits and reform initiatives, we are unable to predict the effects of any such matters on our business.

19

Potential or pending litigation may adversely affect our business.

        Beginning in fiscal year 2002, we have been involved in material litigation with Mentor in connection with the Mentor marketing and distribution agreement. We have already incurred significant costs related to the defense of the litigation and we expect to continue to incur significant costs. The cost of defense or resolution of any future litigation could have a negative impact on our financial position and results of operations. Although we believe we have meritorious defenses available to us, it is possible that a judgment could be entered against us. Such a result could have a materially adverse effect on our results of operations.

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

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

        We use radioactive materials which are subject to stringent regulation in our Worcester, Massachusetts research laboratory. We operate under a "Massachusetts Radioactive Materials License" issued by the Commonwealth of Massachusetts Executive Office of Health and Human Services, which expires in October 2007.

        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.

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 is an example of such a transaction. In the future, we may choose to enter into such transactions. Depending upon the nature of any transaction, we may experience a charge to earnings which could be material.

We may require additional capital in the future and we may be unable to obtain capital on terms favorable to us, or at all.

        Our capital requirements have been and are expected to continue to be significant. We expect our existing capital resources and future operating cash flows to be sufficient for the foreseeable future. We anticipate significant expenditures related to ongoing clinical trial and development costs for Hynic-Annexin V over the next several years. However, we may require further capital for the purchase of complementary businesses, technologies or products. Our capital requirements will depend on numerous factors, including the time and cost involved in expanding production capacity, the cost involved in protecting our proprietary rights and the time and expense involved in obtaining required regulatory approvals for new products we may develop or acquire.

20

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 ability to transition from the Mentor exclusive marketing and distribution relationship to direct sales and marketing of our brachytherapy seeds



•

The costs of research and development in connection with our Hynic-Annexin V product candidate are difficult to estimate and vary between periods



•

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



•

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



•

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



•

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



•

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

The testing, marketing and sale of our products involve the risk of product liability claims by consumers and other third parties, and insurance against such potential claims is expensive.

        Our business is subject to product liability risks inherent in the testing, manufacturing and marketing of products containing radioisotopes. To date, no product liability claims have been asserted against us. However, there can be no assurance that such claims will not arise in the future based on past, present or future services or products we offer. We maintain product liability and general liability insurance with a limit in the aggregate amount of $2 million with additional umbrella insurance coverage of $10 million; however, there can be no assurance that liability claims will not exceed the scope of coverage or limits of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. If we do not or cannot maintain sufficient liability insurance, our ability to market our products may be significantly impaired. In addition, product liability claims, as well as negative publicity arising out of such claims, could have a material adverse effect on our business, operating results and financial condition.

Item 2.    PROPERTIES

        We are headquartered in the Los Angeles, California metropolitan area where we occupy two properties totaling approximately 40,000 square feet. These facilities are used for office, manufacturing, engineering, warehouse and research and development. We believe our manufacturing and distribution facilities are adequate, suitable and of sufficient capacity to support our current operations. Our lease on our North Hollywood facility expires in November 2003, with multiple renewal options. The lease on our Chatsworth facility also expires in November 2003, with a five-year renewal option. Our Theseus subsidiary is headquartered in Boston, Massachusetts where we lease office space totaling approximately 4,100 square feet, with our lease expiring in September 2004. In July 2002, we leased laboratory space in Worcester,

21

Massachusetts, totaling approximately 4,300 square feet, for the Hynic-Annexin V development program. That lease expires in September 2004.

Item 3.    LEGAL PROCEEDINGS

        In October 2002, Mentor Corporation filed suit in Los Angeles Superior Court against us alleging breach of our exclusive marketing and distribution agreement arising out of our direct sales efforts for Prospera® Pd-103. Mentor also alleges that we breached the contract by marketing our Prospera® I-125 seeds while still under terms of the agreement for sales after the expiration of the agreement. Mentor's suit further alleges that we have misappropriated purported trade secrets and that we have engaged in unfair competition. Mentor is seeking unspecified monetary damages and injunctive relief. In October 2002, Mentor was denied a temporary restraining order. In November 2002, Mentor was denied a preliminary injunction, and in December 2002, Mentor lost a Motion for Reconsideration on the preliminary injunction. In January 2003, we filed our responsive pleading, as well as counterclaims against Mentor seeking monetary damages for breach of contract, misappropriation of our confidential information and trade secrets, trade libel, intentional and negligent misrepresentation, unfair competition, and violation of the Lanham Act.

        We believe that we have meritorious defenses against Mentor's claims and intend to vigorously contest them. While it is not possible to predict the outcome of the lawsuit discussed above, we believe that costs associated with the lawsuit will not have a material adverse impact on our financial position or liquidity, but may be material to the consolidated results of operations of any one period. If we were to have a judgment entered against us, such a result may have a materially adverse impact on our financial results.

        The agreement contains a termination clause for a material breach of contract, upon 30 days notice of such an alleged breach. In December 2002, we formally notified Mentor of its multiple, material breaches mentioned above. Mentor did not cure the breaches we alleged in our December notification. Accordingly, the agreement formally terminated in mid-January 2003 for both IoGold® and PdGold®. We are marketing and selling our Prospera® seed products through our internal sales force.

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

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

        None.

22

PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Since February 12, 1998, our common stock has been traded on the Nasdaq National Market under the symbol "NASI". The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported on the Nasdaq National Market.

        As of January 23, 2003, we had approximately 88 holders of record and estimate that we had approximately 4,400 beneficial owners of our Common Stock.

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

23

Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

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

(1)

Excludes $17,093 and $19,603 of non-current marketable securities in fiscal 2002 and 2001, respectively.

24

Item 7.    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 Annual Report on Form 10-K, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "projections," and words of similar import, are forward looking as that term is defined by the Private Securities Litigation Reform Act of 1995, or 1995 Act, and releases issued by the Securities and Exchange Commission, or SEC. These statements are being made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution that any forward looking statements made herein are not guarantees of future performance and that actual results may differ materially from those in such forward looking statements as a result of various factors, including, but not limited to, any risks detailed herein, including the "Risk Factors" section contained in this Item 1, or detailed in our most recent reports on Form 10-Q and Form 8-K and from time to time in our other filings with the SEC and amendments thereto. We are not undertaking any obligation to update publicly any forward-looking statements. Readers should not place undue reliance on these forward-looking statements.

Overview

        We design, develop and produce innovative radioisotopic products, including brachytherapy seeds and radiopharmaceuticals, for the treatment and diagnosis of disease. Since 1990, we have applied our expertise in radioisotopes to develop and market products for medical, environmental, research and industrial applications.

        Since 1998, our brachytherapy seeds have been distributed under an exclusive agreement with Mentor Corporation ("Mentor"). Sales to Mentor represented approximately 78% of our revenue in fiscal 2002. In January 2003 our exclusive agreement with Mentor terminated and we have since begun to directly market and sell our brachytherapy products to health care providers. Future revenues and gross profit relating to our brachytherapy products will depend on several factors, including our ability to successfully directly market and distribute our brachytherapy products and to successfully withstand pricing pressure from increased competition and price containment pressure from Medicare reimbursement limits for brachytherapy procedures. We also anticipate a significant increase in expenses going forward as we develop our sales and marketing infrastructure.

        In October 2000, we acquired Theseus Imaging Corporation, a developer of proprietary radiopharmaceuticals to enhance the medical management of cancer, heart attacks, and heart transplant rejection. We expect to continue to incur significant clinical trial and development costs over the next several years related to Hynic-Annexin V, our principal radiopharmaceutical product candidate based upon the Apomate™ technology platform, especially as we initiate and expand our clinical trials in the U.S and Europe. In addition, upon receipt of applicable approvals from regulatory agencies, we expect to incur substantial expenses in connection with the commercial launch of this product.

Results of Operations

Fiscal Year Ended October 31, 2002 Compared to Fiscal Year Ended October 31, 2001

        Net sales.    Net sales increased $1,437,000, or 7%, to $20,780,000 for the year ended October 31, 2002 from $19,343,000 for the year ended October 31, 2001. The increase in net sales was due to the increase in revenues generated from our brachytherapy product lines.

25

        Gross profit.    Gross profit increased $718,000 or 6% to $13,199,000 for the fiscal year ended October 31, 2002 from $12,481,000 for the fiscal year ended October 31, 2001. Gross profit as a percent of sales decreased from 65% to 64% during this period. The decrease in gross profit as a percentage of sales was primarily due to a change in the product mix and increased price competition in our brachytherapy products. Our future gross profit may be adversely affected by a decrease in sales volume as we initiate direct brachytherapy seed sales, in addition to industry wide pricing pressure.

        Selling, general and administrative expenses ("SG&A").    SG&A increased $428,000 or 7%, to $6,525,000 for the fiscal year ended October 31, 2002, from $6,097,000 for the fiscal year ended October 31, 2001. The increase is primarily attributed to our increase in personnel costs due to the growth of our brachytherapy and radiopharmaceutical business, increased operating expenses associated with the development of Hynic-Annexin V, and an increase in the provision for doubtful accounts, which was partially offset by discontinued amortization of goodwill. The Company elected to early adopt SFAS No. 142 effective November 1, 2001. In accordance with SFAS No. 142, we discontinued the amortization of goodwill. Amortization of goodwill for the year ended October 31, 2001 was $368,000. For additional information regarding SFAS No. 142, see Note 8 in the financial statement footnotes.

        Research and development.    Research and development costs increased $1,349,000 or 18%, to $8,951,000 for the fiscal year ended October 31, 2002, from $7,602,000 for the fiscal year ended October 31, 2001. These costs primarily represent our continued investment in our Hynic-Annexin V product candidate. The increase in research and development spending reflects our belief that to maintain our competitive position in a market characterized by rapid rates of technological advancement, we must continue to invest significant resources in new product development, as well as continue to enhance existing products. All of our research and development cost are expensed as incurred. We anticipate incurring significant costs in the future as we initiate and expand our clinical trials in Europe and the United States.

        Write-off of licenses and equipment.    Results of operations for the fiscal year ended October 31, 2002 include a charge of approximately $2.7 million to reflect the total write-off of abandoned licenses and related equipment associated with technology licensed from third parties for the development of our Apomate™ technology platform. In 2001 we licensed additional technology and patent rights from a third party for the development of an improved version of our Apomate™ kit, or Hynic-Annexin V. During the second quarter of 2002, we decided to exclusively pursue the development of our Apomate™ technology with the newly licensed technology and to write-off the prior technology.

        Results of operations for the fiscal year ended October 31, 2001 included a charge of approximately $3.7 million to reflect the write-off of the costs of two partially completed linear particle accelerators that were intended to produce Palladium-103 for use in our brachytherapy products. Based on the uncertainty of the estimated costs to complete the units coupled with an increasingly reliable commercial supply of Palladium-103, we ceased the development efforts and disposed of the equipment.

        Interest and other income, net.    Interest and other income decreased $52,000, or 3% to $1,834,000 for the fiscal year ended October 31, 2002 from $1,886,000 for the fiscal year ended October 31, 2001. This decrease was a result of a decline in the effective yield on our portfolio of marketable securities consistent with the general decline in interest rates throughout 2002, which was partially offset by (i) the recognition of a full year worth of interest income related to the investment of funds received from our follow-on offering completed in December 2000, (ii) a gain on sale of securities held as available for sale, and (iii) the elimination of interest expense in fiscal 2002 as our short term debt was retired in fiscal 2001.

        Provision (benefit) for income taxes.    Results of operations for the year ended October 31, 2002 included a provision for income taxes of $2,087,000 as compared to a benefit for income taxes of $1,090,000 for the year ended October 31, 2001. Due to the uncertainty of our ability to fully recognize the

26

future benefit of our deferred tax assets, in accordance with the SFAS No. 109, we recorded a valuation allowance of approximately $5.1 million as of October 31, 2002.

Fiscal Year Ended October 31, 2001 Compared to Fiscal Year Ended October 31, 2000

        Net sales.    Net sales increased $1,853,000, or 11%, to $19,343,000 for the year ended October 31, 2001 from $17,490,000 for the year ended October 31, 2000. The increase in net sales was due to the increase in revenues generated from both our brachytherapy and non-therapeutic product lines.

        Gross profit.    Gross profit increased $825,000 or 7% to $12,481,000 for the fiscal year ended October 31, 2001 from $11,656,000 for the fiscal year ended October 31, 2000. Gross profit as a percent of sales decreased from 67% to 65% during this period. The decrease in gross profit as a percentage of sales was primarily due to a change in the product mix and increased price competition in our brachytherapy products.

        Selling, general and administrative expenses.    SG&A increased $2,372,000 or 64%, to $6,097,000 for the fiscal year ended October 31, 2001, from $3,725,000 for the fiscal year ended October 31, 2000. SG&A expenses increased primarily due to the following: (i) the inclusion of expenses incurred by Theseus which was acquired in October 2000, (ii) amortization of goodwill and other intangible assets resulting from the acquisition of Theseus totaling $582,000 and (iii) other general and administrative expenses were increased as a result of management's plans for the expansion of the Company.

        Research and development.    Research and development costs totaled $7,602,000 for the fiscal year ended October 31, 2001. Such costs were not significant for the fiscal year ended October 31, 2000. These costs primarily represent our continued investment in our Apomate™ technology platform and related product candidate. The increase in research and development spending reflects our belief that to maintain our competitive position in a market characterized by rapid rates of technological advancement, we must continue to invest significant resources in new product development, as well as continue to enhance existing products. All of our research and development costs are expensed as incurred.

        In-process research and development ("IPR&D").    During the fiscal year ended October 31, 2000, we incurred a one-time charge of $11,431,000 for IPR&D relating to our acquisition of Theseus completed in fiscal 2000 (see Note 2 to the Consolidated Financial Statements).

        Write-off of construction in progress.    Included in the results of operations for the fiscal year ended October 31, 2001, is a charge of $3,743,000 relating to the write-off of construction in progress. Since 1998, we incurred costs in the development of two linear particle accelerators. We intended to use these units in the production of Palladium-103 for use in our brachytherapy products. Based on the uncertainty of the estimated costs to complete the units coupled with an increasingly reliable commercial supply of Palladium-103, in June 2001, the Board of Directors authorized the Company's management to attempt to identify buyers for this equipment while continuing to monitor the commercial advantages of purchasing the radioisotopes instead of manufacturing them. In August 2001, we concluded that (i) the availability of commercially produced isotopes substantially diminished the economic benefits of completing the accelerators and (ii) there were no immediate buyers for the equipment. Accordingly, we elected to cease development efforts, write off the value of the equipment in its entirety and subsequently dispose of the equipment.

        Interest and other income, net.    Interest and other income increased $776,000 to $1,886,000 for the fiscal year ended October 31, 2001 from $1,110,000 for the fiscal year ended October 31, 2000. This increase resulted from the investment of funds received from our follow-on offering completed in December 2000, which was partially offset by (i) the interest expense incurred on our short-term debt and (ii) the fact that in 2000 we realized a pre-tax gain of $119,000 related to the disposition of 7,680 shares of

27

Series A preferred stock in RadioMed, a privately held company. Our effective yield on our investment portfolio has decreased consistent with a declining interest rate environment.

        Provision (benefit) for income taxes.    Our effective income tax rate was 35% (benefit) and 115% for the fiscal years ended October 31, 2001 and 2000, respectively. The decrease in the effective rate is primarily due to the non-deductibility of the IPR&D charge associated with the purchase of Theseus in the year ended October 31, 2000.

Critical Accounting Policies

        The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K 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 impairments, loss contingencies, and taxes. Actual results could differ substantially from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.

Revenue Recognition

        We apply the provisions of SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure of revenue recognition policies. In general, we recognize revenue related to our 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.

Allowance for Doubtful Accounts

        The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there were a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be overstated which could have an adverse impact on our financial results.

Goodwill

        We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. In response to changes in industry and market conditions, we may strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill.

Impairment of Long-lived Assets

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

28

Legal Contingencies

        We are currently involved in certain legal proceedings which are further discussed elsewhere in this Form 10-K. We record liabilities related to pending litigation when an unfavorable outcome is probable and we can reasonably estimate the amount of the loss. We have not recorded liabilities for our pending litigation because of the uncertainties related to assessing both the amount and the probable outcome of those claims. We regularly evaluate current information available to determine whether such a liability should be recorded.

Deferred 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.

Liquidity and Capital Resources

        To date, our short-term liquidity needs have generally consisted of operating capital to finance growth in inventories, trade accounts receivable, new product research and development, capital expenditures and strategic investments in related businesses. We have satisfied these needs primarily through a combination of public offerings and private placements of our common stock and from cash generated by operations. We do not currently have a line of credit or similar arrangements with a bank. In December 2000, we completed a follow-on public offering of 2,695,000 shares of our common stock. The net proceeds we received from the sale were approximately $44.6 million.

        At October 31, 2002, we had cash and investments in marketable securities aggregating approximately $55.9 million and working capital of $39.5 million. Working capital does not include $17.1 million of our marketable securities that are classified as non current assets since the maturities of these marketable debt instruments are beyond a one year period.

        For the year ended October 31, 2002, net cash provided by operating activities was approximately $2.4 million. Net cash used in investing activities totaled approximately $3.1 million during the year ended October 31, 2002.

        During the year ended October 31, 2002, we received $362,000 from the exercise of stock options and the purchase of shares related to our employee stock purchase plan. Proceeds from the exercise of stock options, employee stock purchase plan, and their related tax benefits will vary from period to period based upon, among other factors, fluctuations in the market value of our stock relative to the exercise price of such options.

        We are authorized to repurchase up to $10 million of our common stock on the open market. No such shares have been repurchased as of October 31, 2002.

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

        We believe our current cash and marketable securities and anticipated cash flow from operations will be sufficient to support our operations and planned expansion for the foreseeable future. However, the amount of capital that we will need in the future will depend on many factors including:

•

costs related to research, development, clinical trials, license fees, royalty obligations, regulatory approvals and commercialization of our Hynic-Annexin V product candidate and other product candidates

29

•

the development of a sales and marketing force for our brachytherapy seed products as we transition from our exclusive distribution agreement with Mentor to direct sales and marketing



•

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



•

market acceptance of our products



•

progress in and scope of our research and development activities



•

levels of inventory and accounts receivable that we maintain



•

competitors' responses to our products



•

level of capital expenditures



•

acquisition and/or development of complementary businesses, technologies or products

        We anticipate incurring significant expenses with respect to our Hynic-Annexin V product candidate over the next several years for clinical trials and development costs. Significant milestone payments to third parties are payable throughout the life of the contracts associated with our licenses of patent rights of technology related to our Hynic-Annexin V product candidate.

        We anticipate that available cash will provide sufficient funds to cover the above costs. In addition, the costs related to Hynic-Annexin V may be reduced if we enter into strategic partnerships related to Hynic-Annexin V.

        We lease facilities and equipment under non-cancelable operating lease agreements. Future minimum lease payments are subject to annual adjustment for increases in the Consumer Price Index. Future minimum lease payments under all operating leases in each of the next three years from fiscal 2003 to 2005 are $720,000, $373,000, and $19,000, respectively.

        We have minimum commitments for various contract services with unrelated parties totaling approximately $2.1 million. The agreements provide for various payments to be made over a one to three year period as services are provided. We have contractual rights to terminate our payment obligations on approximately $1.6 million of such agreements with 30 to 90 day notification.

        Future capital requirements will also depend on the extent to which we acquire or invest in businesses, products and technologies. If we should require additional financing due to unanticipated developments, additional financing may not be available when needed or, if available, we may not be able to obtain this financing on terms favorable to our stockholders or us. Insufficient funds may require us to delay, scale back or eliminate some or all of our research and development programs. If additional funds are raised by issuing equity securities, dilution to existing stockholders would result.

Recent Accounting Pronouncements

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Statement is effective for fiscal years beginning after June 15, 2002. We do not believe that the adoption of this statement will have a material impact on our consolidated financial statements.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." SFAS No.144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", and APB Opinion No. 30, "Reporting Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and amends APB No. 51, "Consolidated Financial Statements." This Statement was issued to address the accounting for a segment of a business accounted for as a

30

discontinued operation under APB No. 30 and to establish a single accounting model based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. We do not believe that the adoption of this statement will have a material impact on our consolidated financial statements.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not believe that the adoption of this statement will have a material impact on our consolidated financial statements.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our financial instruments include cash and marketable securities. At January 24, 2003, the carrying values of our financial instruments approximated their fair values based on current market prices and rates.

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

Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

        None

PART III

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required under this Item is incorporated by reference to our definitive proxy statement pursuant to Regulation 14A to be filed with the Commission no later than 120 days after the close of our fiscal year ended October 31, 2002.

Item 11.    EXECUTIVE COMPENSATION

        The information required under this Item is incorporated by reference to our definitive proxy statement pursuant to Regulation 14A to be filed with the Commission no later than 120 days after the close of our fiscal year ended October 31, 2002.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required under this Item is incorporated by reference to our definitive proxy statement pursuant to Regulation 14A to be filed with the Commission no later than 120 days after the close of our fiscal year ended October 31, 2002.

31

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required under this Item is incorporated by reference to our definitive proxy statement pursuant to Regulation 14A to be filed with the Commission no later than 120 days after the close of our fiscal year ended October 31, 2002.

Item 14.    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

The Company's principal executive officer and principal financial officer, based on their evaluation within 90 days of the filing date of this Form 10-K, have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

(b)  Changes in internal controls.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

32

PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

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

(b)

Reports on Form 8-K:

None.

(c)  Exhibits

33

34

+

Compensation plan or agreement

*

Filed herewith

35

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
North American Scientific, Inc.

        In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 33 present fairly, in all material respects, the financial position of North American Scientific, Inc. and its subsidiaries at October 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 33 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

36

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Balance Sheets

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

37

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Operations

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

38

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Changes in Stockholders' Equity

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

39

NORTH AMERICAN SCIENTIFIC, INC.

Consolidated Statements of Cash Flows

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

40

NORTH AMERICAN SCIENTIFIC, INC.

Notes to Consolidated Financial Statements

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

        North American Scientific, Inc. (the "Company"), a Delaware corporation, manufactures and markets a line of radioisotopic products for medical, scientific and industrial uses. The Company operates in a single business segment with its primary products being (i) brachytherapy seeds for the treatment of prostate cancer and (ii) radioactive reference sources used to calibrate a variety of medical and commercial equipment. The Company is also engaged in the research and development of a novel, proprietary radiopharmaceutical imaging agent.

Principles of Consolidation

        The consolidated financial statements include the accounts of North American Scientific and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles of the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

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

Inventories

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

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

Fair Value of Financial Instruments

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

Marketable Securities

        The Company invests excess cash in marketable securities consisting primarily of commercial paper, corporate notes and bonds, U.S. Government securities and money market funds.

41

        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.

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 is computed using the straight-line method over the estimated useful lives as follows:

Goodwill

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

Research and Development Costs

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

Licenses and Patents

        License agreements are amortized on a straight-line basis over periods ranging up to fifteen years. The amortization periods are based on the lives of the license agreements or the approximate remaining lives of the related patents, whichever is shorter.

Long-Lived Assets

        The Company identifies and records impairment losses on long-lived assets 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 applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" which provides guidance on the recognition, presentation and

42

disclosure of revenue in financial statements. SAB No. 101 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 our 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 Option Plan

        The Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has provided additional disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation." The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18.

Net Income (Loss) per Share

        Basic earnings (loss) per share is computed by dividing the net income (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 unless such assumed exercises are anti-dilutive. The following table sets forth the computation of basic and diluted earnings (loss) per share:

        Stock options and warrants to purchase 486,445, 616,314 and 735,546 common shares for the years ended October 31, 2002, 2001 and 2000, respectively, were not included in the computation of diluted loss per share for those years because the Company reported a loss, and therefore, the effect of exercise would have been anti-dilutive.

        In addition, stock options to purchase 615,260, 349,212, and 96,393 common shares for the years ended October 31, 2002, 2001 and 2000, respectively, were not included in the computation of diluted loss per share because the exercise prices of the options were greater than the average market price of the common shares.

Income Taxes

        The Company accounts for income taxes under the liability method. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities. A valuation allowance is provided when it is more likely than not that all or some portion of deferred tax assets will not be realized.

43

Diversification of Credit Risk

        The Company's financial instruments that are subject to concentrations of credit risk consist primarily of cash equivalents, marketable securities, and accounts receivable, which are not collateralized. The Company's policy is to invest its cash with highly rated financial institutions in order to limit the amount of credit exposure.

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

Significant Concentrations

        The Company had an exclusive agreement with Mentor Corporation ("Mentor") for the distribution of its brachytherapy products. This customer represented 78%, 79% and 81% of total revenues for the years ended October 31, 2002, 2001 and 2000, respectively. As of October 31, 2002, amounts due from this customer accounted for 81% of gross trade receivables. Subsequent to year end, the agreement with Mentor was terminated. See Note 12 of Notes to Financial Statements.

        The Company relies on certain companies as the sole source of various materials in its manufacturing process. Any extended interruption in the supply of these materials could result in the failure to meet customer demand.

Reclassifications

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

Recent Accounting Pronouncements

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Statement is effective for fiscal years beginning after June 15, 2002. The Company does not believe that the adoption of this statement will have a material impact on its consolidated financial statements.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and amends APB No. 51, "Consolidated Financial Statements." This Statement was issued to address the accounting for a segment of a business accounted for as a discontinued operation under APB No. 30 and to establish a single accounting model based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not believe that the adoption of this statement will have a material impact on its consolidated financial statements.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31,

44

2002. The Company does not believe that the adoption of this statement will have a material impact on its consolidated financial statements.

NOTE 2—ACQUISITION OF THESEUS IMAGING CORPORATION

        On October 13, 2000, the Company acquired Theseus Imaging Corporation ("Theseus"), a developer of proprietary radiopharmaceuticals to enhance the medical management of cancer, heart attack and organ transplantation. Theseus' stockholders and option holders received a total of 345,665 shares of, or options to purchase for nominal consideration, the Company's common stock in exchange for 100% of Theseus' outstanding common stock and options.

        The acquisition was accounted for using the purchase method of accounting. Accordingly, the results of operations of Theseus have been included in the consolidated financial statements since the date of acquisition. The purchase price was determined as follows:

        The purchase price was allocated as follows:

        In connection with the purchase transaction, the Company recorded a charge for acquired IPR&D of $11,431,000. The in-process research and development projects were valued through the use of a discounted cash flow analysis, taking into account the projected future cash flows associated with these projects once they achieve technological feasibility, their stage of completion at the acquisition date and the expected return requirements for present valuing the projected cash flow. Since there were no completed products at the date of acquisition, a comparison with historical pricing, margins and expense levels cannot be made.

        The cash flow projections for revenues were based on estimates of relevant market sizes and growth factors, expected industry trends, anticipated nature and timing of new product introductions by the Company, individual product life cycles and estimated life of each product's underlying technology. Estimated cost of goods sold, royalties, general and administrative expenses, distribution costs, licensing fees and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. The cash flow projection used a risk-adjusted discount rate of 35%.

        The unaudited pro forma summary for the fiscal year ended October 31, 2000 reflects combined results of operations of the Company and Theseus as if the acquisition had occurred on November 1, 2000. The following pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been consummated as of the beginning of the periods presented, nor is it necessarily indicative of the future operating results of the Company.

45

        The unaudited pro forma financial information is as follows (in thousands, except per share data):

(a)

Includes the IPR&D charge of $11,431,000 attributable to the acquisition. Excluding this charge results in pro forma basic and diluted earnings per share of $0.25 and $0.22, respectively.

NOTE 3—MARKETABLE SECURITIES

        Marketable securities consist of the following:

        The amortized cost of all held to maturity securities approximates fair value. At October 31, 2002, investments in debt securities with scheduled maturities within one year were $34,144,000 and for one to three years were $17,093,000.

NOTE 4—ACCOUNTS RECEIVABLE

        Accounts receivable consist of the following: