IsoRay, Inc.
Annual Report 2009

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KIsoRay, Inc. - ISRFiled: September 23, 2009 (period: June 30, 2009)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K þAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended June 30, 2009or ¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from __________ to ____________Commission File No. 001-33407 ISORAY, INC.(Exact name of registrant as specified in its charter) Minnesota(State of incorporation)41-1458152(I.R.S. Employer Identification No.) 350 Hills St., Suite 106Richland, Washington(Address of principal executive offices)99354(Zip code)Registrant's telephone number, including area code: (509) 375-1202Securities registered pursuant to Section 12(b) of the Exchange Act – Common Stock – $0.001 par value(NYSE Amex)Securities registered pursuant to Section 12(g) of the Exchange Act – Series C Preferred Share Purchase RightsNumber of shares outstanding of each of the issuer's classes of common equity:Class Outstanding as of September 14, 2009Common stock, $0.001 par value 22,942,088Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934 DURING THEPRECEDING 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 FORthe past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TObe submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes x No o 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 bestof registrant’s knowledge, in definitive proxy or information statements INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS Form10-K. o Indicate BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY. SEE THEdefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer o Accelerated filer o Non-accelerated filer oSmaller reporting company xIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THECOMMON EQUITY WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH COMMON EQUITY, AS OF THE LAST BUSINESS DAY OF THE REGISTRANT’S MOST RECENTLYcompleted second fiscal quarter – $4,509,712 as of December 31, 2008. Documents incorporated by reference – none. Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ISORAY, INC.Table of Contents Page ITEM 1 – BUSINESS1ITEM 1A – RISK FACTORS23ITEM 1B – UNRESOLVED STAFF COMMENTS31ITEM 2 – PROPERTIES31ITEM 3 – LEGAL PROCEEDINGS31ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS31ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES32ITEM 6 – SELECTED FINANCIAL DATA33ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS34ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK46ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA46ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE46ITEM 9A – CONTROLS AND PROCEDURES46ITEM 9B – OTHER INFORMATION47ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE47ITEM 11 – EXECUTIVE COMPENSATION51ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS54ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE55ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES56ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES57 SIGNATURES61 Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Caution Regarding Forward-Looking InformationIn addition to historical information, this Form 10-K contains certain "forward-looking statements" within the meaning of the Private Securities LitigationReform Act of 1995 (PSLRA). This statement is included for the express purpose of availing IsoRay, Inc. of the protections of the safe harbor provisions ofthe PSLRA.All statements contained in this Form 10-K, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words "believe," "expect," "anticipate," "intends," "estimate," "forecast,""project," and similar expressions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements,including any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products,services, developments or industry rankings; any statements regarding future revenue, economic conditions or performance; any statements of belief; andany statements of assumptions underlying any of the foregoing. These statements are based on certain assumptions and analyses made by us in light of ourexperience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriateunder the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risksand uncertainties described under Item 1A – Risk Factors beginning on page 23 below that may cause actual results to differ materially.Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and there can be no assurancethat the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to oreffects on our business operations. Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of theCompany's views as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.PART IAs used in this Form 10-K, unless the context requires otherwise, “we” or “us” or the “Company” means IsoRay, Inc. and its subsidiaries.ITEM 1 – BUSINESSGeneralCentury PARK PICTURES CORPORATION (CENTURY) WAS ORGANIZED UNDER MINNESOTA LAW IN 1983. CENTURY HAD NO OPERATIONS SINCE ITS FISCAL YEAR ENDED SEPTEMBER30, 1999 through June 30, 2005.On July 28, 2005, ISORAY MEDICAL, INC. (MEDICAL) BECAME A WHOLLY-OWNED SUBSIDIARY OF CENTURY PURSUANT TO A MERGER. CENTURY CHANGED ITS NAME TO ISORAY,Inc. (IsoRay or the Company). In the merger, the Medical stockholders received approximately 82% of the then outstanding securities of the Company.MEDICAL, A DELAWARE CORPORATION, WAS INCORPORATED ON JUNE 15, 2004 TO DEVELOP, MANUFACTURE AND SELL ISOTOPE-BASED MEDICAL PRODUCTS AND DEVICES FOR THEtreatment of cancer and other malignant diseases. Medical is headquartered in Richland, Washington.IsoRay INTERNATIONAL LLC (INTERNATIONAL), A WASHINGTON LIMITED LIABILITY COMPANY, WAS FORMED ON NOVEMBER 27, 2007 AND IS A WHOLLY-OWNED SUBSIDIARY OFthe Company. International has not had any significant transactions since its inception. 1Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Available InformationThe COMPANY ELECTRONICALLY FILES ITS ANNUAL REPORTS ON FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q, CURRENT REPORTS ON FORM 8-K, AND ALL AMENDMENTS TO THESEREPORTS AND OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THESE REPORTS CAN BE OBTAINED BY ACCESSING THE SEC’S WEBSITE ATWWW.SEC.GOV. THE PUBLIC CAN ALSO OBTAIN COPIES BY VISITING THE SEC’S PUBLIC REFERENCE ROOM AT 100 F STREET NE, WASHINGTON, DC 20549 OR BY CALLING THESEC at 1-800-SEC-0330. In addition, the Company makes copies of its annual AND QUARTERLY REPORTS AVAILABLE TO THE PUBLIC AT ITS WEBSITE AT www.isoray.com. Information on this website is not a part of this report.Business OperationsOverviewIN 2003, ISORAY OBTAINED CLEARANCE FROM THE FDA FOR TREATMENT FOR ALL SOLID TUMOR APPLICATIONS USING CESIUM-131 (CS-131). SUCH APPLICATIONS INCLUDEprostate CANCER; OCULAR MELANOMA; HEAD, NECK AND LUNG TUMORS; AND BREAST, LIVER, BRAIN AND PANCREATIC CANCER. THE SEED MAY BE USED IN SURFACE, INTERSTITAL ANDINTRACAVITY APPLICATIONS FOR TUMORS WITH KNOWN RADIO SENSITIVITY. MANAGEMENT BELIEVES ITS CS-131 TECHNOLOGY WILL ALLOW IT TO BECOME A LEADER IN theBRACHYTHERAPY MARKET. MANAGEMENT BELIEVES THAT THE ISORAY PROXCELAN CESIUM-131 BRACHYTHERAPY SEED REPRESENTS THE FIRST MAJOR ADVANCEMENT INbrachytherapy technology in over 21 years with attributes that could make it the long-term “seed of choice” for internal radiation therapy procedures.IsoRay BEGAN PRODUCTION AND SALES OF PROXCELAN CESIUM-131 BRACHYTHERAPY SEEDS IN OCTOBER 2004 FOR THE TREATMENT OF PROSTATE CANCER AFTER CLEARANCE OF ITSPREMARKET NOTIFICATION (510(K)) BY THE FOOD AND DRUG ADMINISTRATION (FDA). IN DECEMBER 2007, ISORAY BEGAN SELLING ITS PROXCELAN CS-131 SEEDS FOR THETREATMENT OF OCULAR MELANOMA. ON JUNE 1, 2009, THE COMPANY AGAIN EXPANDED ITS APPLICATION OF CS-131 WITH THE TREATMENT OF A HEAD AND NECK TUMOR THATCOULD NOT BE ACCESSED BY OTHER TREATMENT MODALITIES. MORE RECENTLY THE COMPANY HAS FOCUSED ON OTHER APPLICATIONS WHICH REQUIRE REVISING THE DELIVERYsystem from those historically used by the Company.IN AUGUST 2009, ISORAY MEDICAL RECEIVED CLEARANCE FROM THE FDA FOR ITS PREMARKET NOTIFICATION (510(K)) FOR PROXCELAN™ CESIUM-131 BRACHYTHERAPY SEEDSthat are PRELOADED INTO BIOABSORBABLE BRAIDED STRANDS. THIS CLEARANCE PERMITS THE PRODUCT TO BE COMMERCIALLY DISTRIBUTED FOR TREATMENT OF LUNG, HEAD AND NECKtumors as WELL AS TUMORS IN OTHER ORGANS. WHILE CS-131 BRACHYTHERAPY SEEDS THEMSELVES HAVE BEEN CLEARED FOR TREATMENT IN ALL ORGANS SINCE 2003, THIS 510(K)ALLOWS CS-131 SEEDS TO BE DELIVERED IN A CONVENIENT AND STERILE FORMAT THAT CAN BE IMPLANTED WITHOUT ADDITIONAL SEED LOADING BY THE FACILITY. THE 510(K) alsoclears the application of braided strands onto a bioabsorbable mesh matrix to further facilitate the implant procedure.BRACHYTHERAPY SEEDS ARE SMALL DEVICES USED IN AN INTERSTITAL RADIATION PROCEDURE. THE PROCEDURE HAS BECOME ONE OF THE PRIMARY TREATMENTS FOR PROSTATEcancer. THE BRACHYTHERAPY PROCEDURE PLACES RADIOACTIVE SEEDS AS CLOSE AS POSSIBLE TO (IN OR NEAR) THE CANCEROUS TUMOR (THE WORD “BRACHYTHERAPY” MEANS CLOSETHERAPY). THE SEEDS DELIVER THERAPEUTIC RADIATION THEREBY KILLING THE CANCEROUS TUMOR CELLS WHILE MINIMIZING EXPOSURE TO ADJACENT HEALTHY TISSUE. THISPROCEDURE ALLOWS DOCTORS TO ADMINISTER A HIGHER DOSE OF RADIATION DIRECTLY TO THE TUMOR. EACH SEED CONTAINS A RADIOISOTOPE SEALED WITHIN A WELDED TITANIUMcapsule. When brachytherapy is the only treatment (monotherapy), approximately 70 to 120 seeds are permanently implanted in the PROSTATE IN AN OUTPATIENTPROCEDURE LASTING LESS THAN ONE HOUR. THE NUMBER OF SEEDS USED VARIES BASED ON THE SIZE OF THE PROSTATE AND THE ACTIVITY LEVEL SPECIFIED BY THE PHYSICIAN.WHEN BRACHYTHERAPY IS COMBINED WITH EXTERNAL BEAM RADIATION OR INTENSITY MODULATED RADIATION THERAPY (DUAL THERAPY), THEN APPROXIMATELY 40-80 SEEDS AREUSED IN THE PROCEDURE. THE ISOTOPE DECAYS OVER TIME AND EVENTUALLY THE SEEDS BECOME INERT. THE SEEDS MAY BE USED AS A PRIMARY TREATMENT OR IN CONJUNCTIONWITH OTHER TREATMENT MODALITIES, SUCH AS CHEMOTHERAPY, OR AS TREATMENT FOR RESIDUAL DISEASE AFTER EXCISION OF PRIMARY TUMORS. THE NUMBER OF SEEDS FOR OTHERtreatment sites will vary from as few as 10-12 to as many at 80-100 depending on the location of the tumor being treated. 2Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Brachytherapy Isotope ComparisonINCREASINGLY, PROSTATE CANCER PATIENTS AND THEIR DOCTORS WHO DECIDE ON SEED BRACHYTHERAPY CHOOSE CS-131 BECAUSE OF ITS SIGNIFICANT ADVANTAGES OVERPalladium-103 (Pd-103) and Iodine-125 (I-125), two other isotopes currently in use. These advantages include:Higher EnergyCS-131 HAS A HIGHER AVERAGE ENERGY THAN ANY OTHER COMMONLY USED PROSTATE BRACHYTHERAPY ISOTOPE ON THE MARKET. ENERGY IS A KEY FACTOR IN HOWUNIFORMLY THE RADIATION DOSE CAN BE DELIVERED THROUGHOUT THE PROSTATE. THIS QUALITY OF A PROSTATE IMPLANT IS KNOWN AS HOMOGENEITY. EARLY STUDIESDEMONSTRATE CS-131 IMPLANTS ARE ABLE TO DELIVER THE REQUIRED DOSE WHILE MAINTAINING HOMOGENEITY ACROSS THE GLAND ITSELF AND POTENTIALLY REDUCINGUNNECESSARY DOSE TO CRITICAL STRUCTURES SUCH AS THE URETHRA AND RECTUM. (PRESTIDGE B.R., BICE W.S., JURKOVIC I., et al. CESIUM-131 PERMANENT PROSTATEBrachytherapy: An Initial Report. Int. J. Radiation Oncology Biol. Phys. 2005: 63 (1) 5336-5337.)Shorter Half-LifeCs-131 HAS THE SHORTEST HALF-LIFE OF ANY COMMONLY USED PROSTATE BRACHYTHERAPY ISOTOPE AT 9.7 DAYS. CS-131 DELIVERS 90% OF THE PRESCRIBED DOSE INJUST 33 DAYS COMPARED TO 58 DAYS FOR PD-103 AND 204 DAYS FOR I-125. BY FAR THE MOST COMMONLY REPORTED SIDE EFFECTS OF PROSTATE BRACHYTHERAPY AREIRRITATIVE AND OBSTRUCTIVE SYMPTOMS IN THE ACUTE PHASE POST-IMPLANT (NEILL B, ET AL. THE NATURE AND EXTENT OF URINARY MORBIDITY IN RELATION TOPROSTATE BRACHYTHERAPY URETHRAL DOSIMETRY. BRACHYTHERAPY 2007:6(3)173-9.). THE SHORT HALF-LIFE OF CS-131 REDUCES THE DURATION OF TIME DURINGwhich the patient experiences the irritating effects of the radiation.Improved Coverage of the ProstatePermanent PROSTATE BRACHYTHERAPY UTILIZING CS-131 SEEDS ALLOWS FOR BETTER DOSE HOMOGENEITY AND SPARING OF THE URETHRA AND RECTUM WHILE PROVIDINGCOMPARABLE PROSTATE COVERAGE COMPARED TO I-125 OR PD-103 SEEDS WITH COMPARABLE OR FEWER SEEDS AND NEEDLES. SEVERAL STUDIES HAVE DEMONSTRATEDDOSIMETRIC ADVANTAGES OF CS-131 OVER THE OTHER COMMONLY USED PROSTATE BRACHYTHERAPY ISOTOPES. (MUSMACHER JS, ET AL. DOSIMETRIC COMPARISON OFCESIUM-131 AND PALLADIUM-103 FOR PERMANENT PROSTATE BRACHYTHERAPY. INT. J. RADIATION ONCOLOGY BIOL. PHYS. 2007:69(3)S730-1.) (YAPARPALVI R, ETAL. IS CS-131 OR I-125 OR PD-103 THE “IDEAL” ISOTOPE FOR PROSTATE BOOST BRACHYTHERAPY? A DOSIMETRIC VIEW POINT. INT. J. RADIATION ONCOLOGY BIOL.PHYS. 2007:69(3)S677-8) (SUTLIEF S, ET AL. CS-131 PROSTATE BRACHYTHERAPY AND TREATMENT PLAN PARAMETERS. MEDICAL PHYSICS 2007:34(6)2431.) (YangR, ET AL. DOSIMETRIC COMPARISON OF PERMANENT PROSTATE BRACHYTHERAPY PLANS UTILIZING CS-131, I-125 AND PD-103 SEEDS. MEDICAL PHYSICS2008:35(6)2734.)Rapid Resolution of Side effectsSTUDIES DEMONSTRATE THAT OBJECTIVE MEASURES OF COMMON SIDE-EFFECTS SHOWED AN EARLY PEAK IN SYMPTOMS IN THE 2-WEEK TO 1-MONTH TIME FRAME. RESOLUTION OF MORBIDITY RESOLVED RAPIDLY WITHIN 4-6 MONTHS. (PRESTIDGE B, ET. AL. CLINICAL OUTCOMES OF A PHASE-II, MULTI-INSTITUTIONAL CESIUM-131Permanent Prostate Brachytherapy Trial. Brachytherapy. 2007: 6 (2)78.) (Moran B, et al. Cesium-131 Prostate Brachytherapy: An Early Experience. BRACHYTHERAPY 2007:6(2)80.) (JONES A, ET AL. IPSS TRENDS FOR CS-131 PERMANENT PROSTATE BRACHYTHERAPY. BRACHYTHERAPY 2008:7(2)194.) (DEFOE SG,ET AL. IS THERE DECREASED DURATION OF ACUTE URINARY AND BOWEL SYMPTOMS AFTER PROSTATE BRACHYTHERAPY WITH CESIUM 131 RADIOISOTOPE? INT. J.RADIATION ONCOLOGY BIOL. PHYS. 2008:72(S1)S317.) MORE STRINGENT STUDIES ARE UNDERWAY TO MORE FULLY CHARACTERIZE ANY ADVANTAGE IN SIDE EFFECTresolution experienced by patients undergoing Cs-131 prostate brachytherapy versus brachytherapy with other isotopes. 3Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Higher Biologically Effective DoseAnother BENEFIT TO THE SHORT HALF-LIFE OF CS-131 IS WHAT IS KNOWN AS THE “BIOLOGICAL EFFECTIVE DOSE” OR BED. BED IS A WAY FOR HEALTH CARE PROVIDERS TOpredict HOW AN ISOTOPE WILL PERFORM AGAINST CANCERS EXHIBITING DIFFERENT CHARACTERISTICS – FOR INSTANCE, SLOW VERSUS FAST GROWING TUMORS. STUDIES HAVESHOWN CS-131 IS ABLE TO DELIVER A HIGHER BED ACROSS A WIDE RANGE OF TUMOR TYPES THAN EITHER I-125 OR PD-103. ALTHOUGH PROSTATE CANCER IS TYPICALLYVIEWED AS A SLOW GROWING CANCER IT CAN PRESENT WITH AGGRESSIVE FEATURES. CS-131’S HIGHER BED MAY BE PARTICULARLY BENEFICIAL IN SUCH SITUATIONS. (ARMPILIA CI, DALE RG, COLES IP et al. THE DETERMINATION OF RADIOBIOLOGICALLY OPTIMIZED HALF-LIVES FOR RADIONUCLIDES USED IN PERMANENTBrachytherapy Implants. Int. J. Radiation Oncology Biol. Phys. 2003; 55 (2): 378-385.)PSA ControlInvestigators tracking PSA in both single arm and randomized trials have concluded Cs-131’s PSA RESPONSE RATES SHOW SIMILAR EARLY TUMOR CONTROL TOI-125, LONG CONSIDERED THE GOLD STANDARD IN PERMANENT SEED BRACHYTHERAPY. LONGITUDINAL PSA MEASUREMENTS FROM ONGOING CS-131 CLINICAL SERIESDEMONSTRATE TRENDS VERY SIMILAR TO THOSE SEEN WITH OTHER ISOTOPES. (MORAN B, ET. AL. CESIUM-131 PROSTATE BRACHYTHERAPY” AN EARLY EXPERIENCE.Brachytherapy. 2007:6(2)80.) (BICE W, ET. AL. RECOMMENDATIONS FOR PERMANENT PROSTATE BRACHYTHERAPY WITH 131CS: A CONSENSUS REPORT FROM THECESIUM ADVISORY GROUP. BRACHYTHERAPY 2008:7(4)290-296.) (PLATTA CS, ET AL. EARLY OUTCOMES OF PROSTATE SEED IMPLANTS WITH 131CS: TOXICITY ANDInitial PSA Dynamics from a Single Institution. Int. J. Radiation Oncology Biol. Phys. 2008:72(S1)S323-4.)Industry InformationIncidence of Prostate CancerThe prostate is a walnut-sized gland surrounding the male urethra, located below the BLADDER AND ADJACENT TO THE RECTUM. PROSTATE CANCER IS A MALIGNANT TUMORTHAT BEGINS MOST OFTEN IN THE PERIPHERY OF THE GLAND AND, LIKE OTHER FORMS OF CANCER, MAY SPREAD BEYOND THE PROSTATE TO OTHER PARTS OF THE BODY. ACCORDING TOTHE AMERICAN CANCER SOCIETY, APPROXIMATELY ONE IN SIX MEN WILL BE DIAGNOSED WITH PROSTATE CANCER DURING HIS LIFETIME. IT IS THE MOST COMMON FORM OF CANCERIN MEN AFTER SKIN CANCER, AND THE SECOND LEADING CAUSE OF CANCER DEATHS IN MEN FOLLOWING LUNG AND BRONCHUS CANCERS THAT ACCOUNT FOR 30% OF DEATHS fromCANCER IN MEN. THE AMERICAN CANCER SOCIETY ESTIMATES THERE WILL BE ABOUT 192,280 NEW CASES OF PROSTATE CANCER DIAGNOSED AND AN ESTIMATED 27,360 deathsASSOCIATED WITH THE DISEASE IN THE UNITED STATES IN 2009. BECAUSE OF EARLY DETECTION TECHNIQUES (E.G., SCREENING FOR PROSTATE SPECIFIC ANTIGEN, OR PSA),APPROXIMATELY NINE OUT OF TEN PROSTATE CANCERS ARE FOUND IN THE LOCAL AND REGIONAL STAGES (LOCAL MEANS IT IS STILL CONFINED TO THE PROSTATE; REGIONAL MEANS IT HASspread from the prostate to nearby areas, but not to distant sites, such as bone).PROSTATE CANCER ACCOUNTS FOR ABOUT 9% OF CANCER RELATED DEATHS IN MEN. PROSTATE CANCER INCIDENCE AND MORTALITY INCREASE WITH AGE. THE NATIONAL CANCERINSTITUTE HAS REPORTED THAT THE INCIDENCE OF PROSTATE CANCER INCREASES DRAMATICALLY IN MEN OVER THE AGE OF 55. AT THE AGE OF 70, THE CHANCE OF HAVING PROSTATEcancer is 12 times greater than at age 50.The AMERICAN CANCER SOCIETY RECOMMENDS THAT MEN WITHOUT SYMPTOMS, RISK FACTORS AND WHO HAVE A LIFE EXPECTANCY OF AT LEAST TEN YEARS, SHOULD BEGIN REGULARannual MEDICAL EXAMS AT THE AGE OF 50, AND BELIEVES THAT HEALTH CARE PROVIDERS SHOULD OFFER AS PART OF THE EXAM THE PROSTATE-SPECIFIC ANTIGEN (PSA) BLOOD TESTAND A DIGITAL RECTAL EXAMINATION. THE PSA BLOOD TEST DETERMINES THE AMOUNT OF PROSTATE SPECIFIC ANTIGEN PRESENT IN THE BLOOD. PSA IS FOUND IN A PROTEINSECRETED BY THE PROSTATE, AND ELEVATED LEVELS OF PSA CAN BE ASSOCIATED WITH EITHER PROSTATITIS (A NONCANCEROUS INFLAMMATORY CONDITION) OR A PROLIFERATION OFCANCER CELLS IN THE PROSTATE. TRANSRECTAL ULTRASOUND TESTS AND BIOPSIES ARE TYPICALLY PERFORMED ON PATIENTS WITH ELEVATED PSA READINGS TO CONFIRM THE existenceOF CANCER. EARLY SCREENING HAS FOSTERED A DECLINE IN THE PROSTATE CANCER DEATH RATE SINCE 1990. WHEN COMPARED TO MEN OF THE SAME AGE AND RACE WHO DO NOTHAVE CANCER (CALLED RELATIVE SURVIVAL), THE 5-YEAR RELATIVE SURVIVAL RATE FOR MEN WHEN THE CANCER IS FOUND IN THE LOCAL AND REGIONAL STAGES IS NEARLY 100%. DURING THIS PAST YEAR THE NATIONAL PRESS PUBLICIZED A MEETING AMONG UROLOGISTS AT THE ANNUAL AMERICAN UROLOGY ASSOCIATION MEETING DEBATING THE NEED FORANNUAL PSA TESTING. RESULTS OF THIS PUBLICITY MAY RESULT IN FUTURE RECOMMENDATIONS TO BEGIN TESTING AT A LATER AGE AND NOT TEST ANNUALLY UNLESS THERE ARE RISKFACTORS. BASED ON ITS OWN INDUSTRY KNOWLEDGE, MANAGEMENT BELIEVES THIS COULD LEAD TO AN INCREASE IN PROSTATE CANCER, WHICH HAS NOT BEEN EXPERIENCED SINCE2000. 4Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Incidence of Lung CancerAn ESTIMATED 219,440 NEW CASES OF LUNG CANCER ARE EXPECTED IN 2009, ACCOUNTING FOR 15% OF ALL CANCER DIAGNOSES IN THE UNITED STATES. LUNG CANCER ACCOUNTSfor THE MOST CANCER RELATED DEATHS IN BOTH MEN AND WOMEN IN THE UNITED STATES. AN ESTIMATED 159,390 DEATHS, ACCOUNTING FOR ABOUT 28% OF ALL CANCER DEATHS,are EXPECTED TO OCCUR IN 2009. THIS EXCEEDS THE COMBINED NUMBER OF DEATHS FROM THE LEADING CAUSES OF CANCER (BREAST, PROSTATE, AND COLON CANCERS). IT alsoACCOUNTS FOR 6% OF ALL DEATHS FROM ANY SOURCE IN THE UNITED STATES. (CANCER MANAGEMENT: A MULTIDISCIPLINARY APPROACH, 11TH EDITION (2008). RICHARDPazdur, Lawrence R. Coia, William J. Hoskins, Lawrence D. Wagman; American Cancer Society, 2009.)Cigarette smoking is the most important risk factor for lung cancer. Risk increases with quantity and length of TIME A PERSON HAS SMOKED DURING HIS OR HER LIFETIME. OTHER RISK FACTORS INCLUDE OCCUPATIONAL OR ENVIRONMENTAL EXPOSURE TO SECONDHAND SMOKE, RADON, ASBESTOS (PARTICULARLY AMONG SMOKERS), CERTAIN METALS(chromium, cadmium, arsenic), some organic chemicals, radiation, air pollution, and a history of tuberculosis. Genetic susceptibility plays a contributing rolein the development of lung cancer, especially in those who develop the disease at a younger age. (American Cancer Society, 2009)The 1-YEAR RELATIVE SURVIVAL FOR LUNG CANCER INCREASED FROM 35% IN 1975-1979 TO 41% IN 2001-2004, LARGELY DUE TO IMPROVEMENTS IN SURGICAL TECHNIQUES ANDCOMBINED THERAPIES. HOWEVER, THE 5-YEAR SURVIVAL RATE FOR ALL STAGES COMBINED IS ONLY 15%. THE 5-YEAR SURVIVAL RATE IS 50% FOR CASES DETECTED WHEN THEdisease is still localized, but only 16% of lung cancers are diagnosed at this early stage. (American Cancer Society, 2009)Incidence of Head and Neck CancersIN 2008 IT WAS ESTIMATED THAT THERE WERE A TOTAL OF 47,560 HEAD AND NECK CANCER CASES, WHICH INCLUDES 22,900 CASES OF ORAL CAVITY CANCER, 12,250 CASES OFLARYNGEAL CANCER, AND 12,410 CASES OF PHARYNGEAL CANCER, DIAGNOSED IN THE UNITED STATES. (CANCER MANAGEMENT: A MULTIDISCIPLINARY APPROACH, 11TH EDITION(2008). Richard Pazdur, Lawrence R. Coia, William J. Hoskins, Lawrence D. Wagman; American Cancer Society, 2009.)Symptoms MAY INCLUDE A SORE IN THE THROAT OR MOUTH THAT BLEEDS EASILY AND DOES NOT HEAL, A LUMP OR THICKENING, EAR PAIN, A NECK MASS, COUGHING UP BLOOD,and a red or WHITE PATCH THAT PERSISTS. DIFFICULTIES IN CHEWING, SWALLOWING, OR MOVING THE TONGUE OR JAWS ARE OFTEN LATE SYMPTOMS. (AMERICAN CANCER SOCIETY,2009)KNOWN RISK FACTORS INCLUDE ALL FORMS OF SMOKED AND SMOKELESS TOBACCO PRODUCTS AND EXCESSIVE CONSUMPTION OF ALCOHOL. MANY STUDIES HAVE REPORTED ASYNERGISM BETWEEN SMOKING AND ALCOHOL USE, RESULTING IN MORE THAN A 30-FOLD INCREASED RISK IN INDIVIDUALS WHO BOTH SMOKE AND DRINK HEAVILY. HPVinfection is associated with certain types of oropharyngeal cancer. (American Cancer Society, 2009)Incidence of Ocular MelanomaThe AMERICAN CANCER SOCIETY ESTIMATES THAT 2,350 NEW CASES OF CANCERS OF THE EYE AND ORBIT (PRIMARILY MELANOMA) WILL BE DIAGNOSED IN 2009 AND ABOUT 230DEATHS FROM CANCER OF THE EYE WILL OCCUR IN 2009. EYE CANCER CAN OCCUR AT ANY AGE BUT TYPICALLY OCCURS IN PEOPLE OVER 50 YEARS OF AGE. (AMERICAN CANCERSociety, 2009) 5Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Eye CANCER MAY NOT PRESENT SYMPTOMS UNLESS IT GROWS IN CERTAIN PARTS OF THE EYE OR IS IN AN ADVANCED STAGE. SOME SIGNS AND SYMPTOMS MAY INCLUDE DECREASEDABILITY TO SEE, FLOATERS OR FLASHES OF LIGHT, VISUAL FIELD LOSS, A GLOWING DARK SPOT ON THE IRIS, CHANGE IN POSITION OF THE EYEBALL WITHIN ITS SOCKET, BULGING OF THEEYE, AND/OR CHANGE IN THE MOVEMENT OF THE EYE WITHIN THE SOCKET. KNOWN RISK FACTORS FOR OCULAR MELANOMA INCLUDE SUN EXPOSURE, CERTAIN OCCUPATIONS (e.g.WELDERS, FARMERS, FISHERMEN, AND CHEMICAL WORKERS), RACE/ETHNICITY/EYE COLOR, AND CERTAIN INHERITED CONDITIONS SUCH AS DYSPLASTIC NEVUS SYNDROME. (AmericanCancer Society, 2009)Prostate BrachytherapyThere is A LARGE POTENTIAL MARKET FOR THE COMPANY’S PRODUCTS. SEVERAL SIGNIFICANT CLINICAL AND MARKET FACTORS ARE CONTRIBUTING TO THE INCREASING POPULARITY OFthe BRACHYTHERAPY PROCEDURE. OVER 61,000 PROCEDURES WERE FORECASTED TO OCCUR IN THE U.S. IN 2007 (SOURCE: IDATA RESEARCH, INC., 2008). IN 1996 ONLY 4% ofPROSTATE CANCER CASES WERE TREATED WITH BRACHYTHERAPY, OR ABOUT 8,000 PROCEDURES. THE NUMBER OF BRACHYTHERAPY CASES HAS CONSISTENTLY INCREASED AND IN 2007approximately 61,000 brachytherapy procedures were performed to treat prostate cancer. (Source: iData Research Inc., 2008)MINIMALLY INVASIVE BRACHYTHERAPY HAS SIGNIFICANT ADVANTAGES OVER COMPETING TREATMENTS INCLUDING LOWER COST, EQUAL OR BETTER SURVIVAL DATA, FEWER SIDEeffects, faster RECOVERY TIME AND THE CONVENIENCE OF A SINGLE OUTPATIENT IMPLANT PROCEDURE THAT GENERALLY LASTS LESS THAN ONE HOUR (MERRICK, ET AL., TECHNIQUESin Urology, Vol. 7, 2001; Potters, et al., Journal of Urology, May 2005; Sharkey, et al., Current Urology Reports, 2002).Treatment Options and ProtocolIN ADDITION TO BRACHYTHERAPY, LOCALIZED PROSTATE CANCER CAN BE TREATED WITH PROSTATECTOMY SURGERY (RP FOR RADICAL PROSTATECTOMY), EXTERNAL BEAM RADIATIONTHERAPY (EBRT), INTENSITY MODULATED RADIATION THERAPY (IMRT), DUAL OR COMBINATION THERAPY, HIGH DOSE RATE BRACHYTHERAPY (HDR), CRYOSURGERY, HORMONETHERAPY, AND WATCHFUL WAITING. THE SUCCESS OF ANY TREATMENT IS MEASURED BY THE FEASIBILITY OF THE PROCEDURE FOR THE PATIENT, MORBIDITIES ASSOCIATED WITH theTREATMENT, OVERALL SURVIVAL, AND COST. WHEN THE CANCEROUS TISSUE IS NOT COMPLETELY ELIMINATED, THE CANCER TYPICALLY RETURNS TO THE PRIMARY SITE, OFTEN WITHmetastases to other areas of the body.Prostatectomy Surgery Options. HISTORICALLY THE MOST COMMON TREATMENT OPTION FOR PROSTATE CANCER, RADICAL PROSTATECTOMY IS THE REMOVAL OF THE PROSTATEGLAND AND SOME SURROUNDING TISSUE THROUGH AN INVASIVE SURGICAL PROCEDURE. RP IS PERFORMED UNDER GENERAL ANESTHESIA AND INVOLVES A HOSPITAL STAY OF THREEdays on average for patient observation and recovery. Possible side affects of RP include impotence and incontinence. According to a study published in theJournal of the American Medical Association IN JANUARY 2000, APPROXIMATELY 60% OF MEN WHO HAD A RP REPORTED ERECTILE DYSFUNCTION AS A RESULT OF SURGERY. THIS SAME STUDY STATED THAT APPROXIMATELY 40% OF THE PATIENTS OBSERVED REPORTED AT LEAST OCCASIONAL INCONTINENCE. NEW METHODS SUCH AS LAPAROSCOPIC ANDROBOTIC PROSTATECTOMY SURGERIES ARE CURRENTLY BEING USED MORE FREQUENTLY IN ORDER TO MINIMIZE THE NERVE DAMAGE THAT LEADS TO IMPOTENCE AND INCONTINENCE,but these techniques REQUIRE A HIGH DEGREE OF SURGICAL SKILL. RP AND LAPAROSCOPIC PROSTATECTOMY ARE PROJECTED TO DECREASE APPROXIMATELY 31% IN THE U.S. FROMthe 2004 high of 66,567 to 20,838 procedures in 2014. However, robotic surgeries are PROJECTED TO MORE THAN REPLACE THE DECREASE IN THE RP AND LAPAROSCOPICprocedures (Source: iData Research Inc., 2008).Primary External Beam Radiation Therapy. EBRT INVOLVES DIRECTING A BEAM OF RADIATION FROM OUTSIDE THE BODY AT THE PROSTATE GLAND TO DESTROY CANCEROUSTISSUE. EBRT TREATMENTS ARE RECEIVED ON AN OUTPATIENT BASIS FIVE DAYS PER WEEK USUALLY OVER A PERIOD OF EIGHT OR NINE WEEKS. SOME STUDIES HAVE SHOWN,HOWEVER, THAT THE TEN-YEAR DISEASE FREE SURVIVAL RATES WITH TREATMENT THROUGH EBRT ARE LESS THAN THE DISEASE FREE SURVIVAL RATES AFTER RP OR BRACHYTHERAPYTREATMENT. SIDE EFFECTS OF EBRT CAN INCLUDE DIARRHEA, RECTAL LEAKAGE, IRRITATED INTESTINES, FREQUENT URINATION, BURNING WHILE URINATING, AND BLOOD IN THE URINE. Also THE INCIDENCE OF INCONTINENCE AND IMPOTENCE FIVE TO SIX YEARS AFTER EBRT IS COMPARABLE TO THAT FOR SURGERY. EBRT PROCEDURES ARE PROJECTED TO INCREASEslightly from 22,000 procedures in 2006 to 24,900 in 2012 (Source: Millennium Research Group, 2008). 6Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Intensity Modulated Radiation Therapy. IMRT IS CONSIDERED A MORE ADVANCED FORM OF EBRT IN WHICH SOPHISTICATED COMPUTER CONTROL IS USED TO AIM THEBEAM AT THE PROSTATE FROM MULTIPLE DIFFERENT ANGLES AND TO VARY THE INTENSITY OF THE BEAM. THUS, DAMAGE TO NORMAL TISSUE AND CRITICAL STRUCTURES IS MINIMIZEDBY DISTRIBUTING THE UNWANTED RADIATION OVER A LARGER GEOMETRIC AREA. THIS COURSE OF TREATMENT IS SIMILAR TO EBRT AND REQUIRES DAILY DOSES OVER A PERIOD OFSEVEN TO EIGHT WEEKS TO DELIVER THE TOTAL DOSE OF RADIATION PRESCRIBED TO KILL THE TUMOR. BECAUSE IMRT IS A NEW TREATMENT, LESS CLINICAL DATA REGARDINGtreatment EFFECTIVENESS AND THE INCIDENCE OF SIDE EFFECTS IS AVAILABLE. ONE ADVANTAGE OF IMRT, AND TO SOME EXTENT EBRT, IS THE ABILITY TO TREAT CANCERS THATHAVE BEGUN TO SPREAD FROM THE TUMOR SITE. AN INCREASINGLY POPULAR THERAPY FOR PATIENTS WITH MORE ADVANCED PROSTATE CANCER IS A COMBINATION OF IMRT WITHSEED BRACHYTHERAPY, KNOWN AS COMBINATION OR DUAL THERAPY. IMRT IN THE U.S. (INCLUDING DUAL THERAPY) IS PROJECTED TO GROW 9% PER YEAR FROM 31,500PROCEDURES IN 2007 TO 48,500 PROCEDURES IN 2012 (SOURCE: MILLENNIUM RESEARCH GROUP, 2008). IMRT IS GENERALLY MORE EXPENSIVE THAN OTHER COMMONtreatment modalities.Dual or Combination Therapy. DUAL THERAPY IS THE COMBINATION OF IMRT OR 3-DIMENSIONAL CONFORMAL EXTERNAL BEAM RADIATION AND SEED BRACHYTHERAPY TOTREAT EXTRA-PROSTATIC EXTENSIONS OR HIGH RISK PROSTATE CANCERS THAT HAVE GROWN OUTSIDE THE PROSTATE. COMBINATION THERAPY TREATS HIGH RISK PATIENTS WITH A FULLCOURSE OF IMRT OR EBRT OVER A PERIOD OF SEVERAL WEEKS. WHEN THIS INITIAL TREATMENT IS COMPLETED, THE PATIENT MUST THEN WAIT FOR SEVERAL MORE WEEKS TOmonths to have the prostate seed implant.WITH THE ARRIVAL OF PROXCELAN CS-131, WITH ITS SHORT HALF LIFE, PATIENTS MAY NOW COMPLETE THEIR COURSE OF TREATMENT SOONER AND HAVE SHORTER DURATION OF side-effects. Management estimates that at least 30% of all prostate implants are now dual therapy cases.High Dose Rate Temporary Brachytherapy. HDR TEMPORARY BRACHYTHERAPY INVOLVES PLACING VERY TINY PLASTIC CATHETERS INTO THE PROSTATE GLAND, AND THENGIVING A SERIES OF RADIATION TREATMENTS THROUGH THESE CATHETERS. THE CATHETERS ARE THEN REMOVED, AND NO RADIOACTIVE MATERIAL IS LEFT IN THE PROSTATE GLAND. Acomputer-controlled machine inserts a single highly radioactive iridium seed into the catheters one by one. This procedure is typically repeated at LEAST THREETIMES WHILE THE PATIENT IS HOSPITALIZED FOR AT LEAST 24 HOURS. HDR IS PROJECTED TO GROW APPROXIMATELY 1.3% PER YEAR FROM 26,200 PROCEDURES IN 2007 THROUGH2012 (Source: Millennium Research Group, 2008).Cryosurgery. CRYOSURGERY INVOLVES PLACING COLD METAL PROBES INTO THE PROSTATE AND FREEZING THE TISSUE IN ORDER TO DESTROY THE TUMOR. CRYOSURGERY PATIENTSTYPICALLY STAY IN THE HOSPITAL FOR A DAY OR TWO AND HAVE HAD HIGHER RATES OF IMPOTENCE AND OTHER SIDE EFFECTS THAN THOSE WHO HAVE USED SEED IMPLANTBRACHYTHERAPY. MARKET RESEARCH FIRMS PROJECT THAT CRYOSURGERY WILL GROW STEADILY THROUGH 2012. TO DATE THE MARKET HAS REMAINED ALMOST FLAT (Source:Millennium Research Group, 2008).Additional Treatments. ADDITIONAL TREATMENTS INCLUDE HORMONE THERAPY AND CHEMOTHERAPY. HORMONE THERAPY IS GENERALLY USED TO SHRINK THE TUMOR OR MAKEit grow more SLOWLY BUT WILL NOT ERADICATE THE CANCER. LIKEWISE, CHEMOTHERAPY WILL NOT ERADICATE THE CANCER BUT CAN SLOW THE TUMOR GROWTH. GENERALLY, THESETREATMENT ALTERNATIVES ARE USED BY DOCTORS TO EXTEND PATIENTS’ LIVES ONCE THE CANCER HAS REACHED AN ADVANCED STAGE OR IN CONJUNCTION WITH OTHER TREATMENTMETHODS. HORMONE THERAPY CAN CAUSE IMPOTENCE, DECREASED LIBIDO, AND BREAST ENLARGEMENT. MOST RECENTLY, HORMONE THERAPY HAS BEEN LINKED TO AN increasedRISK OF CARDIOVASCULAR DISEASE IN MEN WITH CERTAIN PRE-EXISTING CONDITIONS SUCH AS HEART DISEASE OR DIABETES. CHEMOTHERAPY CAN CAUSE ANEMIA, NAUSEA, HAIRloss, and fatigue.Watchful Waiting. Watchful waiting is not a treatment but might be suggested by some HEALTHCARE PROVIDERS DEPENDING ON THE AGE AND LIFE EXPECTANCY OF THEPATIENT. WATCHFUL WAITING MAY BE RECOMMENDED IF THE CANCER IS DIAGNOSED AS LOCALIZED AND SLOW GROWING, AND THE PATIENT IS ASYMPTOMATIC. GENERALLY, thisAPPROACH IS CHOSEN WHEN PATIENTS ARE TRYING TO AVOID THE SIDE AFFECTS ASSOCIATED WITH OTHER TREATMENTS OR WHEN THEY ARE NOT CANDIDATES FOR CURRENT therapiesDUE TO OTHER HEALTH ISSUES. HEALTHCARE PROVIDERS WILL CAREFULLY MONITOR THE PATIENT’S PSA LEVELS AND OTHER SYMPTOMS OF PROSTATE CANCER AND MAY DECIDE ONactive treatments at a later date. 7Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Comparing Cs-131 to I-125 and Pd-103 Clinical ResultsLong-term SURVIVAL DATA IS NOW AVAILABLE FOR BRACHYTHERAPY WITH I-125 AND PD-103, WHICH SUPPORT THE EFFICACY OF BRACHYTHERAPY. CLINICAL DATA INDICATE THATBRACHYTHERAPY OFFERS SUCCESS RATES FOR EARLY-STAGE PROSTATE CANCER TREATMENT THAT ARE EQUAL TO OR BETTER THAN THOSE OF RP OR EBRT. WHILE CLINICAL STUDIES OFBRACHYTHERAPY TO DATE HAVE FOCUSED PRIMARILY ON RESULTS FROM BRACHYTHERAPY WITH I-125 AND PD-103, MANAGEMENT BELIEVES THAT THESE DATA ARE ALSO RELEVANT FORBRACHYTHERAPY WITH CS-131. IN FACT, IT APPEARS THAT CS-131 OFFERS IMPROVED CLINICAL OUTCOMES OVER I-125 AND PD-103, GIVEN ITS SHORTER HALF-LIFE AND HIGHERenergy.Improved patient outcomes. A NUMBER OF PUBLISHED STUDIES DESCRIBING THE USE OF I-125 AND PD-103 BRACHYTHERAPY IN THE TREATMENT OF EARLY-STAGE PROSTATECANCER HAVE BEEN VERY POSITIVE. A RECENT STUDY OF 2,963 PROSTATE CANCER PATIENTS WHO UNDERWENT BRACHYTHERAPY AS THEIR SOLE THERAPEUTIC MODALITY AT 11INSTITUTIONS ACROSS THE U.S. CONCLUDED THAT LOW-RISK PATIENTS (WHO MAKE UP THE PREPONDERANCE OF LOCALIZED CASES) WHO UNDERWENT ADEQUATE IMPLANTSEXPERIENCED RATES OF PSA RELAPSE SURVIVAL OF GREATER THAN 90% BETWEEN EIGHT AND TEN YEARS (ZELEFSKY MJ, KUBAN DA, ET AL, “MULTI-INSTITUTIONAL ANALYSIS OFLONG-TERM OUTCOME FOR STAGES T1-T2 PROSTATE CANCER TREATED WITH PERMANENT SEED IMPLANTATION” INTERNATIONAL JOURNAL OF RADIATION ONCOLOGY BIOLOGYPhysics, Volume 67, Issue 2, 2007, 327-333).OTHER RECENT STUDIES HAVE DEMONSTRATED SIMILAR, DURABLY HIGH RATES OF CONTROL FOLLOWING BRACHYTHERAPY FOR LOCALIZED PROSTATE CANCER OUT TO 15 YEARS post-TREATMENT (SYLVESTER J, ET AL. “15-YEAR BIOCHEMICAL RELAPSE FREE SURVIVAL IN CLINICAL STAGE T1-T3 PROSTATE CANCER FOLLOWING COMBINED EXTERNAL BEAMRADIOTHERAPY AND BRACHYTHERAPY; SEATTLE EXPERIENCE”, INTERNATIONAL JOURNAL OF RADIATION ONCOLOGY BIOLOGY PHYSICS, VOL. 67, ISSUE 1, 2007, 57-64.). THEcumulative effect of these series has been the conclusion by leaders in the field that brachytherapy offers a disease control rate as high as surgery, though withA LESSER SIDE-EFFECT PROFILE THAN SURGERY (CIEZKI JP. “PROSTATE BRACHYTHERAPY FOR LOCALIZED PROSTATE CANCER” CURRENT TREATMENT OPTIONS IN ONCOLOGY, VOLUME 6,2005, 389-393).Reduced Incidence of Side Effects. SEXUAL IMPOTENCE AND URINARY INCONTINENCE ARE TWO MAJOR CONCERNS MEN FACE WHEN CHOOSING AMONG VARIOUS FORMS OFtreatment for prostate CANCER. STUDIES HAVE SHOWN THAT BRACHYTHERAPY WITH EXISTING SOURCES RESULTS IN LOWER RATES OF IMPOTENCE AND INCONTINENCE THAN SURGERY(Frank, BURON). COMBINED WITH THE HIGH DISEASE CONTROL RATES DESCRIBED IN MANY STUDIES, THESE FINDINGS HAVE DRIVEN THE ADOPTION OF BRACHYTHERAPY AS A front-line therapy for localized prostate cancer.It has been noted, however, that a significant proportion of patients who undergo I-125 OR PD-103 BRACHYTHERAPY EXPERIENCE ACUTE URINARY IRRITATIVE SYMPTOMSFOLLOWING TREATMENT – IN FACT MORE SO THAN WITH SURGERY OR EXTERNAL BEAM RADIATION THERAPY (FRANK SJ, PISTERS LL, ET AL, “AN ASSESSMENT OF QUALITY OF LIFEfollowing RADICAL PROSTATECTOMY, HIGH DOSE EXTERNAL BEAM RADIATION THERAPY, AND BRACHYTHERAPY IODINE IMPLANTATION AS MONOTHERAPIES FOR LOCALIZED PROSTATECANCER” JOURNAL OF UROLOGY, VOLUME 177, 2007, 2151-2156). IT HAS BEEN POSTULATED THAT CS-131, WITH THE SHORTEST AVAILABLE HALF-LIFE FOR A LOW-DOSE rateTHERAPY ISOTOPE, WILL RESULT IN A QUICKER RESOLUTION OF THESE IRRITATIVE SYMPTOMS BASED ON THE SHORTER TIME INTERVAL OVER WHICH NORMAL TISSUE RECEIVES radiationfrom the implanted sources.Preliminary DATA DRAWN FROM SEVERAL CLINICAL STUDIES SUGGEST THAT PATIENTS TREATED WITH CS-131 DO IN FACT EXPERIENCE A FASTER RESOLUTION OF THESE SIDE EFFECTS INCOMPARISON TO SIMILAR STUDIES PUBLISHED FOR OTHER ISOTOPES (DEFOE SG, ET AL, “IS THERE A DECREASED DURATION OF ACUTE URINARY AND BOWEL SYMPTOMS AFTER PROSTATEBRACHYTHERAPY WITH CESIUM 131 ISOTOPE?", INTERNATIONAL JOURNAL OF RADIATION ONCOLOGY BIOLOGY PHYSICS, VOLUME 72 (SUPPLEMENT 1), S317; JONES A, ET AL,"IPSS TRENDS FOR CS-131 PERMANENT PROSTATE BRACHYTHERAPY" BRACHYTHERAPY, VOLUME 7, ISSUE 2, 194; PLATTA CS, ET AL, “EARLY OUTCOMES OF PROSTATE SEEDImplants with 131Cs: Toxicity and Initial PSA Dynamics from a Single Institution" International Journal of Radiation Oncology Biology Physics, Volume 72(Supplement 1), 2008, S323-4).A Cs-131 monotherapy trial for the treatment of prostate cancer was fully enrolled in FEBRUARY 2007. THE TRIAL WAS A 100 PATIENT MULTI-INSTITUTIONAL STUDY THATSOUGHT TO (1) DOCUMENT THE DOSIMETRIC CHARACTERISTICS OF CS-131, (2) TO SUMMARIZE THE SIDE EFFECT PROFILE OF CS-131 TREATMENT, AND (3) TO TRACK biochemical(PSA) results in patients following Cs-131 therapy. 8Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The INVESTIGATORS RESPONSIBLE FOR CONDUCTING THE STUDY HAVE CONCLUDED BASED ON THE RESULTS OF THE MONOTHERAPY TRIAL THAT CS-131 IS A VIABLE ALTERNATIVE AS ANISOTOPE FOR PERMANENT SEED PROSTATE BRACHYTHERAPY (PRESTIDGE BR, BICE WS, “CLINICAL OUTCOMES OF A PHASE II, MULTI-INSTITUTIONAL CESIUM-131 PERMANENTprostate brachytherapy trial”. Brachytherapy, Volume 6, Issue 2, April-June 2007, Page 78). Some of the significant and specific findings were as follows: §PATIENT REPORTED IRRITATIVE URINARY SYMPTOMS (IPSS SCORES) WERE MILD TO MODERATE WITH RELATIVELY RAPID RESOLUTION WITHIN 4-6 MONTHS. THE FIGUREbelow DEPICTS THE SYMPTOM SCORES IN THE CS-131 STUDY AS COMPARED TO PUBLISHED REPORTS OF PATIENTS WHO UNDERWENT I-125 BRACHYTHERAPY. ESPECIALLYNOTABLE IS THE STEEP DROP IN THE CS-131 GROUP SCORES (PURPLE LINE) AS OPPOSED TO THE MORE GRADUAL DROP IN THE I-125 GROUP SCORES (GREEN AND BLUElines). 9Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. §PROSTATE SPECIFIC ANTIGEN, OR PSA, RESPONSE OVER 36 MONTHS HAS BEEN VERY ENCOURAGING TO DATE WITH SIMILAR TUMOR CONTROL RATES TO THAT OF I-125. (PRESTIDGE BR, BICE WS, “CLINICAL OUTCOMES OF A PHASE II, MULTI-INSTITUTIONAL CESIUM-131 PERMANENT PROSTATE BRACHYTHERAPY TRIAL”.Brachytherapy, Volume 6, Issue 2, April-June 2007, PAGE 78). THE GRAPH BELOW DEPICTS THE MEDIAN PSAS TO DATE FROM THE 100 PATIENT CS-131BRACHYTHERAPY SERIES AS COMPARED TO PREVIOUSLY PUBLISHED I-125 SERIES. THERE HAVE BEEN NO PSA FAILURES IN THE CS-131 MONOTHERAPY STUDY TO DATE. (A PSA failure is a rise in the blood level of PSA in prostate cancer patients after treatment with radiation or surgery.) §Gland COVERAGE WAS EXCELLENT AND THE DOSE DELIVERED TO CRITICAL STRUCTURES OUTSIDE THE PROSTATE WAS WELL WITHIN ACCEPTABLE LIMITS. (BICE WS, PrestidgeBR, “CESIUM-131 PERMANENT PROSTATE BRACHYTHERAPY: THE DOSIMETRIC ANALYSIS OF A MULTI-INSTITUTIONAL PHASE II TRIAL”. BRACHYTHERAPY 2007(6); 88-89.).Several OTHER SERIES HAVE BEEN REPORTED THAT HAVE COMPARED DOSIMETRIC PARAMETERS (INDICATORS OF DOSE) AMONG CS-131, PD-103, AND I-125. THESE COMPARATIVESTUDIES HAVE SHOWN A CLEAR ADVANTAGE TO CESIUM-131 FROM A DOSIMETRIC POINT-OF-VIEW, IN TERMS OF SUCCESSFUL GLAND COVERAGE OBTAINED (TYPICALLY MEASURED BYD90) WHILE KEEPING UNNECESSARY GLAND OVER-DOSING (TYPICALLY MEASURED BY V150 OR V200) TO A MINIMUM (MUSMACHER JS, ET AL, "DOSIMETRIC COMPARISON OFCESIUM-131 AND PALLADIUM-103 FOR PERMANENT PROSTATE BRACHYTHERAPY" INTERNATIONAL JOURNAL OF RADIATION ONCOLOGY BIOLOGY PHYSICS, VOLUME 69,(SUPPLEMENT 3), 2007, S730-1; YAPARPALVI R, ET AL, "IS CS-131 OR I-125 OR PD-103 THE IDEAL ISOTOPE FOR PROSTATE BOOST BRACHYTHERAPY? A DOSIMETRIC VIEWPOINT." INTERNATIONAL JOURNAL OF RADIATION ONCOLOGY BIOLOGY PHYSICS, VOLUME 69 (SUPPLEMENT 3), 2007, S677-8; SUTLIEF S AND WALLNER K, "CS-131 PROSTATEBRACHYTHERAPY AND TREATMENT PLAN PARAMETERS." MEDICAL PHYSICS, VOLUME 34, 2007, 2431; KURTZMAN S, "DOSIMETRIC EVALUATION OF PERMANENT PROSTATEBrachytherapy Using Cs-131 Sources" International Journal of Radiation Oncology Biology Physics, Volume 66 (Supplement 3), S395). THE MONOTHERAPY CS-131 TRIAL WILL CONTINUE TO FOLLOW PATIENTS WITH ANNUAL UPDATES ON SYMPTOMS AND PATIENT LONG-TERM SURVIVAL DATA. THE COMPANYanticipates maintaining this ongoing monitoring over several years to prove the long-term effectiveness of Cs-131.The PROSPECTIVE RANDOMIZED MONOTHERAPY TRIAL HEADED BY DR. BRIAN MORAN OF THE CHICAGO PROSTATE CANCER CENTER DIRECTLY COMPARED CS-131 TO I-125 PSAresponse AND TREATMENT RELATED MORBIDITIES FOLLOWING BRACHYTHERAPY FOR LOCALIZED CARCINOMA OF THE PROSTATE IN LOW TO INTERMEDIATE RISK PATIENTS. DR. MORANCONCLUDED THAT PROSTATE BRACHYTHERAPY WITH CS-131 IS EFFECTIVE AND WELL-TOLERATED; BOTH PSA RESPONSE AND THE ACUTE MORBIDITY PROFILE WERE VERYencouraging. Dr. Moran will continue to track these patients in order to collect long-term outcomes. 10Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. RECENTLY ACCEPTED FOR PUBLICATION WAS THE CS-131 ADVISORY GROUP’S (CAG) ARTICLE ENTITLED “RECOMMENDATIONS FOR PERMANENT PROSTATE BRACHYTHERAPY WITH131CS: A CONSENSUS REPORT FROM THE CESIUM ADVISORY GROUP”. THE OBJECTIVE OF THE ARTICLE WAS TO PROVIDE CONSENSUS RECOMMENDATIONS FOR CS-131 PROSTATEBRACHYTHERAPY BASED ON EXPERIENCE TO DATE FOR PHYSICIANS STILL UNFAMILIAR WITH CS-131. THE RECOMMENDATIONS ARE BASED ON THREE CLINICAL TRIALS, ONE OF WHICHHAS COMPLETED ACCRUAL AND HAS BEEN PUBLISHED IN THE PEER REVIEWED LITERATURE, AND COMBINED CAG EXPERIENCE OF MORE THAN 1,200 CS-131 IMPLANTS. THERECOMMENDATIONS FROM THE GROUP ARE DESIGNED TO AID PRACTITIONERS IN THE SAFE AND EFFECTIVE DELIVERY OF CS-131 PROSTATE BRACHYTHERAPY. THE CONSENSUS PAPERwas published in Brachytherapy in the fourth quarter of calendar year 2008. The CAG is sponsored by the Company.THE COMPANY HAS ALSO COMMISSIONED A DUAL THERAPY PROTOCOL. THIS MULTI-INSTITUTIONAL TRIAL OBSERVES THE DOSIMETRIC CHARACTERISTICS OF CS-131 AND healthRELATED QUALITY OF LIFE (HRQOL) RESULTS FOLLOWING COMBINED CS-131 TRANSPERINEAL PERMANENT PROSTATE BRACHYTHERAPY AND EXTERNAL BEAM RADIOTHERAPY INPATIENTS WITH INTERMEDIATE TO HIGH RISK PROSTATE CANCER. THIS PROTOCOL IS BEING CONDUCTED TO CONFIRM CLINICALLY WHAT RADIOBIOLOGICAL DATA SUGGESTS regardingTHIS TREATMENT MODALITY. THE QUANTIFIED DOSIMETRIC VARIABLES COLLECTED WILL BE CORRELATED TO THE REPORTED HRQOL DATA AND ULTIMATELY COMPARED TO EXISTINGDATA IN THE LITERATURE FOR SIMILAR INVESTIGATIONS USING I-125 AND PD-103. PATIENT ENROLLMENT FOR THIS STUDY BEGAN IN APRIL 2007 AND 65 PATIENTS HAD BEENenrolled through June 30, 2009.In ADDITION TO ESTABLISHING THE DOSIMETRIC AND QUALITY OF LIFE IMPACT OF PROXCELAN CESIUM-131 BRACHYTHERAPY SEEDS IN DIFFERENT TREATMENT MODALITIES, ALL TRIALShave been designed to collect ongoing PSA results for the purposes of establishing long-term survival rates using Cs-131 seed implant brachytherapy.Lung Cancer Treatment OptionsLung CANCER HAS HISTORICALLY BEEN TREATED BY SURGERY AND CHEMOTHERAPY BUT IN RECENT YEARS VARIOUS FORMS OF RADIATION HAVE ALSO BEEN USED. SURGERY GENERALLYINVOLVES REMOVING A PORTION OF THE LUNG OR THE ENTIRE LUNG. CHEMOTHERAPY MAY BE USED EITHER AS A PRIMARY TREATMENT OR A SECONDARY TREATMENT DEPENDING ONTHE TYPE AND STAGE OF THE LUNG CANCER. EXTERNAL BEAM RADIATION THERAPY IS SOMETIMES USED AS THE PRIMARY TREATMENT IF THE TUMOR CANNOT BE REMOVED BY surgerydue to the tumor’s location or the patient’s health.Brachytherapy IS NOW BEING USED IN CONJUNCTION WITH SURGERY TO KILL SMALL AREAS OF CANCER THAT MIGHT BE MISSED DURING SURGERY. THE COMPANY BELIEVES THATCS-131, WITH ITS SHORTER HALF-LIFE AND HIGH ENERGY, IS BETTER SUITED FOR TREATING LUNG CANCER THAN EITHER I-125 OR PD-103. THE BIOABSORBABLE MESH USED IN THISprocedure GENERALLY DISSOLVES AFTER ABOUT 45 DAYS. CS-131 DELIVERS 90% OF ITS DOSE IN 33 DAYS AND IS THEREFORE WELL-SUITED TO USE WITH THE BIOABSORBABLE MESHin this procedure.Head and Neck Cancer Treatment OptionsMOST HEAD AND NECK CANCERS ARE TREATED WITH SOME COMBINATION OF SURGERY, CHEMOTHERAPY, AND RADIATION THERAPY. SURGERY IS THE MOST COMMON OPTION ANDTAKES MANY DIFFERENT FORMS IN AN EFFORT TO REMOVE ANY CANCEROUS TISSUE. CHEMOTHERAPY IS OFTEN USED IN CONJUNCTION WITH SURGERY OR RADIATION THERAPYDEPENDING ON THE TYPE AND STAGE OF THE CANCER. EXTERNAL BEAM RADIATION THERAPY AND BRACHYTHERAPY HAVE BEEN USED TOGETHER OR IN COMBINATION WITH SURGERYor chemotherapy.Ocular Melanoma Treatment OptionsIN ADDITION TO BRACHYTHERAPY TO TREAT OCULAR MELANOMA, OTHER TREATMENT OPTIONS INCLUDE SURGERY, EXTERNAL BEAM RADIATION, AND LASER THERAPY. SURGERY COULDINCLUDE REMOVAL OF PART OF THE IRIS, A PORTION OF THE OUTER EYEBALL, OR THE REMOVAL OF THE ENTIRE EYEBALL. EXTERNAL BEAM RADIATION (INCLUDING PROTON beamRADIATION THERAPY AND STEREOTACTIC RADIOSURGERY) INVOLVES SENDING RADIATION FROM A SOURCE OUTSIDE THE BODY THAT IS FOCUSED ON THE CANCER BUT HAS NOT BEEN ASWIDELY USED TO DATE FOR OCULAR MELANOMA. LASER THERAPY BURNS THE CANCEROUS TISSUE BY USING A HIGHLY FOCUSED, HIGH-ENERGY LIGHT BEAM AND IS EFFECTIVE FORsmall melanomas near the optic nerve as it causes less nerve damage. (American Cancer Society, 2009) 11Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Brachytherapy USING CS-131, I-125, OR PD-103 IS DONE BY PLACING THE SEEDS IN A PLAQUE (SHAPED LIKE A SMALL CAP) THAT IS ATTACHED TO THE EYEBALL WITH MINUTESTITCHES FOR 2 TO 5 DAYS. THE PATIENT GENERALLY STAYS IN THE HOSPITAL UNTIL THE PLAQUE IS REMOVED FROM THE EYE. BRACHYTHERAPY CURES APPROXIMATELY 9 OUT OF 10small tumors and can preserve the vision of some patients. (American Cancer Society, 2009)Our StrategyThe key elements of IsoRay’s strategy for fiscal year 2010 include: §Continue to introduce the Proxcelan Cs-131 brachytherapy seed into the U.S. market. UTILIZING OUR DIRECT SALES ORGANIZATION, ISORAY INTENDS TOCONTINUE EXPANDING THE USE OF PROXCELAN CS-131 SEEDS IN BRACHYTHERAPY PROCEDURES FOR PROSTATE CANCER BY INCREASING THE NUMBER OF TREATMENTcenters offering CS-131 AND INCREASING THE NUMBER OF PATIENTS TREATED AT EACH CENTER USING CS-131. ISORAY HOPES TO CAPTURE MUCH OF THE INCREMENTALmarket growth in seed implant brachytherapy and take market share from existing competitors. §Work with our distribution partner, BrachySciences, to increase prostate market penetration. WITH BRACHYSCIENCE’S ADDITIONAL SALES PERSONNEL,ISORAY EXPECTS TO REACH AN INCREASING NUMBER OF CENTERS AND PHYSICIANS ACROSS THE COUNTRY THAT HAVE NOT HAD ACCESS TO A SALES REPRESENTATIVE IN THEIRarea. IsoRay RECEIVED ITS FIRST ORDER FROM BRACHYSCIENCES IN AUGUST 2009. THE INCREASES FROM THIS DISTRIBUTION CHANNEL HAVE BEEN SLOW DUE TO MANYOF THE SAME ISSUES THAT ISORAY’S DIRECT SALES FORCE ENCOUNTERS (E.G. FACILITY LICENSE AMENDMENTS). HOWEVER, MANAGEMENT BELIEVES THAT DISTRIBUTIONsales will become an important sales channel in the future. §Increase utilization of Cs-131 in treatment of other solid tumor applications such as head and neck and lung cancers. ISORAY MEDICAL HAS RECEIVEDCLEARANCE FROM THE FDA FOR ITS PREMARKET NOTIFICATION, (510(K)) FOR PROXCELAN™ BRACHYTHERAPY SEEDS THAT ARE PRELOADED INTO BIOABSORBABLE BRAIDEDSTRANDS. THIS ORDER CLEARS THE PRODUCT FOR COMMERCIAL DISTRIBUTION FOR TREATMENT OF LUNG AND HEAD AND NECK TUMORS AS WELL AS TUMORS IN OTHER ORGANS. IsoRay has RECEIVED INTEREST FROM SOME PHYSICIANS WHO WISH TO USE CS-131 FOR OTHER TUMOR SITES INCLUDING LUNG, AND HEAD AND NECK, DUE TO THE SHORTHALF LIFE THAT MAY POTENTIALLY HELP REDUCE THE MIGRATION OF THE RADIOACTIVITY TO THE OTHER PARTS OF THE BODY BEFORE THE TREATMENT DOSE HAS BEENDELIVERED TO THE TUMOR. WHILE CS-131 BRACHYTHERAPY SEEDS THEMSELVES HAVE BEEN CLEARED FOR THESE APPLICATIONS SINCE 2003, THIS CURRENT 510(K)allows CESIUM-131 SEEDS TO BE DELIVERED IN A CONVENIENT AND STERILE FORMAT THAT CAN BE IMPLANTED WITHOUT ADDITIONAL SEED LOADING BY THE FACILITY. THE 510(K) ALSO PERMITS THE APPLICATION OF THE BRAIDED STRANDS ONTO A BIOABSORBABLE MESH MATRIX TO FURTHER FACILITATE THE IMPLANT PROCEDURE. THEMATERIAL (MESH) USED TO HOLD THE FLEXIBLE SUTURE MATERIAL IN PLACE DISSOLVES WITHIN 45 DAYS. WITH THE TREATMENT DOSE FROM CS-131 BEING DELIVERED IN33 days, many physicians feel confident THAT THE TREATMENT DOSE NEEDED TO TREAT THE TUMOR WILL BE DELIVERED PRIOR TO THE MESH DISSOLVING. ISORAY WILLCONTINUE TO EXPLORE JOINT VENTURES WITH OTHER COMPANIES TO DEVELOP THE APPROPRIATE TECHNOLOGIES AND THERAPEUTIC DELIVERY SYSTEMS FOR TREATMENT OFother solid tumors such as breast, liver, pancreas, and brain cancers. §Continue to develop an enriched barium manufacturing process. WORKING WITH LEADING SCIENTISTS, ISORAY IS WORKING TO DESIGN AND CREATE APROPRIETARY PROCESS FOR MANUFACTURING ENRICHED BARIUM, A KEY SOURCE MATERIAL FOR CS-131. THIS WILL ENSURE ADEQUATE FUTURE SUPPLY OF CS-131 ANDgreater efficiencies in producing the isotope. §Continue to develop data on Cs-131 for treatment of ocular melanoma. THE COMPANY’S FIRST SALE FOR OCULAR MELANOMA OCCURRED IN LATE 2007 ANDperiodic sales HAVE OCCURRED SINCE THEN. ISORAY IS SPONSORING A PROSPECTIVE REVIEW OF THE PATIENTS TREATED WITH CS-131 TO DATE. THIS CLINICAL DATA ISEXPECTED TO BE AVAILABLE FOR THE AMERICAN BRACHYTHERAPY SOCIETY ANNUAL MEETING IN THE SPRING OF 2010. ALTHOUGH THE OCULAR MELANOMA MARKET isnot a large one, this application of Cs-131 shows potential viability for other solid tumors. 12Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. §Support clinical research and sustained product development. THE COMPANY PLANS TO STRUCTURE AND SUPPORT CLINICAL STUDIES ON THE THERAPEUTICBENEFITS OF CS-131 FOR THE TREATMENT OF SOLID TUMORS AND OTHER PATIENT BENEFITS. WE ARE AND WILL CONTINUE TO SUPPORT CLINICAL STUDIES WITH SEVERALleading radiation ONCOLOGISTS TO CLINICALLY DOCUMENT PATIENT OUTCOMES, PROVIDE SUPPORT FOR OUR PRODUCT CLAIMS, AND COMPARE THE PERFORMANCE OF OURSEEDS TO COMPETING SEEDS. ISORAY PLANS TO SUSTAIN LONG-TERM GROWTH BY IMPLEMENTING RESEARCH AND DEVELOPMENT PROGRAMS WITH LEADING MEDICALinstitutions in the U.S. and other countries to identify and develop other applications for IsoRay’s core radioisotope technology. ·Introduce Proxcelan Cesium-131 brachytherapy seeds to the Canadian and Russian markets. Health Canada’s Therapeutic Products Directorate hasAPPROVED ISORAY’S CLASS 3 MEDICAL DEVICE LICENSE APPLICATIONS FOR MODEL CS-1 PROXCELAN ™ (CESIUM-131) BRACHYTHERAPY SEEDS AND THEPROXCELAN™ STERILE IMPLANT DEVICES CONTAINING MODEL CS-1 SEEDS. THIS ALLOWS ISORAY TO MARKET ITS BRACHYTHERAPY SEEDS AND RELATED PRELOADEDBRACHYTHERAPY SEEDS THROUGHOUT CANADA. ISORAY WILL CONDUCT A SEARCH TO LOOK FOR A VIABLE DISTRIBUTION PARTNER IN CANADA. APPROVAL TO MARKETCESIUM-131 SEEDS IN RUSSIA WAS ALSO OBTAINED IN 2009; HOWEVER, THE ECONOMIC DOWNTURN IN RUSSIA HAS SLOWED THE COMPANY’S MARKET PENETRATIONEFFORTS. THE COMPANY IS NOW FOCUSING ON THE CANADIAN AND RUSSIAN MARKETS AND IS NO LONGER PURSUING SALES IN THE EUROPEAN UNION (EU). MANAGEMENT NO LONGER BELIEVES A STRATEGIC ALLIANCE WITH IBT, SA, A BELGIAN COMPANY, WILL BE CONSUMMATED NOR WILL MANAGEMENT LEVERAGE IBT’Sdistribution channels in the EU. §Maintain ISO 13485 certification. IN AUGUST 2008, THE COMPANY OBTAINED ITS ISO 13485 CERTIFICATION. THIS WAS AN IMPORTANT STEP TO ALLOW THECompany TO REGISTER AND EVENTUALLY SELL ITS PROXCELAN CS-131 BRACHYTHERAPY SEEDS IN CANADA AND RUSSIA. THE COMPANY COMPLETED ITS REGISTRATIONSof Proxcelan Cs-131 brachytherapy seeds in Canada and Russia during fiscal year 2009.ProductsIsoRay MARKETS THE PROXCELAN CS-131 brachytherapy SEED FOR THE TREATMENT OF PROSTATE CANCER, OCULAR MELANOMAS, AND HEAD AND NECK CANCERS, AND INTENDS TOMARKET CS-131 FOR THE TREATMENT OF OTHER MALIGNANT DISEASE, SUCH AS LUNG, IN THE NEAR FUTURE. ADDITIONALLY, THE COMPANY IS INVESTIGATING ITS ABILITY TO MARKETother radioactive isotopes.Competitive Advantages of Proxcelan Cs-131Management believes that the Proxcelan Cesium-131 brachytherapy seed has specific clinical advantages for treating cancer over I-125 and Pd-103, the otherisotopes CURRENTLY USED IN BRACHYTHERAPY SEEDS. THE TABLE BELOW HIGHLIGHTS THE KEY DIFFERENCES OF THE THREE SEEDS. THE COMPANY BELIEVES THAT THE SHORT half-LIFE, HIGH-ENERGY CHARACTERISTICS OF CS-131 WILL INCREASE INDUSTRY GROWTH AND FACILITATE MEANINGFUL PENETRATION INTO THE TREATMENT OF OTHER FORMS OF CANCER SUCHas lung cancer.Isotope Delivery Over TimeIsotope Half-Life Energy 90% Dose Total DoseCs-131 9.7 days 30.4 KeV 33 days 115 GyPd-103 17 days 20.8 KeV 58 days 125 GyI-125 60 days 28.5 KeV 204 days 145 GyCs-131 Manufacturing Process and SuppliersProduct Overview. CS-131 IS A RADIOACTIVE ISOTOPE THAT CAN BE PRODUCED BY THE NEUTRON BOMBARDMENT OF BARIUM-130 (BA-130). WHEN PLACED INTO A NUCLEARREACTOR AND EXPOSED TO A FLUX OF NEUTRONS, BA-130 BECOMES BA-131, THE RADIOACTIVE MATERIAL THAT IS THE PARENT ISOTOPE OF CS-131. THE RADIOACTIVE ISOTOPE CS-131 IS NORMALLY PRODUCED BY PLACING A QUANTITY OF STABLE NON-RADIOACTIVE BARIUM (IDEALLY BARIUM ENRICHED IN ISOTOPE BA-130) INTO THE NEUTRON FLUX OF ANUCLEAR REACTOR. THE IRRADIATION PROCESS CONVERTS A SMALL FRACTION OF THIS MATERIAL INTO A RADIOACTIVE FORM OF BARIUM (BA-131). THE BA-131 DECAYS BY ELECTRONcapture to the radioactive isotope of interest (Cs-131). 13Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. To PRODUCE THE PROXCELAN SEED, THE PURIFIED CS-131 ISOTOPE IS ADSORBED ONTO A CERAMIC CORE CONTAINING A GOLD X-RAY MARKER. THIS INTERNAL CORE ASSEMBLY ISSUBSEQUENTLY INSERTED INTO A TITANIUM CAPSULE THAT IS THEN WELDED SHUT AND BECOMES A SEALED RADIOACTIVE SOURCE AND A BIOCOMPATIBLE MEDICAL DEVICE. THEDIMENSIONAL TOLERANCES FOR THE CERAMIC CORE, GOLD X-RAY MARKER, AND THE TITANIUM CAPSULE ARE EXTREMELY IMPORTANT. TO DATE THE COMPANY HAS USED SOLE-SOURCEPROVIDERS FOR CERTAIN COMPONENTS SUCH AS THE GOLD X-RAY MARKER AND THE TITANIUM CAPSULE AS THESE SUPPLIERS HAVE BEEN VALIDATED BY OUR QUALITY DEPARTMENTand they have been cost effective.Barium Enrichment Device. THE COMPANY HAS RETAINED AN INDEPENDENT CONTRACTOR TO DEVELOP AN ENRICHMENT DEVICE TO PRODUCE “ENRICHED BARIUM” HAVING Ahigher CONCENTRATION OF THE BA-130 ISOTOPE THAN IS FOUND IN NATURALLY OCCURRING BARIUM. IRRADIATING ENRICHED BARIUM WILL RESULT IN HIGHER YIELDS OF Cs-131. THE COMPANY ANTICIPATES THE USE OF ENRICHED BARIUM WILL ALSO STREAMLINE THE MANUFACTURING PROCESS AND REDUCE CS-131 PRODUCTION COSTS. THE COMPANY’Sprototype enrichment device has experienced development delays, is NOW 18 MONTHS BEYOND ITS ORIGINAL COMPLETION DATE AND IS NOW EXPECTED TO BE TESTED INthe Fall of 2009, but there is no assurance this testing will occur by then or whether it will be successful. The Company will owe an additional $56,610 TO THECONTRACTOR UPON COMPLETION OF A SUCCESSFUL DEMONSTRATION OF THE ENRICHMENT PROCESS AND WILL DETERMINE FOLLOWING THE DEMONSTRATION WHETHER THE prototypeMODEL WILL BE CAPABLE OF PRODUCING SUFFICIENT QUANTITIES OF ENRICHED BARIUM. IF THE PROTOTYPE MODEL WILL NOT PRODUCE SUFFICIENT QUANTITIES, THEN THE COMPANYwill need to spend $100,000 to $150,000 for a larger production model.Isotope Suppliers. DUE TO THE SHORT HALF-LIFE OF BOTH THE BA-131 AND CS-131 ISOTOPES, POTENTIAL SUPPLIERS MUST BE CAPABLE OF REMOVING IRRADIATED MATERIALSFROM THE REACTOR CORE ON A ROUTINE BASIS FOR SUBSEQUENT PROCESSING TO PRODUCE ULTRA-PURE CS-131. IN ADDITION, THE SUPPLIER’S NUCLEAR REACTOR FACILITY MUST HAVESUFFICIENT IRRADIATION CAPACITY TO ACCOMMODATE BARIUM TARGETS AND THE NUCLEAR REACTORS MUST HAVE SUFFICIENT NEUTRON FLUX TO ECONOMICALLY PRODUCECOMMERCIALLY VIABLE QUANTITIES OF CS-131. IDEALLY, THE IRRADIATION FACILITY WILL ALSO HAVE A RADIOCHEMICAL SEPARATION INFRASTRUCTURE TO CARRY OUT THE INITIALSEPARATION STEPS. THE COMPANY HAS IDENTIFIED KEY REACTOR FACILITIES IN THE U.S. AND IN RUSSIA THAT ARE CAPABLE OF MEETING THESE REQUIREMENTS. IN ORDER TOMANAGE THE RUSSIAN SUPPLY MORE EFFECTIVELY ISORAY ENTERED INTO AN AGREEMENT WITH URALDIAL, LLC (A RUSSIAN LLC) TO PROVIDE CS-131 ISOTOPE FROM RUSSIA TOthe COMPANY’S FACILITY IN RICHLAND, WA. URALDIAL OBTAINS CS-131 FROM TWO SUPPLIERS. THE COMPANY ALSO CONTINUES TO RECEIVE IRRADIATED BARIUM FROM theMURR REACTOR LOCATED IN THE UNITED STATES. FOR THE FISCAL YEAR ENDED JUNE 30, 2009, APPROXIMATELY SIXTY-FIVE PERCENT (65%) OF OUR CS-131 WAS SUPPLIED byone of two Russian supply sources and 35% from domestic sources.The COMPANY PLANS TO EXPAND CS-131 MANUFACTURING CAPABILITY AT THE MURR REACTOR BUT WILL CONTINUE TO OBTAIN CS-131 FROM MULTIPLE SUPPLIERS. FAILURE TOobtain DELIVERIES OF CS-131 FROM AT LEAST ONE OF ITS RUSSIAN SUPPLIERS COULD HAVE A MATERIAL ADVERSE EFFECT ON SEED PRODUCTION. MANAGEMENT BELIEVES IT WILLcontinue to rely solely on its existing suppliers in the near future and shutdowns from these suppliers could cause delays in deliveries and production.Quality Controls. WE HAVE ESTABLISHED PROCEDURES AND CONTROLS TO COMPLY WITH THE FDA’S QUALITY SYSTEM REGULATION. THE COMPANY CONSTANTLY MONITORSTHESE PROCEDURES AND CONTROLS TO ENSURE THAT THEY ARE OPERATING PROPERLY, THEREBY WORKING TO MAINTAIN A HIGH-QUALITY PRODUCT. ALSO, THE QUALITY, PRODUCTION,AND CUSTOMER SERVICE DEPARTMENTS MAINTAIN OPEN COMMUNICATIONS TO ENSURE THAT ALL REGULATORY REQUIREMENTS FOR THE FDA, DOT, AND APPLICABLE NUCLEARradiation and health authorities are fulfilled.In July 2008, IsoRay had its baseline inspection by the FDA at its manufacturing and ADMINISTRATIVE OFFICES IN RICHLAND, WA. THIS INSPECTION WAS CARRIED OUTOVER A FIVE DAY PERIOD OF TIME DURING WHICH THE INVESTIGATOR PERFORMED A COMPLETE INSPECTION FOLLOWING QUALITY SYSTEMS INSPECTION TECHNIQUES (QSIT). ATthe end of the inspection no report of deviations from Good Manufacturing Practices or list of observations (form FDA 483) was issued to IsoRay. 14Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Order Processing. The COMPANY HAS IMPLEMENTED A JUST-IN-TIME PRODUCTION PROCESS THAT IS RESPONSIVE TO CUSTOMER INPUT AND ORDERS TO ENSURE THAT INDIVIDUALCUSTOMERS RECEIVE A HIGHER LEVEL OF CUSTOMER SERVICE THAN RECEIVED FROM OUR COMPETITORS WHO HAVE THE LUXURY OF LONGER LEAD TIMES DUE TO LONGER HALF-LIFEPRODUCTS. TIME FROM ORDER CONFIRMATION TO COMPLETION OF PRODUCT MANUFACTURE IS REDUCED TO SEVERAL WORKING DAYS, INCLUDING RECEIPT OF IRRADIATED BARIUM(FROM A SUPPLIER’S REACTOR), SEPARATION OF CS-131, ISOTOPE LABELING OF THE CORE, AND LOADING OF CORES INTO PRE-WELDED TITANIUM “CANS” FOR FINAL WELDING, TESTING,quality assurance and shipping.IT IS UP TO EACH PHYSICIAN TO DETERMINE THE DOSAGE NECESSARY FOR IMPLANTS AND ACCEPTABLE DOSAGES VARY AMONG PHYSICIANS. MANY OF THE PHYSICIANS WHO ORDERour seeds order more seeds than necessary to assure themselves that they have a sufficient QUANTITY. UPON RECEIPT OF AN ORDER, THE COMPANY EITHER DELIVERS THESEEDS FROM ITS FACILITY DIRECTLY TO THE PHYSICIAN OR SENDS THE ORDER TO AN INDEPENDENT PRELOADING SERVICE THAT DELIVERS THE SEEDS PRELOADED INTO NEEDLES ORcartridges JUST PRIOR TO IMPLANT. IF THE IMPLANT IS POSTPONED OR RESCHEDULED, THE SHORT HALF-LIFE OF THE SEEDS MAKES THEM UNSUITABLE FOR USE AND THEREFORE THEYmust be re-ordered.DUE TO THE LEAD TIME FOR OBTAINING AND PROCESSING THE CS-131 ISOTOPE AND THE SHORT HALF-LIFE, THE COMPANY RELIES ON SALES FORECASTS AND HISTORICAL KNOWLEDGEto estimate the proper inventory levels of isotope needed to fulfill all customer orders. Consequently, some portion of the isotope is lost through decay and isNOT USED IN AN END PRODUCT. MANAGEMENT CONTINUES TO REDUCE THE VARIANCES BETWEEN ORDERED ISOTOPE AND ISOTOPE DELIVERIES AND IS CONTINUALLY IMPROVING ITSordering process efficiencies.Automated Manufacturing ProcessIN FISCAL 2009, ISORAY AUTOMATED CERTAIN ASPECTS OF ITS MANUFACTURING LINE IDENTIFIED BY MANAGEMENT TO PROVIDE PROCESS EFFICIENCIES, COST SAVINGS ANDconsistent MANUFACTURING QUALITY. THE COMPANY WILL CONTINUE TO EVALUATE AND IMPLEMENT AUTOMATION IN THE FUTURE THAT SUPPORTS PROCESS IMPROVEMENT ANDresource MANAGEMENT. IN ADDITION, MANAGEMENT PLANS TO IMPLEMENT PROCESSES AND AUTOMATION IN SUPPORT OF ADDITIONAL TREATMENT SITES SUCH AS HEAD AND NECKand lung in 2009-2010. The Company also has a contract with a third party to outsource certain sub-processes.Manufacturing FacilityTHE COMPANY MAINTAINS A PRODUCTION FACILITY LOCATED AT APPLIED PROCESS ENGINEERING LABORATORY (APEL). THE APEL FACILITY BECAME OPERATIONAL INSeptember 2007. THE PRODUCTION FACILITY HAS OVER 15,000 SQUARE FEET AND INCLUDES SPACE FOR ISOTOPE SEPARATION, SEED PRODUCTION, ORDER DISPENSING, A CLEANroom FOR RADIOPHARMACY WORK, AND A DEDICATED SHIPPING AREA. A DESCRIPTION OF THE LEASE TERMS FOR THE APEL FACILITY IS LOCATED IN THE OTHER COMMITMENTS ANDCONTINGENCIES SECTION OF ITEM 7 BELOW. MANAGEMENT BELIEVES THAT THE APEL FACILITY WILL BE UTILIZED FOR MANUFACTURING SPACE THROUGH FISCAL YEAR 2016 WHICHIS THE ORIGINAL LEASE TERM PLUS THE TWO THREE-YEAR RENEWAL OPTIONS. Management currently anticipates exercising both three-year renewal options to EXTEND THEAPEL facility lease through April 2016.MANAGEMENT NO LONGER BELIEVES THAT THE SHUTTLE SYSTEM AT IDAHO'S ADVANCED TEST REACTOR (ATR) WILL PROVIDE THE CONDITIONS NECESSARY FOR CS-131PRODUCTION. THE FACILITY'S CAPACITY IS FULLY ALLOCATED TO THE NAVY AND MANAGEMENT BELIEVES IT WOULD BE DIFFICULT TO HAVE ISORAY'S COMMERCIAL OPERATIONS ATthe same facility as these military operations, even if the shuttle was certified for use in IsoRay operations, which has not occurred. 15Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Repackaging ServicesMOST BRACHYTHERAPY MANUFACTURERS OFFER THEIR SEED PRODUCT TO THE END USER PACKAGED IN FIVE PRINCIPAL CONFIGURATIONS PROVIDED IN A STERILE OR NON-STERILEpackage depending on the customer’s preference. These include: §Loose seeds §Pre-loaded needles (loaded typically with three to five seeds and spacers) §Pre-loaded Mick cartridges (fits the Mick applicator) §Strands of seeds (consists of seeds and spacers in a biocompatible “shrink wrap”) §Preloaded Strands (strands loaded into the needle)IN 2008, THE MILLENIUM RESEARCH GROUP REPORTED THAT THE ESTIMATED MARKET SHARES FOR EACH OF THE FIVE PACKAGING TYPES ARE: LOOSE SEEDS AND PRELOADED LOOSEseeds (8%), MICK CARTRIDGES (26%), AND ALL STRAND CONFIGURATIONS INCLUDING PRELOADED STRANDS (66%). MARKET TRENDS INDICATE SIGNIFICANT MOVEMENT TOWARD THEstranded configuration, as there are some clinical data suggesting less potential for post-implant seed migration when a stranded configuration is used.The role OF THE PRELOADING SERVICE IS TO PACKAGE, ASSAY AND CERTIFY THE CONTENTS OF THE FINAL PRODUCT CONFIGURATION SHIPPED TO THE CUSTOMER. A COMMONLY USEDMETHOD OF PROVIDING THIS SERVICE IS THROUGH INDEPENDENT RADIOPHARMACIES. MANUFACTURERS SEND LOOSE SEEDS ALONG WITH THE PHYSICIAN'S INSTRUCTIONS TO theRADIOPHARMACY WHICH, IN TURN, LOADS NEEDLES AND/OR STRANDS THE SEEDS ACCORDING TO THE DOCTOR'S INSTRUCTIONS. THESE RADIOPHARMACIES THEN STERILIZE THE PRODUCTand certify the final packaging prior to shipping directly to the end user.IsoRay CURRENTLY HAS AGREEMENTS WITH SEVERAL INDEPENDENT RADIOPHARMACIES TO ASSAY, PRELOAD, AND STERILIZE LOOSE SEEDS. SHIPPING TO INDEPENDENT PHARMACIEScreates ADDITIONAL LOSS OF OUR ISOTOPE THROUGH DECAY. WHILE THE COMPANY PRE-LOADS MANY OF ITS CURRENT ORDERS, WE HAVE CONTINUED TO UTILIZE LOADING SERVICESto supplement our own custom preloading operation and to meet the requests of the ordering physicians.We CURRENTLY LOAD APPROXIMATELY 95% OF MICK CARTRIDGES IN OUR OWN FACILITY WHICH IN FISCAL YEAR 2009 ACCOUNTED FOR APPROXIMATELY 60% OF SEEDS SOLD. THEREMAINING APPROXIMATELY 40% OF SEEDS SOLD ARE STRAND CONFIGURATIONS INCLUDING PRELOADED STRANDS. DURING FISCAL YEAR 2008, THE COMPANY BEGAN OFFERING A100% CONFIRMATION ASSAY PERFORMED BY IN-HOUSE ANALYTICAL SERVICES. PROVIDING THE ASSAY AND ULTIMATELY THE PRELOADING SERVICES IN-HOUSE ALLOWS THECompany to eliminate approximately 25% loss in isotope activity due to RADIOACTIVE DECAY. THE COST OF PRIORITY OVERNIGHT SHIPMENT OF EACH ORDER OF SEEDS TOA THIRD-PARTY PROVIDER IS ALSO ELIMINATED. HOWEVER, WE WILL CONTINUE TO UTILIZE THE INDEPENDENT RADIOPHARMACIES TO BACK UP OUR OWN PRELOADING OPERATION, TOhandle periodic increases in demand, and to cater to certain doctors’ preferences.With a CLEARANCE FROM THE FDA FOR PRELOADING FLEXIBLE BRAIDED STRANDS AND BIOABSORBABLE MESH, ISORAY WILL BECOME THE SECOND COMPANY IN THE INDUSTRY THAThas 510(k) clearance to preload both the strands and the mesh. This will allow IsoRay TO KEEP THESE SERVICES IN HOUSE, REDUCE COSTS AND PROVIDE THESE SERVICESdirectly to our customers.Independent radiopharmacies usually provide the final packaging of the product delivered to the end user thereby eliminating the opportunity for reinforcingTHE "BRANDING" OF OUR SEED PRODUCT. BY PROVIDING OUR OWN REPACKAGING SERVICE, WE WILL PRESERVE THE PRODUCT BRANDING OPPORTUNITY AND ELIMINATE anyconcerns related to the handling of our product by a third party prior to delivery to the end user.PROVIDING CUSTOM PACKAGING CONFIGURATIONS ENHANCES OUR PRODUCT WHILE PROVIDING AN ADDITIONAL REVENUE STREAM AND INCREMENTAL MARGINS TO THE COMPANYTHROUGH PRICING PREMIUMS CHARGED TO OUR CUSTOMERS. THE END USERS OF THESE PACKAGING OPTIONS ARE WILLING TO PAY A PREMIUM BECAUSE OF THE SAVINGS THEYREALIZE BY ELIMINATING THE NEED FOR LOOSE SEED HANDLING AND LOADING CAPABILITIES ON SITE, ELIMINATING THE NEED FOR ADDITIONAL STAFFING TO STERILIZE SEEDS ANDneedles, and eliminating the expense of additional assaying of the seeds. 16Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Marketing and SalesMarketing StrategyThe COMPANY IS MARKETING PROXCELAN CESIUM-131 BRACHYTHERAPY SEEDS AS THE “SEED OF CHOICE” FOR PROSTATE BRACHYTHERAPY. BASED ON CURRENT AND PRELIMINARYCLINICAL STUDIES, MANAGEMENT BELIEVES THERE IS NO APPARENT CLINICAL REASON TO USE OTHER ISOTOPES WHEN CS-131 IS AVAILABLE. THE ADVANTAGES ASSOCIATED WITH AHIGHER ENERGY AND SHORTER HALF-LIFE ISOTOPE ARE GENERALLY ACCEPTED WITHIN THE CLINICAL COMMUNITY AND THE COMPANY INTENDS TO HELP EDUCATE POTENTIAL patientsabout the clinical benefits from Cs-131 for their brachytherapy seed treatment.IsoRay has chosen to identify its proprietary Cs-131 seed with the trademarked brand of “PROXCELAN.” MANAGEMENT IS USING THIS BRAND TO DIFFERENTIATE CS-131SEEDS FROM SEEDS USING THE OTHER ISOTOPES. WE CONTINUE TO TARGET THE COMPETING ISOTOPE PRODUCTS OF IODINE AND PALLADIUM RATHER THAN THE VARIOUSMANUFACTURERS AND DISTRIBUTORS OF THESE ISOTOPES. USING THIS STRATEGY, THE CHOICE OF BRACHYTHERAPY ISOTOPES SHOULD BE LESS DEPENDENT ON THE NAME ANDdistribution strengths of the various iodine and palladium manufacturers and distributors and more dependent on the therapeutic benefits of Cs-131.THE PROFESSIONAL AND PATIENT MARKET SEGMENTS EACH PLAY A ROLE IN THE ULTIMATE CHOICE OF CANCER TREATMENT AND THE SPECIFIC ISOTOPE CHOSEN FOR SEEDBRACHYTHERAPY TREATMENT. THE COMPANY HAS DEVELOPED A CUSTOMIZED BRAND MESSAGE FOR EACH AUDIENCE. IN 2009, THE COMPANY’S WEBSITE WWW.ISORAY.COMWAS SUBSTANTIALLY UPDATED TO INCLUDE SECTIONS FOR CLINICIANS, PRODUCT INFORMATION, AND RESOURCES. ISORAY ALSO MAINTAINS PRINT AND VISUAL MEDIAS (INCLUDINGPHYSICIAN BROCHURES DISCUSSING THE CLINICAL ADVANTAGES OF CS-131, CLINICAL INFORMATION BINDERS, INFORMATIONAL DVDS, SINGLE SHEET GLOSSIES WITH TARGETEDCLINICAL DATA, ETC.), AND ADVERTISEMENTS IN THE LEADING MEDICAL JOURNALS. IN ADDITION, THE COMPANY ATTENDS NATIONAL PROFESSIONAL MEETINGS, INCLUDING THEfollowing: §American Brachytherapy Society (ABS); §American Society for Therapeutic Radiation and Oncology (ASTRO); §Association of American Physicists in Medicine (AAPM); and §Various local chapter meetings.THE COMPANY ALSO CONTINUES TO CONSULT WITH NOTED CONTRIBUTORS FROM THE MEDICAL PHYSICS COMMUNITY AND WILL HAVE ARTICLES SUBMITTED TO PROFESSIONALJOURNALS SUCH AS Medical Physics, the Brachytherapy Journal, AND THE International Journal of Radiation Oncology, Biology, and Physics REGARDING THEbenefits of and clinical trials involving Cs-131.BEGINNING IN JANUARY 2008, ISORAY IMPLEMENTED A VARIETY OF PHYSICIAN CS-131 TRAINING OUTREACH PROGRAMS INCLUDING THE FOLLOWING: A TWO DAY TRAININGcourse held APPROXIMATELY THREE TIMES PER YEAR AT CHICAGO PROSTATE CANCER CENTER (CPCC); PROCTORING AND MENTORING PROGRAMS LED BY STEVE KURTZMAN, MD,ISORAY’S MEDICAL DIRECTOR; AND A TRAINING DVD FOR PHYSICIANS WHO CHOOSE NOT TO LEAVE THEIR PRACTICES TO ATTEND A TRAINING COURSE. THE OBJECTIVE OF THEtraining programs is to increase the physician’s confidence in using the product.IN TODAY’S U.S. HEALTH CARE MARKET, PATIENTS ARE MORE INFORMED AND INVOLVED IN THE MANAGEMENT OF THEIR HEALTH THAN IN THE PAST. MANY PHYSICIANS RELATEINCIDENTS OF THEIR PATIENTS COMING FOR CONSULTATIONS ARMED WITH ARTICLES RESEARCHED ON THE INTERNET AND OTHER SOURCES DESCRIBING NEW TREATMENTS ANDmedications. In many cases, these patients are demanding a certain therapy or drug and the physicians are complying when medically appropriate. 17Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Because OF THIS CONSUMER-DRIVEN MARKET FACTOR, WE ALSO PROMOTE OUR PRODUCTS DIRECTLY TO THE GENERAL PUBLIC. WE TARGET THE PROSTATE CANCER PATIENT, HIS SPOUSE,FAMILY AND CARE GIVERS. WE EMPHASIZE TO THESE SEGMENTS THE SPECIFIC ADVANTAGES OF THE PROXCELAN CESIUM-131 BRACHYTHERAPY SEED THROUGH OUR WEBSITES(LOCATED AT WWW.ISORAY.COM AND WWW.PROXCELAN.COM), PATIENT ADVOCACY EFFORTS, INFORMATIONAL PATIENT BROCHURES AND DVDS WITH PATIENT TESTIMONIALS, PATIENTFOCUSED INFORMATIONAL WEBSITE (WWW.PROXCELAN.COM), AND ADVERTISEMENTS IN SPECIFIC MARKETS SUPPORTING BRACHYTHERAPY. NONE OF OUR WEBSITES SHOULD BEconsidered a part of this report.IN ADDITION, THE COMPANY CONTINUES TO PROMOTE THE CLINICAL FINDINGS OF THE VARIOUS PROTOCOLS THROUGH PRESENTATIONS BY RESPECTED THOUGHT LEADERS. THECompany will continually review and update all marketing materials as more clinical information is gathered from the protocols and studies.APART FROM CLINICAL STUDIES AND PAPERS SPONSORED BY THE COMPANY, SEVERAL PHYSICIANS ACROSS THE COUNTRY ARE NOW INDEPENDENTLY PUBLISHING PAPERS ANDstudies extolling the benefits of Cs-131.Sales and DistributionACCORDING TO A RECENT INDUSTRY SURVEY, APPROXIMATELY 2,000 HOSPITALS AND FREE STANDING CLINICS ARE CURRENTLY OFFERING RADIATION ONCOLOGY SERVICES IN THEUnited STATES. NOT ALL OF THESE FACILITIES OFFER SEED BRACHYTHERAPY SERVICES. THESE INSTITUTIONS ARE STAFFED WITH RADIATION ONCOLOGISTS AND MEDICAL PHYSICISTSwho provide expertise in radiation therapy treatments and serve as consultants for urologists and prostate cancer patients. We TARGET THE RADIATION ONCOLOGISTSand the medical physicists as well as urologists as key clinical decision-makers in the type of radiation therapy offered to prostate cancer patients.ISORAY HAS A DIRECT SALES ORGANIZATION TO INTRODUCE PROXCELAN CESIUM-131 BRACHYTHERAPY SEEDS TO RADIATION ONCOLOGISTS AND MEDICAL PHYSICISTS. CURRENTLYIsoRay HAS FOUR DIRECT SALES PERSONS AND A VP OF BUSINESS DEVELOPMENT. THESE SALES PEOPLE INCLUDE THOSE EXPERIENCED IN THE BRACHYTHERAPY MARKET AND THEMEDICAL DEVICE MARKET. IN 2008, THE COMPANY HAD SIX DIRECT SALES PERSONS AND A NATIONAL SALES DIRECTOR; HOWEVER, THE COMPANY HAS EXPERIENCED SOMETURNOVER IN THE SALES FORCE DUE TO CHANGES IN THE SALES COMPENSATION PROGRAM, TERMINATION OF THOSE WHO FAILED TO SELL SUFFICIENT AMOUNTS OF PRODUCTS, AND THEtravel demands required by the position. The Company is currently actively recruiting one to two additional sales persons.In 2009, IsoRay entered into an exclusive distribution agreement with BrachySciences to MARKET CS-131 SEEDS IN THE U.S. BRACHYSCIENCES HAS A SALES FORCE OFAPPROXIMATELY 6 SALES PERSONS AND A MANAGER BRINGING THE TOTAL SALES PERSONNEL SELLING PROXCELAN CS-131 BRACHYTHERAPY SEEDS IN THE U.S. TO APPROXIMATELY12. THE BRACHYSCIENCES SALES FORCE SOLD ITS FIRST CS-131 PROSTATE IMPLANT IN AUGUST 2009; BUT IT HAS TAKEN LONGER THAN ANTICIPATED FOR BRACHYSCIENCES’customers to obtain the license amendments required for the Cs-131 product.THE COMPANY EXPECTS TO CONTINUE TO EXPAND ITS CUSTOMER BASE OUTSIDE THE U.S. MARKET, THROUGH USE OF ESTABLISHED DISTRIBUTORS IN THE KEY MARKETS OF OTHERCOUNTRIES. THIS STRATEGY SHOULD REDUCE THE TIME AND EXPENSES REQUIRED TO identify, train and penetrate the key implant centers and establish RELATIONSHIPS WITHTHE KEY OPINION LEADERS IN THESE MARKETS. USING ESTABLISHED DISTRIBUTORS ALSO SHOULD REDUCE THE TIME SPENT ACQUIRING THE PROPER RADIATION HANDLING LICENSESand other regulatory requirements of these markets.ReimbursementPAYMENT FOR ISORAY PRODUCTS COMES FROM THIRD-PARTY PAYERS INCLUDING THE CENTERS FOR MEDICARE AND MEDICAID SERVICES (CMS) AND PRIVATE INSURANCECOMPANIES. THESE PAYERS REIMBURSE THE HOSPITALS AND CLINICS VIA WELL-ESTABLISHED PAYMENT PROCEDURES. IN 2003, THE COMPANY WAS APPROVED FOR AN INITIALHCPCS code FOR CS-131 BRACHYTHERAPY SEEDS. IN JULY 2007, CMS DIVIDED THE HCPCS CODE INTO TWO CODES FOR ALL MANUFACTURERS OF BRACHYTHERAPY SEEDS. THEcurrent METHOD HAS ASSIGNED ONE HCPCS CODE FOR LOOSE SEEDS AND A SECOND HCPCS CODE FOR STRANDED SEEDS. MEDICARE IS THE MOST SIGNIFICANT U.S. PAYER FORprostate brachytherapy services, and is the payer in approximately 65% of all U.S. prostate brachytherapy cases. 18Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROSTATE BRACHYTHERAPY IS TYPICALLY PERFORMED IN AN OUTPATIENT SETTING, AND AS SUCH, IS COVERED BY THE CMS OUTPATIENT PROSPECTIVE PAYMENT SYSTEM. CURRENTLY, WHEN CHARGES FOR THE SEEDS ARE CORRECTLY SUBMITTED TO CMS, THE TOTAL COST OF THE SEEDS IS REIMBURSED TO THE HOSPITAL OR CLINIC BY CMS. CMSproposed in July 2009 TO IMPLEMENT A FIXED PRICE PER SEED REIMBURSEMENT FOLLOWING THE HCPCS METHODOLOGY. ITS PROPOSAL IS TO PAY ONE PRICE FOR LOOSE SEEDSAND ANOTHER FOR STRANDED SEEDS. IODINE, PALLADIUM AND CESIUM WOULD EACH HAVE THEIR OWN PRICING. IN 2008, CMS PREVIOUSLY PROPOSED THAT A FIXED PRICE PERSEED BE USED FOR REIMBURSEMENT; HOWEVER, CONGRESS (AFTER POSTPONING A DECISION ON THE MEDICAL BILL WHICH INCLUDED BRACHYTHERAPY SEED REIMBURSEMENT)VOTED ON JULY 15, 2008 TO CONTINUE THE PASS-THROUGH REIMBURSEMENT FOR BRACHYTHERAPY SEEDS THROUGH DECEMBER 31, 2009. MANAGEMENT BELIEVES THATCONGRESS WILL AGAIN INTERVENE TO MAINTAIN CURRENT REIMBURSEMENT PRACTICES. OTHER INSURANCE COMPANIES HAVE HISTORICALLY FOLLOWED CMS’S REIMBURSEMENTpolicies.Other InformationCustomersCustomers representing ten percent or more of total Company sales for the twelve months ended June 30, 2009 include:Various Northern California facilities (1)22.6% of revenueChicago Prostate Cancer Center Westmont, IL12.4% of revenue (1)The FOLLOWING FACILITIES LOCATED IN NORTHERN CALIFORNIA ARE USED BY ONE DOCTOR (THE COMPANY’S MEDICAL DIRECTOR): COMMUNITY HOSPITAL OF LOSGatos (8.0% of total revenue), Fremont Surgery Center (5.9%), Mills Peninsula HEALTH SERVICES (3.6%), EL CAMINO HOSPITAL (3.6%) AND ALL OTHERSused by this doctor combined (1.5%).THE LOSS OF ANY OF THESE SIGNIFICANT CUSTOMERS WOULD HAVE AN ADVERSE EFFECT ON THE COMPANY’S REVENUES, WHICH WOULD CONTINUE UNTIL THE COMPANY LOCATEDnew customers to replace them.Proprietary RightsTHE COMPANY RELIES ON A COMBINATION OF PATENT, COPYRIGHT AND TRADEMARK LAWS, TRADE SECRETS, SOFTWARE SECURITY MEASURES, LICENSE AGREEMENTS ANDNONDISCLOSURE AGREEMENTS TO PROTECT ITS PROPRIETARY RIGHTS. SOME OF THE COMPANY’S PROPRIETARY INFORMATION MAY NOT BE PATENTABLE. THE COMPANY HAS Aregistered U.S. trademark for Proxcelan.THE COMPANY INTENDS TO VIGOROUSLY DEFEND ITS PROPRIETARY TECHNOLOGIES, TRADEMARKS, AND TRADE SECRETS. MEMBERS OF MANAGEMENT, EMPLOYEES, AND CERTAINEQUITY HOLDERS HAVE PREVIOUSLY SIGNED NON-DISCLOSURE, NON-COMPETE AGREEMENTS, AND FUTURE EMPLOYEES, CONSULTANTS, ADVISORS, WITH WHOM THE COMPANYENGAGES, AND WHO ARE PRIVY TO THIS INFORMATION, WILL BE REQUIRED TO DO THE SAME. A PATENT FOR THE CESIUM SEPARATION AND PURIFICATION PROCESS WAS GRANTED ONMAY 23, 2000 BY THE U.S. PATENT AND TRADEMARK OFFICE (USPTO) UNDER PATENT NUMBER 6,066,302, WITH AN EXPIRATION DATE OF MAY 23, 2020. THE PROCESS WASdeveloped by Lane BRAY, CHIEF CHEMIST AND A SHAREHOLDER OF THE COMPANY, AND HAS BEEN ASSIGNED EXCLUSIVELY TO ISORAY. ISORAY’S PREDECESSOR ALSO FILED FORpatent protection in four European countries under the Patent Cooperation Treaty. Those patents have been assigned to IsoRay.OUR MANAGEMENT BELIEVES THAT CERTAIN ASPECTS OF THE ISORAY SEED DESIGN AND CONSTRUCTION TECHNIQUES ARE PATENTABLE INNOVATIONS. THESE INNOVATIONS HAVEBEEN DOCUMENTED IN ISORAY LABORATORY RECORDS, AND A PATENT APPLICATION WAS FILED WITH THE USPTO ON NOVEMBER 12, 2003. IN AUGUST 2008, THIS PATENT WASGRANTED BY THE USPTO UNDER PATENT NUMBER 7,410,458, WITH AN EXPIRATION DATE OF NOVEMBER 12, 2023. CERTAIN METHODOLOGIES REGARDING ISOTOPE PRODUCTION,SEPARATION, AND SEED MANUFACTURE ARE RETAINED AS TRADE SECRETS AND ARE EMBODIED IN ISORAY’S PROCEDURES AND DOCUMENTATION. IN JUNE 2004, JULY 2004, ANDFEBRUARY 2007, FIVE PATENT APPLICATIONS WERE FILED RELATING TO METHODS OF DERIVING CS-131 DEVELOPED BY ISORAY EMPLOYEES. THE COMPANY IS CURRENTLYworking on developing and patenting additional methods of deriving Cs-131 and other isotopes. 19Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. THERE ARE SPECIFIC CONDITIONS ATTACHED TO THE ASSIGNMENT OF THE CS-131 PATENT FROM LANE BRAY. IN PARTICULAR, THE ASSOCIATED ROYALTY AGREEMENT PROVIDES FOR1% OF GROSS PROFIT PAYMENT FROM SEED SALES TO LANE BRAY AND 1% OF GROSS PROFIT FROM ANY USE OF THE CS-131 PROCESS PATENT FOR NON-SEED PRODUCTS. IF ISORAYREASSIGNS THE ROYALTY AGREEMENT TO ANOTHER COMPANY, THESE ROYALTIES INCREASE TO 2%. THE ROYALTY AGREEMENT HAS AN ANTI-SHELVING CLAUSE WHICH REQUIRESISORAY TO RETURN THE PATENT IF ISORAY PERMANENTLY ABANDONS SALES OF PRODUCTS USING THE INVENTION. DURING FISCAL YEARS 2009 AND 2008, THE COMPANY recordedroyalty expense of $20,063 and $21,219, respectively, related to this patent.THE TERMS OF A LICENSE AGREEMENT WITH THE LAWRENCE FAMILY TRUST (SUCCESSOR TO DON LAWRENCE) FOR A PATENT APPLICATION AND RELATED “KNOW-HOW” REQUIRE THEPAYMENT OF A ROYALTY BASED ON THE NET FACTORY SALES PRICE, AS DEFINED IN THE AGREEMENT, OF LICENSED PRODUCT SALES. BECAUSE THE LICENSOR’S PATENT APPLICATIONWAS ULTIMATELY ABANDONED, ONLY A 1% “KNOW-HOW” ROYALTY REMAINS APPLICABLE. TO DATE, MANAGEMENT BELIEVES THAT THERE HAVE BEEN NO PRODUCT SALESINCORPORATING THE “KNOW-HOW;” AND THEREFORE BELIEVES NO ROYALTY IS DUE PURSUANT TO THE TERMS OF THE AGREEMENT. MANAGEMENT BELIEVES THAT ULTIMATELY NOroyalties should be paid under this agreement as there is no intent to use this “know-how” in the future.The LAWRENCE FAMILY TRUST HAS DISPUTED MANAGEMENT’S CONTENTION THAT IT IS NOT USING THIS “KNOW-HOW”. ON SEPTEMBER 25, 2007 AND AGAIN ON OCTOBER 31,2007, THE COMPANY PARTICIPATED IN NONBINDING MEDIATION REGARDING THIS MATTER; HOWEVER, NO SETTLEMENT WAS REACHED WITH THE LAWRENCE FAMILY TRUST. AFTERADDITIONAL SETTLEMENT DISCUSSIONS, WHICH ENDED IN APRIL 2008, THE PARTIES FAILED TO REACH A SETTLEMENT. THE PARTIES MAY DEMAND BINDING ARBITRATION AT ANYtime.Research and DevelopmentDURING THE THREE-YEAR PERIOD ENDED JUNE 30, 2009, ISORAY AND ITS PREDECESSOR COMPANIES INCURRED MORE THAN $3.7 MILLION IN COSTS RELATED TO RESEARCH ANDdevelopment activities. The Company expects to continue ongoing research and development activities for the foreseeable future.WHETHER SUCCESSFUL OR NOT, THE COMPANY ANTICIPATES ENDING ITS MAJOR RESEARCH AND DEVELOPMENT PROJECT TO DEVELOP A PROPRIETARY SEPARATION PROCESS TOmanufacture ENRICHED BARIUM DURING FISCAL YEAR 2010. DURING FISCAL YEAR 2009, THE COMPANY INCURRED APPROXIMATELY $39,000 ON THIS PROJECT. THE REMAININGPROJECT COSTS ARE ANTICIPATED TO BE APPROXIMATELY $100,000 TO $150,000 FOR A PRODUCTION MODEL (IF REQUIRED) IN ADDITION TO THE $56,610 PAYMENT TO BE MADEfor the prototype if the demonstration is successful.Government RegulationTHE COMPANY'S PRESENT AND FUTURE INTENDED ACTIVITIES IN THE DEVELOPMENT, MANUFACTURE AND SALE OF CANCER THERAPY PRODUCTS ARE SUBJECT TO EXTENSIVE LAWS,REGULATIONS, REGULATORY APPROVALS AND GUIDELINES. WITHIN THE UNITED STATES, THE COMPANY'S THERAPEUTIC RADIOLOGICAL DEVICES MUST COMPLY WITH THE U.S.FEDERAL FOOD, DRUG AND COSMETIC ACT, WHICH IS ENFORCED BY THE FDA. THE COMPANY IS ALSO REQUIRED TO ADHERE TO APPLICABLE FDA QUALITY SYSTEMRegulations, also known AS THE GOOD MANUFACTURING PRACTICES, WHICH INCLUDE EXTENSIVE RECORD KEEPING AND PERIODIC INSPECTIONS OF MANUFACTURING FACILITIES. THE COMPANY'S PREDECESSOR OBTAINED FDA 510(K) CLEARANCE IN MARCH 2003 TO MARKET THE PROXCELAN CS-131 SEED FOR THE TREATMENT OF LOCALIZED SOLID TUMORSand other malignant disease and IsoRay obtained FDA 510(k) clearance in November 2006 to market preloaded brachytherapy seeds.In the UNITED STATES, THE FDA REGULATES, AMONG OTHER THINGS, NEW PRODUCT CLEARANCES AND APPROVALS TO ESTABLISH THE SAFETY AND EFFICACY OF THESE PRODUCTS. WEare also subject to other federal and state laws and regulations, including the Occupational Safety and Health Act and the Environmental Protection Act. 20Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 CANRESULT IN CIVIL PENALTIES, RECALL, INJUNCTION OR SEIZURE OF PRODUCTS, REFUSAL OF THE GOVERNMENT TO APPROVE OR CLEAR PRODUCT APPROVAL APPLICATIONS, disqualificationFROM SPONSORING OR CONDUCTING CLINICAL INVESTIGATIONS, PREVENTING US FROM ENTERING INTO GOVERNMENT SUPPLY CONTRACTS, WITHDRAWAL OF PREVIOUSLY APPROVEDapplications, and criminal prosecution.In the UNITED STATES, MEDICAL DEVICES ARE CLASSIFIED INTO THREE DIFFERENT CATEGORIES OVER WHICH THE FDA APPLIES INCREASING LEVELS OF REGULATION: CLASS I, CLASS II,AND CLASS III. MOST CLASS I DEVICES ARE EXEMPT FROM PREMARKET NOTIFICATION (510(K)); MOST CLASS II DEVICES REQUIRE PREMARKET NOTIFICATION (510(K)); AND mostClass III devices require premarket approval. Our Proxcelan Cs-131 seed is a Class II device and received 510(k) clearance in March 2003.Approval OF NEW CLASS III MEDICAL DEVICES IS A LENGTHY PROCEDURE AND CAN TAKE A NUMBER OF YEARS AND REQUIRE THE EXPENDITURE OF SIGNIFICANT RESOURCES. THEREIS A SHORTER FDA REVIEW AND CLEARANCE PROCESS FOR CLASS II MEDICAL DEVICES, THE PREMARKET NOTIFICATION OR 510(K) PROCESS, WHEREBY A COMPANY CAN MARKETCERTAIN CLASS II MEDICAL DEVICES THAT CAN BE SHOWN TO BE SUBSTANTIALLY EQUIVALENT TO OTHER LEGALLY MARKETED DEVICES. SINCE BRACHYTHERAPY SEEDS HAVE BEENclassified by the FDA as a Class II device, we have been able to achieve market clearance for our Cs-131 seed using the 510(k) process.AS A REGISTERED MEDICAL DEVICE MANUFACTURER WITH THE FDA, WE ARE SUBJECT TO INSPECTION TO ENSURE COMPLIANCE WITH THEIR CURRENT GOOD MANUFACTURINGPRACTICES, OR CGMP. THESE REGULATIONS REQUIRE THAT WE AND ANY OF OUR CONTRACT MANUFACTURERS DESIGN, MANUFACTURE AND SERVICE PRODUCTS, AND MAINTAINDOCUMENTS IN A PRESCRIBED MANNER WITH RESPECT TO MANUFACTURING, TESTING, DISTRIBUTION, STORAGE, DESIGN CONTROL, AND SERVICE ACTIVITIES. MODIFICATIONS ORENHANCEMENTS THAT COULD SIGNIFICANTLY AFFECT THE SAFETY OR EFFECTIVENESS OF A DEVICE OR THAT CONSTITUTE A MAJOR CHANGE TO THE INTENDED USE OF THE DEVICE requirea new 510(k) notice for any product modification.The MEDICAL DEVICE REPORTING REGULATION REQUIRES THAT WE PROVIDE INFORMATION TO THE FDA ON DEATHS OR SERIOUS INJURIES ALLEGED TO BE ASSOCIATED WITH THE USEof 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 ANDpromotional activities are regulated by the FDA and, in some circumstances, by the Federal Trade Commission.As a MEDICAL DEVICE MANUFACTURER, WE ARE ALSO SUBJECT TO LAWS AND REGULATIONS ADMINISTERED BY GOVERNMENTAL ENTITIES AT THE FEDERAL, STATE AND LOCAL LEVELS. FOREXAMPLE, OUR FACILITY IS LICENSED AS A MEDICAL PRODUCT MANUFACTURING FACILITY IN THE STATE OF WASHINGTON AND IS SUBJECT TO PERIODIC STATE REGULATORYinspections. Our customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us.IN SUPPORT OF ISORAY’S GLOBAL STRATEGY TO EXPAND MARKETING TO CANADA AND RUSSIA, WE INITIATED THE PROCESS IN FISCAL YEAR 2008 TO OBTAIN THE EUROPEAN CEMark, CANADIAN REGISTRATION, AND CERTIFICATION TO ISO 13485, AN INTERNATIONALLY RECOGNIZED QUALITY SYSTEM. EUROPEAN LAW REQUIRES THAT MEDICAL DEVICES SOLDIN ANY EU MEMBER STATE COMPLY WITH THE REQUIREMENTS OF THE EUROPEAN MEDICAL DEVICE DIRECTIVE (MDD) OR THE ACTIVE IMPLANTABLE MEDICAL DEVICEDIRECTIVE (AIMDD). ISORAY’S PRODUCTS ARE CLASSIFIED IN EUROPE AS AN ACTIVE IMPLANTABLE AND ARE SUBJECT TO THE AIMDD. COMPLIANCE WITH AIMDD ANDOBTAINING A CE MARK INVOLVES BEING CERTIFIED TO ISO 13485 AND OBTAINING APPROVAL OF THE PRODUCT TECHNICAL FILE BY A NOTIFIED BODY THAT IS RECOGNIZED BYcompetent AUTHORITIES OF A MEMBER STATE. COMPLIANCE WITH ISO 13485 IS ALSO REQUIRED FOR REGISTRATION OF A COMPANY FOR SALE OF ITS PRODUCTS IN CANADA. MANYof THE RECOGNIZED EU NOTIFIED BODIES ARE ALSO RECOGNIZED BY HEALTH CANADA TO CONDUCT THE ISO 13485 INSPECTIONS FOR CANADIAN REGISTRATION. DURING FISCALYEAR 2009, THE COMPANY RECEIVED ITS CERTIFICATION TO ISO 13485 AND OBTAINED APPROVAL FROM HEALTH CANADA FOR ITS CANADIAN REGISTRATION. THE COMPANY ISNOW FOCUSING ON THE CANADIAN AND RUSSIAN MARKETS AND IS NO LONGER PURSUING SALES IN THE EUROPEAN UNION (EU). MANAGEMENT NO LONGER BELIEVES A STRATEGICalliance with IBt, SA, a Belgian company, will be consummated nor will management leverage IBt’s distribution channels in the EU. 21Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In the UNITED STATES, AS A MANUFACTURER OF MEDICAL DEVICES AND DEVICES UTILIZING RADIOACTIVE BYPRODUCT MATERIAL, WE ARE SUBJECT TO EXTENSIVE REGULATION BY NOTONLY FEDERAL GOVERNMENTAL AUTHORITIES, SUCH AS THE FDA, BUT ALSO BY STATE AND LOCAL GOVERNMENTAL AUTHORITIES, SUCH AS THE WASHINGTON STATE DEPARTMENT OFHealth, TO ENSURE SUCH DEVICES ARE SAFE AND EFFECTIVE. IN WASHINGTON STATE, THE DEPARTMENT OF HEALTH, BY AGREEMENT WITH THE FEDERAL NUCLEAR REGULATORYCommission (NRC), REGULATES THE POSSESSION, USE, AND DISPOSAL OF RADIOACTIVE BYPRODUCT MATERIAL AS WELL AS THE MANUFACTURE OF RADIOACTIVE SEALED SOURCES TOENSURE COMPLIANCE WITH STATE AND FEDERAL LAWS AND REGULATIONS. OUR CS-131 BRACHYTHERAPY SEEDS CONSTITUTE BOTH MEDICAL DEVICES AND RADIOACTIVE SEALEDsources and are subject to these regulations.MOREOVER, OUR USE, MANAGEMENT, AND DISPOSAL OF CERTAIN RADIOACTIVE SUBSTANCES AND WASTES ARE SUBJECT TO REGULATION BY SEVERAL FEDERAL AND STATE AGENCIESdepending 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.SeasonalityThe COMPANY BELIEVES THAT SOME SEED IMPLANTATION PROCEDURES ARE DEFERRED AROUND PHYSICIAN VACATIONS (PARTICULARLY IN THE SUMMER MONTHS), HOLIDAYS, ANDMEDICAL CONVENTIONS AND CONFERENCES RESULTING IN A SEASONAL INFLUENCE ON THE COMPANY’S BUSINESS. THESE FACTORS CAUSE A MOMENTARY DECLINE IN REVENUEWHICH MANAGEMENT BELIEVES IS ULTIMATELY REALIZED LATER. BECAUSE ALMOST THIRTY PERCENT (30%) OF THE COMPANY'S BUSINESS RELIES ON THREE PHYSICIANS,simultaneous vacations by these three physicians could cause significant drops in the Company's productivity during those periods.EmployeesAs of SEPTEMBER 14, 2009, ISORAY EMPLOYED 37 FULL-TIME INDIVIDUALS AND ONE PART-TIME INDIVIDUAL. THE COMPANY'S FUTURE SUCCESS WILL DEPEND, IN PART, ON ITSABILITY TO ATTRACT, RETAIN, AND MOTIVATE HIGHLY QUALIFIED SALES, TECHNICAL AND MANAGEMENT PERSONNEL. FROM TIME TO TIME, THE COMPANY MAY EMPLOYINDEPENDENT CONSULTANTS OR CONTRACTORS TO SUPPORT ITS RESEARCH AND DEVELOPMENT, MARKETING, SALES, AND ADMINISTRATIVE ORGANIZATIONS. NONE OF THE COMPANY'SEMPLOYEES ARE REPRESENTED BY ANY COLLECTIVE BARGAINING UNIT. THE COMPANY ESTIMATES THAT SUCCESSFUL IMPLEMENTATION OF ITS GROWTH PLAN WILL RESULT IN UP TOthree to five additional employees by the end of fiscal year 2010.In 2008, THE COMPANY HAD SIX DIRECT SALES PERSONS AND A NATIONAL SALES DIRECTOR; HOWEVER, THE COMPANY HAS EXPERIENCED SOME TURNOVER IN THE SALES FORCE DUEto changes in THE SALES COMPENSATION PROGRAM, TERMINATION OF THOSE WHO FAILED TO SELL SUFFICIENT QUANTITIES OF PRODUCT, AND THE TRAVEL DEMANDS REQUIRED BY THEposition. The Company currently has four direct sales persons and a VP, Business Development and is actively recruiting one to two additional sales persons.CompetitionTHE COMPANY COMPETES IN A MARKET CHARACTERIZED BY TECHNOLOGICAL INNOVATION, EXTENSIVE RESEARCH EFFORTS, AND SIGNIFICANT COMPETITION. IN GENERAL, THEPROXCELAN CESIUM-131 BRACHYTHERAPY SEED COMPETES WITH CONVENTIONAL METHODS OF TREATING LOCALIZED CANCER, INCLUDING, BUT NOT LIMITED TO, ALL FORMS OFPROSTATECTOMY SURGERY AND EXTERNAL BEAM RADIATION THERAPY WHICH INCLUDES INTENSITY MODULATED RADIATION THERAPY, AS WELL AS COMPETING PERMANENTBRACHYTHERAPY DEVICES. SURGERY HAS HISTORICALLY REPRESENTED THE MOST COMMON MEDICAL TREATMENT FOR EARLY-STAGE, LOCALIZED PROSTATE CANCER BUT RADICALPROSTATECTOMIES HAVE DECLINED IN RECENT YEARS. EBRT IS ALSO A WELL-ESTABLISHED METHOD OF TREATMENT AND IS WIDELY ACCEPTED FOR PATIENTS WHO REPRESENT A POORSURGICAL RISK OR WHOSE PROSTATE CANCER HAS ADVANCED BEYOND THE STAGE FOR WHICH SURGICAL TREATMENT IS INDICATED. MANAGEMENT BELIEVES THAT IF GENERALCONVERSION FROM THESE TREATMENT OPTIONS (OR OTHER ESTABLISHED OR CONVENTIONAL PROCEDURES) TO THE PROXCELAN CESIUM-131 BRACHYTHERAPY SEED DOES OCCUR, SUCHCONVERSION WILL LIKELY BE THE RESULT OF A COMBINATION OF EQUIVALENT OR BETTER EFFICACY, REDUCED INCIDENCE AND DURATION OF SIDE EFFECTS AND COMPLICATIONS, LOWERcost, better quality of life outcomes, and pressure by health care providers and patients. 22Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. History HAS SHOWN THE ADVANTAGE OF BEING THE FIRST TO MARKET A NEW BRACHYTHERAPY PRODUCT. FOR EXAMPLE, THERAGENICS CORP., WHICH INTRODUCED THE ORIGINALPD-103 SEED, CURRENTLY CLAIMS OVER 59% OF THE PD-103 MARKET SHARE (THROUGH CR BARD, OTHER DISTRIBUTORS, AND DIRECT DISTRIBUTION). (SOURCE: MillenniumResearch Corp, 2008). Although factors other than being first to market contribute to becoming a market leader, the Company believes it has THE OPPORTUNITYto obtain a similar and significant advantage by being the first to introduce a Cs-131 seed.The COMPANY’S PATENTED CS-131 SEPARATION PROCESS IS LIKELY TO PROVIDE A SUSTAINABLE COMPETITIVE ADVANTAGE. PRODUCTION OF CS-131 ALSO REQUIRES SPECIALIZEDFACILITIES THAT REPRESENT HIGH COST AND LONG LEAD TIME IF NOT READILY AVAILABLE. IN ADDITION, A COMPETITOR WOULD NEED TO DEVELOP A METHOD FOR isotopeATTACHMENT AND SEED ASSEMBLY, WOULD NEED TO CONDUCT TESTING TO MEET NRC AND FDA REQUIREMENTS, AND WOULD NEED TO OBTAIN REGULATORY CLEARANCES BEFOREmarketing a competing device.Several COMPANIES HAVE OBTAINED REGULATORY CLEARANCE TO PRODUCE AND DISTRIBUTE PD-103 AND I-125 SEEDS, WHICH COMPETE DIRECTLY WITH OUR SEED. IT IS POSSIBLEthat THREE OR FOUR OF THE CURRENT I-125 OR PD-103 SEED MANUFACTURERS (E.G., CR BARD, ONCURA, THERAGENICS, ETC.) ARE CAPABLE OF PRODUCING AND MARKETING A CS-131 seed, BUT NONE HAVE REPORTED EFFORTS TO DO SO. BEST MEDICAL OBTAINED A SEED CORE PATENT IN 1992 THAT NAMED TEN DIFFERENT ISOTOPES, INCLUDING CS-131, FORuse in THEIR SEEDS. BEST MEDICAL RECEIVED FDA 510(K) CLEARANCE TO MARKET A CS-131 SEED ON JUNE 6, 1993 BUT TO DATE HAS NOT PRODUCED ANY PRODUCTS FOR SALE. IN ADDITION TO THE FDA AND THE NRC, BEST MEDICAL WOULD BE REQUIRED TO SUBMIT A CS-131 SEED TO THE TG-43 TASK GROUP OF THE AMERICAN ASSOCIATION OFPhysicists in MEDICINE TO DETERMINE THE SEED’S CHARACTERISTICS SUCH AS ANISOTROPY, DOSE RATE CONSTANT, ETC. TO DATE THERE HAS BEEN NO SUBMISSION TO THE TG-43task group for a competing Cs-131 seed.Additional Growth OpportunitiesManagement OF THE COMPANY SEES GROWTH OPPORTUNITIES THROUGH EXPANSION INTO INTERNATIONAL MARKETS AND ADDITIONAL TREATMENT APPLICABILITY TO CANCERS OTHERthan PROSTATE. THE COMPANY PLANS TO INTRODUCE CS-131 FOR PROSTATE BRACHYTHERAPY INITIALLY INTO CANADA AND RUSSIA AND LATER INTO OTHER INTERNATIONAL MARKETSthrough partnerships and strategic alliances with channel partners for manufacturing and distribution.Cs-131 HAS FDA CLEARANCE TO BE USED FOR TREATMENTS FOR A BROAD SPECTRUM OF CANCERS INCLUDING BREAST, BRAIN, LUNG, AND LIVER CANCER, AND THE COMPANY BELIEVESTHAT A MAJOR OPPORTUNITY EXISTS AS AN ADJUNCT THERAPY FOR THE TREATMENT OF RESIDUAL LUNG, HEAD AND NECK, AND OTHER CANCERS. THE COMPANY HAS ALREADY BEGUNTREATING OCULAR MELANOMA AND IS JUST BEGINNING TO TREAT LUNG AND HEAD AND NECK TUMORS. THE COMPANY HAS HAD DISCUSSIONS WITH PROMINENT PHYSICIANS AND ISlooking at treatments for other cancer sites.There is ALSO AN OPPORTUNITY TO DEVELOP AND MARKET OTHER RADIOACTIVE ISOTOPES TO THE UNITED STATES MARKET, AND TO MARKET CS-131 ISOTOPE ITSELF, SEPARATE FROMits use in our seeds. The Company is also in the preliminary stages of exploring ALTERNATE METHODS OF DELIVERING OUR ISOTOPES TO VARIOUS ORGANS OF THE BODY, ASit may be advantageous to use delivery methods other than a titanium-encapsulated seed to deliver radiation to certain organs.ITEM 1A – RISK FACTORSOur Revenues Depend Upon One Product. UNTIL SUCH TIME AS WE DEVELOP ADDITIONAL PRODUCTS, OUR REVENUES DEPEND UPON THE SUCCESSFUL PRODUCTION,MARKETING, AND SALES OF THE PROXCELAN CS-131 BRACHYTHERAPY SEED. THE RATE AND LEVEL OF MARKET ACCEPTANCE OF THIS PRODUCT MAY VARY DEPENDING ON THEPERCEPTION BY PHYSICIANS AND OTHER MEMBERS OF THE HEALTHCARE COMMUNITY OF ITS SAFETY AND EFFICACY AS COMPARED TO THAT OF COMPETING PRODUCTS, IF ANY; THECLINICAL OUTCOMES OF THE PATIENTS TREATED; THE EFFECTIVENESS OF OUR SALES AND MARKETING EFFORTS IN THE UNITED STATES, CANADA, AND RUSSIA; ANY UNFAVORABLEPUBLICITY CONCERNING OUR PRODUCT OR SIMILAR PRODUCTS; OUR PRODUCT’S PRICE RELATIVE TO OTHER PRODUCTS OR COMPETING TREATMENTS; ANY DECREASE IN CURRENTREIMBURSEMENT RATES FROM THE CENTERS FOR MEDICARE AND MEDICAID SERVICES OR THIRD-PARTY PAYERS; REGULATORY DEVELOPMENTS RELATED TO THE MANUFACTURE ORCONTINUED USE OF THE PRODUCT; AVAILABILITY OF SUFFICIENT SUPPLIES OF ENRICHED BARIUM (NOW COMING FROM RUSSIA) FOR CS-131 SEED PRODUCTION; ABILITY TO PRODUCESUFFICIENT QUANTITIES OF THIS PRODUCT; AND THE ABILITY OF PHYSICIANS TO PROPERLY UTILIZE THE DEVICE AND AVOID EXCESSIVE LEVELS OF RADIATION TO PATIENTS. BECAUSEOF OUR RELIANCE ON THIS PRODUCT AS THE SOLE SOURCE OF OUR REVENUE, ANY MATERIAL ADVERSE DEVELOPMENTS WITH RESPECT TO THE COMMERCIALIZATION OF THIS PRODUCTmay cause us to continue to incur losses rather than profits in the future. 23Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Although Cleared To Treat Any Malignant Tissue, Our Sole Product Is Currently Used To Treat Two Types Of Cancer. CURRENTLY, THE PROXCELAN CS-131 SEEDIS USED EXCLUSIVELY FOR THE TREATMENT OF PROSTATE CANCER (OVER NINETY-NINE PERCENT OF OUR SALES) AND OCULAR MELANOMA (LESS THAN ONE PERCENT OF OUR SALES). WEbelieve the Proxcelan Cs-131 seed will be used to treat other types of cancers (and have treated a single head and neck tumor and a single lung tumor to date),AS IS CURRENTLY THE CASE WITH OUR COMPETITORS’ I-125 AND PD-103 SEEDS. HOWEVER, WE BELIEVE THAT CLINICAL DATA GATHERED BY SELECT GROUPS OF PHYSICIANS UNDERTREATMENT PROTOCOLS SPECIFIC TO OTHER ORGANS WILL BE NEEDED PRIOR TO WIDESPREAD ACCEPTANCE OF OUR PRODUCT FOR TREATING OTHER CANCER SITES. IF OUR CURRENT ANDFUTURE PRODUCTS DO NOT BECOME ACCEPTED IN TREATING CANCERS OF OTHER SITES, OUR SALES WILL DEPEND SOLELY ON TREATMENT OF PROSTATE CANCER AND WILL REQUIRE EVERincreasing market share to increase revenues.We Have Increasing Cash Requirements. IsoRay has generated material operating losses since inception. We expect to continue to EXPERIENCE SIGNIFICANT NETOPERATING LOSSES. DUE TO PREVIOUS CAPITAL INVESTMENTS AND SUBSTANTIAL COST REDUCTIONS, MANAGEMENT BELIEVES CASH AND CASH EQUIVALENTS ON HAND AT JUNE 30,2009 WILL BE SUFFICIENT TO MEET OUR ANTICIPATED CASH REQUIREMENTS FOR OPERATIONS, DEBT SERVICE, AND CAPITAL EXPENDITURE REQUIREMENTS THROUGH AT LEAST THE NEXTTWELVE MONTHS. IF OPERATING COSTS EXPAND PROPORTIONATELY WITH REVENUE INCREASES, OTHER APPLICATIONS ARE PURSUED FOR SEED USAGE OUTSIDE THE PROSTATE MARKET,PROTOCOLS ARE EXPANDED TO SUPPORT THE INTEGRITY OF OUR PRODUCT, AND MARKETING EXPENSES INCREASE, MANAGEMENT BELIEVES APPROXIMATELY $1.0 MILLION INMONTHLY REVENUE WILL BE NEEDED TO REACH BREAK-EVEN. THIS IS A DECREASE FROM THE PREVIOUS ESTIMATE OF $1.5 MILLION IN MONTHLY REVENUE DUE TO RECENTimprovements in the Company’s production operating efficiencies and its cost structure implemented BY NEW MANAGEMENT. HOWEVER, THERE IS NO ASSURANCE ASTO WHEN BREAK-EVEN WILL OCCUR. IF WE ARE UNABLE TO GENERATE PROFITS AND UNABLE TO OBTAIN ADDITIONAL FINANCING TO MEET OUR WORKING CAPITAL REQUIREMENTS, WEmay have to curtail our business.We Rely Heavily On A Limited Number Of Suppliers. SOME MATERIALS USED IN OUR PRODUCTS ARE CURRENTLY AVAILABLE ONLY FROM A LIMITED NUMBER OF SUPPLIERS. INFISCAL 2009, APPROXIMATELY SIXTY-FIVE PERCENT (65%) OF OUR CS-131 WAS SUPPLIED THROUGH URALDIAL FROM REACTORS LOCATED IN RUSSIA. UNLESS THE COMPANYSUBSTANTIALLY INCREASES ITS PURCHASE REQUIREMENTS RESULTING FROM SIGNIFICANT INCREASES IN DEMAND FOR ITS PRODUCT, THE COST OF CS-131 IN RUSSIA COULD INCREASEFROM CURRENT PRICING. OUR CURRENT CONTRACT WITH URALDIAL TERMINATES IN DECEMBER 2009 AND WILL HAVE TO BE RENEGOTIATED. MANAGEMENT WILL SEEK TO NEGOTIATEfavorable pricing but there is no assurance as to the outcome of these negotiations.IF THE DEVELOPMENT OF BARIUM ENRICHMENT CAPABILITIES IS SUCCESSFUL, THE COMPANY PLANS TO EXPAND CS-131 MANUFACTURING CAPABILITY AT THE MURR REACTOR INTHE UNITED STATES. RELIANCE ON ANY SINGLE SUPPLIER INCREASES THE RISKS ASSOCIATED WITH CONCENTRATING ISOTOPE PRODUCTION AT A SINGLE REACTOR FACILITY WHICH CANbe SUBJECT TO UNANTICIPATED SHUTDOWNS. FAILURE TO OBTAIN DELIVERIES OF CS-131 FROM MULTIPLE SOURCES COULD HAVE A MATERIAL ADVERSE EFFECT ON SEED PRODUCTIONand there may be a delay before we could locate alternative suppliers beyond the three currently used.WE MAY NOT BE ABLE TO LOCATE ADDITIONAL SUPPLIERS OUTSIDE OF RUSSIA CAPABLE OF PRODUCING THE LEVEL OF OUTPUT OF CESIUM AT THE QUALITY STANDARDS WE REQUIRE.ADDITIONAL FACTORS THAT COULD CAUSE INTERRUPTIONS OR DELAYS IN OUR SOURCE OF MATERIALS INCLUDE LIMITATIONS ON THE AVAILABILITY OF RAW MATERIALS OR manufacturingPERFORMANCE EXPERIENCED BY OUR SUPPLIERS AND A BREAKDOWN IN OUR COMMERCIAL RELATIONS WITH ONE OR MORE SUPPLIERS. SOME OF THESE FACTORS MAY BE COMPLETELYout of our and our suppliers’ control. 24Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. VIRTUALLY ALL TITANIUM TUBING USED IN BRACHYTHERAPY SEED MANUFACTURE COMES FROM A SINGLE SOURCE, ACCELLENT CORPORATION. WE CURRENTLY OBTAIN A KEYcomponent of OUR SEED CORE FROM ANOTHER SINGLE SUPPLIER. WE DO NOT HAVE FORMAL WRITTEN AGREEMENTS WITH ACCELLENT CORPORATION. ANY INTERRUPTION OR delayIN THE SUPPLY OF MATERIALS REQUIRED TO PRODUCE OUR PRODUCTS COULD HARM OUR BUSINESS IF WE WERE UNABLE TO OBTAIN AN ALTERNATIVE SUPPLIER OR SUBSTITUTEEQUIVALENT MATERIALS IN A COST-EFFECTIVE AND TIMELY MANNER. TO MITIGATE ANY POTENTIAL INTERRUPTIONS, THE COMPANY CONTINUALLY EVALUATES ITS INVENTORY LEVELSand management believes that the Company maintains a sufficient quantity on hand to alleviate any potential disruptions.Industry Trends. SEVERAL FACTORS WHICH OCCURRED IN FISCAL 2009 CAUSED OUR REVENUES TO SIGNIFICANTLY DECLINE AND THESE FACTORS ARE STILL CONTRIBUTING TO OURFAILURE TO IMPROVE SALES IN THE PROSTATE MARKET. BEGINNING IN THE FALL OF 2008, U.S. CONSUMERS SIGNIFICANTLY CURTAILED ALL SPENDING (EVEN FOR LIFE SAVINGMEDICAL PROCEDURES) WHICH IMPACTED THE BRACHYTHERAPY INDUSTRY AS A WHOLE. IN FEBRUARY OF 2009 NOTED UROLOGISTS ANNOUNCED AT A MEDICAL CONFERENCE THATPSA TESTING WAS NOT AS NECESSARY AS PREVIOUSLY BELIEVED. THEIR STATEMENTS WERE WIDELY PUBLICIZED. MANAGEMENT BELIEVES THAT MANY PEOPLE HAVE BEENinfluenced BY THESE STATEMENTS TO CUT BACK ON PSA TESTING THEREBY DECREASING IN THE SHORT TERM THE NUMBER OF PROCEDURES PERFORMED. THE FINAL FACTOR WHICHOCCURRED WAS THE EMERGENCE OF IMRT AS THE PREFERRED TREATMENT ALTERNATIVE AS A RESULT OF A MUCH HIGHER REIMBURSEMENT RATE TO PHYSICIANS COMPARED TOBRACHYTHERAPY TREATMENTS. EACH OF THESE FACTORS IS CONTINUING TO IMPACT THE PERFORMANCE OF THE COMPANY IN THE PROSTATE MARKET AND THE INDUSTRY AS A WHOLEduring fiscal 2010 and there is no assurance that they will not continue to impact sales of the Company.Future Production Increases Will Depend on Our Ability to Acquire Larger Quantities of Cs-131 and Hire More Employees. ISORAY CURRENTLY OBTAINS Cs-131THROUGH ITS CONTRACT WITH URALDIAL AND THROUGH REACTOR IRRADIATION OF NATURAL BARIUM AND SUBSEQUENT SEPARATION OF CS-131 FROM THE IRRADIATED BARIUMTARGETS. THE AMOUNT OF CS-131 THAT CAN BE PRODUCED FROM A GIVEN REACTOR SOURCE IS LIMITED BY THE POWER LEVEL AND VOLUME AVAILABLE WITHIN THE REACTOR FORIRRADIATING TARGETS. THIS LIMITATION CAN BE OVERCOME BY UTILIZING BARIUM FEEDSTOCK THAT IS ENRICHED IN THE STABLE ISOTOPE BA-130. HOWEVER, THE NUMBER OFsuppliers of enriched barium is limited and they may be unable to produce this material in sufficient quantities at a reasonable price.IsoRay HAS ENTERED INTO AN EXCLUSIVE AGREEMENT (EFFECTIVE THROUGH DECEMBER 31, 2009) WITH URALDIAL IN RUSSIA TO PROVIDE CS-131 IN QUANTITIES SUFFICIENT TOSUPPLY A SIGNIFICANT PERCENTAGE OF FUTURE DEMAND FOR THIS ISOTOPE. DUE TO THE PURCHASE OF ENRICHED BARIUM IN JUNE 2007, ISORAY HAS ACCESS TO SUFFICIENTQUANTITIES OF ENRICHED BARIUM THAT MAY BE RECYCLED TO INCREASE THE PRODUCTION OF CS-131. ALTHOUGH THE URALDIAL AGREEMENT PROVIDES FOR SUPPLYING CS-131 insignificant quantities, there is no assurance that this will result in IsoRay GAINING ACCESS TO A CONTINUING SUFFICIENT SUPPLY OF ENRICHED BARIUM FEEDSTOCK. IF WEWERE UNABLE TO OBTAIN SUPPLIES OF ISOTOPES FROM RUSSIA IN THE FUTURE, OUR OVERALL SUPPLY OF CS-131 WOULD BE REDUCED SIGNIFICANTLY UNLESS THE COMPANY HAS Asource of enriched barium for utilization in domestic reactors.We Have Entered Into An Agreement With A Single Distributor For Our Cesium-131 From Russia. WE PREVIOUSLY OBTAINED THE MAJORITY OF OUR CS-131 FROMeither the Institute of Nuclear Materials (INM) or the Russian Research Institute of Atomic Reactors (RIAR), both of which are located in Russia. In December2008, WE ENTERED INTO AN AGREEMENT WITH URALDIAL TO PURCHASE CS-131 DIRECTLY FROM URALDIAL INSTEAD OF FROM INM AND RIAR. AS A RESULT, WE NOW RELY ONURALDIAL TO OBTAIN CS-131 FROM RUSSIAN SOURCES. URALDIAL HAS AGREED TO MAINTAIN AT LEAST TWO RUSSIAN SOURCES OF ITS CS-131, AND OUR AGREEMENT WITH UralDialHAS LOWER MINIMUM PURCHASE REQUIREMENTS THAN OUR PRIOR AGREEMENTS WITH INM AND RIAR, AND THESE LOWER MINIMUM PURCHASE REQUIREMENTS ARE BEING MET ATTHIS TIME. THROUGH THE URALDIAL AGREEMENT, WE HAVE OBTAINED SET PRICING FOR OUR RUSSIAN CS-131 THROUGH THE END OF 2009. THERE CAN BE NO GUARANTEE THATURALDIAL WILL ALWAYS BE ABLE TO SUPPLY US WITH SUFFICIENT CS-131, WHICH COULD BE DUE IN PART TO RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND BEYOND OUR ANDUralDial's control, and if we were unable to obtain supplies OF ISOTOPES FROM RUSSIA IN THE FUTURE, OUR OVERALL SUPPLY OF CS-131 WOULD BE REDUCED SIGNIFICANTLYunless we have a source of enriched barium for utilization in domestic reactors. 25Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We Are Subject To Uncertainties Regarding Reimbursement For Use Of Our Products. HOSPITALS AND FREESTANDING CLINICS MAY BE LESS LIKELY TO PURCHASE OURPRODUCTS IF THEY CANNOT BE ASSURED OF RECEIVING FAVORABLE REIMBURSEMENT FOR TREATMENTS USING OUR PRODUCTS FROM THIRD-PARTY PAYERS, SUCH AS MEDICARE ANDPRIVATE HEALTH INSURANCE PLANS. CURRENTLY, MEDICARE REIMBURSES HOSPITALS, CLINICS AND PHYSICIANS FOR THE COST OF SEEDS USED IN BRACHYTHERAPY PROCEDURES ON APASS THROUGH BASIS, AND WILL CONTINUE THIS METHOD OF REIMBURSEMENT THROUGH DECEMBER 31, 2009. HISTORICALLY, PRIVATE INSURERS HAVE FOLLOWED MEDICAREGUIDELINES IN ESTABLISHING REIMBURSEMENT RATES. HOWEVER, THIRD-PARTY PAYERS ARE INCREASINGLY CHALLENGING THE PRICING OF CERTAIN MEDICAL SERVICES OR devices,AND WE CANNOT BE SURE THAT THEY WILL REIMBURSE OUR CUSTOMERS AT LEVELS SUFFICIENT FOR US TO MAINTAIN FAVORABLE SALES AND PRICE LEVELS FOR OUR PRODUCTS. THERE ISno uniform policy on reimbursement among THIRD-PARTY PAYERS, AND WE CAN PROVIDE NO ASSURANCE THAT OUR PRODUCTS WILL CONTINUE TO QUALIFY FOR REIMBURSEMENTFROM ALL THIRD-PARTY PAYERS OR THAT REIMBURSEMENT RATES WILL NOT BE REDUCED. A REDUCTION IN OR ELIMINATION OF THIRD-PARTY REIMBURSEMENT FOR TREATMENTS USINGour products would likely have a material adverse effect on our revenues.IN 2003, WE APPLIED TO THE CENTERS FOR MEDICARE AND MEDICAID SERVICES (CMS) AND RECEIVED A REIMBURSEMENT CODE FOR USE OF OUR CS-131 SEED. AS OF JULY 1,2007, CMS REVISED THE CODING SYSTEM FOR BRACHYTHERAPY SEEDS AND SEPARATED THE SINGLE CODE INTO TWO CODES – ONE CODE FOR LOOSE SEEDS AND A SECOND CODE FORstranded SEEDS. THIS METHODOLOGY WAS APPLIED TO ALL COMPANIES MANUFACTURING AND DISTRIBUTING BRACHYTHERAPY SEEDS. REIMBURSEMENT AMOUNTS ARE reviewedAND REVISED ANNUALLY. ADJUSTMENTS COULD BE MADE TO THESE REIMBURSEMENT AMOUNTS OR POLICIES, WHICH COULD RESULT IN REDUCED REIMBURSEMENT forbrachytherapy services, which could negatively affect market demand for our products.FURTHERMORE, ANY FEDERAL AND STATE EFFORTS TO REFORM GOVERNMENT AND PRIVATE HEALTHCARE INSURANCE PROGRAMS COULD SIGNIFICANTLY AFFECT THE PURCHASE OFHEALTHCARE SERVICES AND PRODUCTS IN GENERAL AND DEMAND FOR OUR PRODUCTS IN PARTICULAR. MEDICARE IS THE PAYER IN APPROXIMATELY 70% OF ALL U.S. prostateBRACHYTHERAPY CASES AND MANAGEMENT ANTICIPATES THIS PERCENTAGE TO INCREASE ANNUALLY. WE ARE UNABLE TO PREDICT WHETHER POTENTIAL HEALTHCARE REFORMS WILL BEENACTED, WHETHER OTHER HEALTHCARE LEGISLATION OR REGULATIONS AFFECTING THE BUSINESS MAY BE PROPOSED OR ENACTED IN THE FUTURE OR WHAT EFFECT ANY SUCHlegislation or regulations would have on our business, financial condition or results of operations.Our Operating Results Will Be Subject To Significant Fluctuations. OUR QUARTERLY REVENUES, EXPENSES, AND OPERATING RESULTS ARE LIKELY TO FLUCTUATESIGNIFICANTLY IN THE FUTURE. FLUCTUATION MAY RESULT FROM A VARIETY OF FACTORS, WHICH ARE DISCUSSED IN DETAIL THROUGHOUT THIS “RISK FACTORS” SECTION,including: §our achievement of product development objectives and milestones; §demand and pricing for the Company’s products; §effects of aggressive competitors; §hospital, clinic and physician buying decisions; §research and development and manufacturing expenses; §patient outcomes from our therapy; §physician acceptance of our products; §government or private healthcare reimbursement policies; §our manufacturing performance and capacity; §incidents, if any, that could cause temporary shutdown of our manufacturing facility; §the amount and timing of sales orders; §rate and success of future product approvals; §timing of FDA clearance, if any, of competitive products and the rate of market penetration of competing products; §seasonality of purchasing behavior in our market; §overall economic conditions; and §the successful introduction or market penetration of alternative therapies.We Have Limited Data on the Clinical Performance of Cs-131. AS OF JULY 31, 2009, THE PROXCELAN CS-131 SEED HAS BEEN IMPLANTED IN OVER 4,000 patientsAND RESEARCH PAPERS ARE BEING PUBLISHED ON THE USE OF THE PROXCELAN SEED. HOWEVER, WE HAVE LESS STATISTICAL DATA THAN IS AVAILABLE FOR I-125 AND PD-103SEEDS. WHILE THIS LIMITED DATA MAY PREVENT US FROM DRAWING STATISTICALLY SIGNIFICANT CONCLUSIONS, THE SIDE EFFECTS EXPERIENCED BY THESE PATIENTS WERE LESSSEVERE THAN SIDE EFFECTS OBSERVED IN SEED BRACHYTHERAPY WITH I-125 AND PD-103 AND IN OTHER FORMS OF TREATMENT SUCH AS RADICAL PROSTATECTOMY. THESE EARLYRESULTS INDICATE THAT THE ONSET OF SIDE EFFECTS GENERALLY OCCURS BETWEEN ONE AND THREE WEEKS POST-IMPLANT, AND THE SIDE EFFECTS ARE RESOLVED BETWEEN FIVE ANDEIGHT WEEKS POST-IMPLANT, MORE QUICKLY THAN THE RESOLUTION OF SIDE EFFECTS THAT OCCUR WITH COMPETING SEEDS OR WITH OTHER FORMS OF TREATMENT. THESE LIMITEDfindings support management’s belief that the Cs-131 seed will result in less severe side effects than COMPETING TREATMENTS, BUT WE MAY HAVE TO GATHER DATA ONoutcomes from additional patients before we can establish statistically valid conclusions regarding the incidence of side effects from our seeds. 26Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We Are Subject To The Risk That Certain Third Parties May Mishandle Our Product. WE RELY ON THIRD PARTIES, SUCH AS FEDERAL EXPRESS, TO DELIVER OURProxcelan Cs-131 seed, and on other third parties, including various radiopharmacies, to package our PROXCELAN CS-131 SEED IN CERTAIN SPECIALIZED PACKAGINGforms requested by customers. We are subject to the risk that these third parties may MISHANDLE OUR PRODUCT, WHICH COULD RESULT IN ADVERSE EFFECTS, PARTICULARLYgiven the radioactive nature of our product.It Is Possible That Other Treatments May Be Deemed Superior To Brachytherapy. OUR PROXCELAN CS-131 SEED FACES COMPETITION NOT ONLY FROM COMPANIESTHAT SELL OTHER RADIATION THERAPY PRODUCTS, BUT ALSO FROM COMPANIES THAT ARE DEVELOPING ALTERNATIVE THERAPIES FOR THE TREATMENT OF CANCERS. IT IS POSSIBLE THATADVANCES IN THE PHARMACEUTICAL, BIOMEDICAL, OR GENE THERAPY FIELDS COULD RENDER SOME OR ALL RADIATION THERAPIES, WHETHER CONVENTIONAL OR BRACHYTHERAPY,OBSOLETE. IF ALTERNATIVE THERAPIES ARE PROVEN OR EVEN PERCEIVED TO OFFER TREATMENT OPTIONS THAT ARE SUPERIOR TO BRACHYTHERAPY, PHYSICIAN ADOPTION OF OURproduct could be negatively affected and our revenues from our product could decline.Our Industry Is Intensely Competitive. THE MEDICAL DEVICE INDUSTRY IS INTENSELY COMPETITIVE. WE COMPETE WITH BOTH PUBLIC AND PRIVATE MEDICAL DEVICE,biotechnology and pharmaceutical companies that have been in existence longer than we have, have a greater number of products on the market, have greaterFINANCIAL AND OTHER RESOURCES, AND HAVE OTHER TECHNOLOGICAL OR COMPETITIVE ADVANTAGES. IN ADDITION, CENTERS THAT WISH TO OFFER THE PROXCELAN CS-131 SEED MUSTCOMPLY WITH LICENSING REQUIREMENTS SPECIFIC TO THE STATE IN WHICH THEY DO BUSINESS AND THESE LICENSING REQUIREMENTS MAY TAKE A CONSIDERABLE AMOUNT OF TIMETO COMPLY WITH. CERTAIN CENTERS MAY CHOOSE TO NOT OFFER OUR PROXCELAN CS-131 SEED DUE TO THE TIME REQUIRED TO OBTAIN NECESSARY LICENSE AMENDMENTS. WEALSO COMPETE WITH ACADEMIC INSTITUTIONS, GOVERNMENT AGENCIES, AND PRIVATE RESEARCH ORGANIZATIONS IN THE DEVELOPMENT OF TECHNOLOGIES AND PROCESSES AND INACQUIRING KEY PERSONNEL. ALTHOUGH WE HAVE PATENTS GRANTED AND PATENTS APPLIED FOR TO PROTECT OUR ISOTOPE SEPARATION PROCESSES AND CS-131 SEEDMANUFACTURING TECHNOLOGY, WE CANNOT BE CERTAIN THAT ONE OR MORE OF OUR COMPETITORS WILL NOT ATTEMPT TO OBTAIN PATENT PROTECTION THAT BLOCKS OR ADVERSELYAFFECTS OUR PRODUCT DEVELOPMENT EFFORTS. TO MINIMIZE THIS POTENTIAL, WE HAVE ENTERED INTO EXCLUSIVE AGREEMENTS WITH KEY SUPPLIERS OF ISOTOPES AND ISOTOPEprecursors, which are subject to becoming non-exclusive as we have failed to meet minimum purchase requirements.We May Be Unable To Adequately Protect Or Enforce Our Intellectual Property Rights Or Secure Rights To Third-Party Patents. OUR ABILITY AND THEABILITIES OF OUR PARTNERS TO OBTAIN AND MAINTAIN PATENT AND OTHER PROTECTION FOR OUR PRODUCTS WILL AFFECT OUR SUCCESS. WE ARE ASSIGNED, HAVE RIGHTS TO, OR HAVEEXCLUSIVE LICENSES TO PATENTS AND PATENTS PENDING IN THE U.S. AND NUMEROUS FOREIGN COUNTRIES. THE PATENT POSITIONS OF MEDICAL DEVICE COMPANIES CAN BEhighly uncertain and involve complex legal and factual questions. Our patent rights may not be upheld in a court of law if challenged. Our patent rights mayNOT PROVIDE COMPETITIVE ADVANTAGES FOR OUR PRODUCTS AND MAY BE CHALLENGED, INFRINGED UPON OR CIRCUMVENTED BY OUR COMPETITORS. WE CANNOT PATENT OURproducts in all countries or afford to litigate every potential violation worldwide.BECAUSE OF THE LARGE NUMBER OF PATENT FILINGS IN THE MEDICAL DEVICE AND BIOTECHNOLOGY FIELD, OUR COMPETITORS MAY HAVE FILED APPLICATIONS OR BEEN ISSUEDPATENTS AND MAY OBTAIN ADDITIONAL PATENTS AND PROPRIETARY RIGHTS RELATING TO PRODUCTS OR PROCESSES COMPETITIVE WITH OR SIMILAR TO OURS. WE CANNOT BE CERTAINthat U.S. or foreign patents do not exist or will not be issued that would harm our ability to commercialize our products and product candidates. 27Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Value Of Our Granted Patents, and Our Patents Pending, Is Uncertain. ALTHOUGH OUR MANAGEMENT STRONGLY BELIEVES THAT OUR PATENT ON THE PROCESS FORPRODUCING CS-131, OUR PATENTS ON ADDITIONAL METHODS FOR PRODUCING CS-131 AND OTHER ISOTOPES, OUR PATENT PENDING ON THE MANUFACTURE OF THE BRACHYTHERAPYSEED, AND ANTICIPATED FUTURE PATENT APPLICATIONS, WHICH HAVE NOT YET BEEN FILED, HAVE SIGNIFICANT VALUE, WE CANNOT BE CERTAIN THAT OTHER LIKE-KIND PROCESSESmay not exist or be discovered, that any of these patents is enforceable, or that any of our patent applications will result in issued patents.Failure To Comply With Government Regulations Could Harm Our Business. AS A MEDICAL DEVICE AND MEDICAL ISOTOPE MANUFACTURER, WE ARE SUBJECT TOEXTENSIVE, COMPLEX, COSTLY, AND EVOLVING GOVERNMENTAL RULES, REGULATIONS AND RESTRICTIONS ADMINISTERED BY THE FDA, BY OTHER FEDERAL AND STATE AGENCIES, ANDBY GOVERNMENTAL AUTHORITIES IN OTHER COUNTRIES. COMPLIANCE WITH THESE LAWS AND REGULATIONS IS EXPENSIVE AND TIME-CONSUMING, AND CHANGES TO OR FAILURE TOcomply with these laws and regulations, or adoption of new laws and regulations, could adversely affect our business.IN THE UNITED STATES, AS A MANUFACTURER OF MEDICAL DEVICES AND DEVICES UTILIZING RADIOACTIVE BY-PRODUCT MATERIAL, WE ARE SUBJECT TO EXTENSIVE REGULATION BYFEDERAL, STATE, AND LOCAL GOVERNMENTAL AUTHORITIES, SUCH AS THE FDA AND THE WASHINGTON STATE DEPARTMENT OF HEALTH, TO ENSURE SUCH DEVICES ARE SAFE ANDEFFECTIVE. REGULATIONS PROMULGATED BY THE FDA UNDER THE U.S. FOOD, DRUG AND COSMETIC ACT, OR THE FDC ACT, GOVERN THE DESIGN, DEVELOPMENT, TESTING,MANUFACTURING, PACKAGING, LABELING, DISTRIBUTION, MARKETING AND SALE, POST-MARKET SURVEILLANCE, REPAIRS, REPLACEMENTS, AND RECALLS OF MEDICAL DEVICES. INWASHINGTON STATE, THE DEPARTMENT OF HEALTH, BY AGREEMENT WITH THE FEDERAL NUCLEAR REGULATORY COMMISSION (NRC), REGULATES THE POSSESSION, USE, ANDDISPOSAL OF RADIOACTIVE BYPRODUCT MATERIAL AS WELL AS THE MANUFACTURE OF RADIOACTIVE SEALED SOURCES TO ENSURE COMPLIANCE WITH STATE AND FEDERAL LAWS ANDregulations. Our Proxcelan Cs-131 brachytherapy seeds constitute both medical devices and radioactive sealed sources and are subject to these regulations.Under the FDC ACT, MEDICAL DEVICES ARE CLASSIFIED INTO THREE DIFFERENT CATEGORIES, OVER WHICH THE FDA APPLIES INCREASING LEVELS OF REGULATION: CLASS I, CLASS II,AND CLASS III. OUR PROXCELAN CS-131 SEED HAS BEEN CLASSIFIED AS A CLASS II DEVICE AND HAS RECEIVED CLEARANCE FROM THE FDA THROUGH THE 510(K) PRE-MARKETNOTIFICATION PROCESS. ANY MODIFICATIONS TO THE DEVICE THAT WOULD SIGNIFICANTLY AFFECT SAFETY OR EFFECTIVENESS, OR CONSTITUTE A MAJOR CHANGE IN INTENDED USE,would require a new 510(k) submission. As with any submittal to the FDA, there is no assurance that a 510(k) clearance would be granted to the Company.In ADDITION TO FDA-REQUIRED MARKET CLEARANCES AND APPROVALS FOR OUR PRODUCTS, OUR MANUFACTURING OPERATIONS ARE REQUIRED TO COMPLY WITH THE FDA'S QUALITYSYSTEM REGULATION, OR QSR, WHICH ADDRESSES REQUIREMENTS FOR A COMPANY'S QUALITY PROGRAM SUCH AS MANAGEMENT RESPONSIBILITY, GOOD MANUFACTURINGPRACTICES, PRODUCT AND PROCESS DESIGN CONTROLS, AND QUALITY CONTROLS USED IN MANUFACTURING. COMPLIANCE WITH APPLICABLE REGULATORY REQUIREMENTS ISMONITORED THROUGH PERIODIC INSPECTIONS BY THE FDA OFFICE OF REGULATORY AFFAIRS (ORA). WE ANTICIPATE BOTH ANNOUNCED AND UNANNOUNCED INSPECTIONS BY theFDA. SUCH INSPECTIONS COULD RESULT IN NON-COMPLIANCE REPORTS (FORM 483) WHICH, IF NOT ADEQUATELY RESPONDED TO, COULD LEAD TO ENFORCEMENT ACTIONS. THEFDA CAN INSTITUTE A WIDE VARIETY OF ENFORCEMENT ACTIONS, RANGING FROM PUBLIC WARNING LETTERS TO MORE SEVERE SANCTIONS SUCH AS FINES, INJUNCTIONS, CIVILPENALTIES, RECALL OF OUR PRODUCTS, OPERATING RESTRICTIONS, SUSPENSION OF PRODUCTION, NON-APPROVAL OR WITHDRAWAL OF PRE-MARKET CLEARANCES FOR NEW PRODUCTS OREXISTING PRODUCTS, AND CRIMINAL PROSECUTION. THERE CAN BE NO ASSURANCE THAT WE WILL NOT INCUR SIGNIFICANT COSTS TO COMPLY WITH THESE REGULATIONS IN THE FUTUREor that the regulations will not have a material adverse effect on our business, financial condition and results of operations.The MARKETING OF OUR PRODUCTS IN FOREIGN COUNTRIES WILL, IN GENERAL, BE REGULATED BY FOREIGN GOVERNMENTAL AGENCIES SIMILAR TO THE FDA. FOREIGN REGULATORYrequirements vary from country to country. The time and cost required to obtain regulatory approvals could be longer than that required for FDA clearance inTHE UNITED STATES AND THE REQUIREMENTS FOR LICENSING A PRODUCT IN ANOTHER COUNTRY MAY DIFFER SIGNIFICANTLY FROM FDA REQUIREMENTS. WE WILL RELY, IN PART, ONFOREIGN DISTRIBUTORS TO ASSIST US IN COMPLYING WITH FOREIGN REGULATORY REQUIREMENTS. WE MAY NOT BE ABLE TO OBTAIN THESE APPROVALS WITHOUT INCURRINGSIGNIFICANT EXPENSES OR AT ALL, AND THE FAILURE TO OBTAIN THESE APPROVALS WOULD PREVENT US FROM SELLING OUR PRODUCTS IN THE APPLICABLE COUNTRIES. THIS COULDlimit our sales and growth. 28Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our Business Exposes Us To Product Liability Claims. OUR DESIGN, TESTING, DEVELOPMENT, MANUFACTURE, AND MARKETING OF PRODUCTS INVOLVE AN INHERENT RISK OFexposure to PRODUCT LIABILITY CLAIMS AND RELATED ADVERSE PUBLICITY. INSURANCE COVERAGE IS EXPENSIVE AND DIFFICULT TO OBTAIN, AND, ALTHOUGH WE CURRENTLY HAVE AFIVE MILLION DOLLAR POLICY, IN THE FUTURE WE MAY BE UNABLE TO OBTAIN OR RENEW COVERAGE ON ACCEPTABLE TERMS, IF AT ALL. IF WE ARE UNABLE TO OBTAIN OR RENEWSUFFICIENT INSURANCE AT AN ACCEPTABLE COST OR IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, WHETHER FULLY COVERED BY INSURANCE OR NOT, OUR BUSINESScould be harmed.Our Business Involves Environmental Risks. OUR BUSINESS INVOLVES THE CONTROLLED USE OF HAZARDOUS MATERIALS, CHEMICALS, BIOLOGICS, AND RADIOACTIVECOMPOUNDS. MANUFACTURING IS EXTREMELY SUSCEPTIBLE TO PRODUCT LOSS DUE TO RADIOACTIVE, MICROBIAL, OR VIRAL CONTAMINATION; MATERIAL OR EQUIPMENT failure;VENDOR OR OPERATOR ERROR; OR DUE TO THE VERY NATURE OF THE PRODUCT’S SHORT HALF-LIFE. ALTHOUGH WE BELIEVE THAT OUR SAFETY PROCEDURES FOR HANDLING AND DISPOSINGOF SUCH MATERIALS COMPLY WITH STATE AND FEDERAL STANDARDS THERE WILL ALWAYS BE THE RISK OF ACCIDENTAL CONTAMINATION OR INJURY. IN ADDITION, RADIOACTIVE,microbial, or viral contamination MAY CAUSE THE CLOSURE OF THE RESPECTIVE MANUFACTURING FACILITY FOR AN EXTENDED PERIOD OF TIME. BY LAW, RADIOACTIVE MATERIALSmay only be disposed of AT STATE-APPROVED FACILITIES. AT OUR LEASED FACILITY WE USE COMMERCIAL DISPOSAL CONTRACTORS. WE MAY INCUR SUBSTANTIAL COSTS RELATED TOTHE DISPOSAL OF THESE MATERIALS. IF WE WERE TO BECOME LIABLE FOR AN ACCIDENT, OR IF WE WERE TO SUFFER AN EXTENDED FACILITY SHUTDOWN, WE COULD INCUR SIGNIFICANTcosts, damages, and penalties that could harm our business.We Rely Upon Key Personnel. Our success will depend, to a great extent, upon the experience, abilities and continued services of our executive officers, salesSTAFF AND KEY SCIENTIFIC PERSONNEL. IF WE LOSE THE SERVICES OF SEVERAL OFFICERS, SALES PERSONNEL, OR KEY SCIENTIFIC PERSONNEL, OUR BUSINESS COULD BE HARMED. OURSUCCESS ALSO WILL DEPEND UPON OUR ABILITY TO ATTRACT AND RETAIN OTHER HIGHLY QUALIFIED SCIENTIFIC, MANAGERIAL, SALES, AND MANUFACTURING PERSONNEL AND THEIRABILITY TO DEVELOP AND MAINTAIN RELATIONSHIPS WITH KEY INDIVIDUALS IN THE INDUSTRY. COMPETITION FOR THESE PERSONNEL AND RELATIONSHIPS IS INTENSE AND WEcompete with numerous pharmaceutical and biotechnology companies as well as with universities and non-profit research organizations. We may not be ableto continue to attract and retain qualified personnel.Our Ability To Operate In Foreign Markets Is Uncertain. Our future growth will depend in part on our ability to establish, grow and maintain product sales inFOREIGN MARKETS, PARTICULARLY IN CANADA AND RUSSIA. HOWEVER, WE HAVE LIMITED EXPERIENCE IN MARKETING AND DISTRIBUTING PRODUCTS IN OTHER COUNTRIES. ANYFOREIGN OPERATIONS WOULD SUBJECT US TO ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING OUR CUSTOMERS’ ABILITY TO OBTAIN REIMBURSEMENT FOR PROCEDURES USING OURPRODUCTS IN FOREIGN MARKETS; THE BURDEN OF COMPLYING WITH COMPLEX AND CHANGING FOREIGN REGULATORY REQUIREMENTS; SPEEDY DELIVERY REQUIREMENTS DUE TO THESHORT HALF-LIFE OF OUR PRODUCT; LANGUAGE BARRIERS AND OTHER DIFFICULTIES IN PROVIDING LONG-RANGE CUSTOMER SERVICE; POTENTIALLY LONGER ACCOUNTS RECEIVABLEcollection times; significant currency fluctuations, which could cause third-party distributors to reduce the number of products they purchase from us becauseTHE COST OF OUR PRODUCTS TO THEM COULD FLUCTUATE RELATIVE TO THE PRICE THEY CAN CHARGE THEIR CUSTOMERS; REDUCED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS INSOME FOREIGN COUNTRIES; AND THE POSSIBILITY THAT CONTRACTUAL PROVISIONS GOVERNED BY FOREIGN LAWS WOULD BE INTERPRETED DIFFERENTLY THAN INTENDED IN THE EVENTOF A CONTRACT DISPUTE. ANY FUTURE FOREIGN SALES OF OUR PRODUCTS COULD ALSO BE ADVERSELY AFFECTED BY EXPORT LICENSE REQUIREMENTS, THE IMPOSITION OFGOVERNMENTAL CONTROLS, POLITICAL AND ECONOMIC INSTABILITY, TRADE RESTRICTIONS, CHANGES IN TARIFFS, AND DIFFICULTIES IN STAFFING AND MANAGING FOREIGNoperations. Many of these factors may also affect our ability to import Cs-131 from Russia under our contract with UralDial.Our Ability To Expand Operations And Manage Growth Is Uncertain. OUR EFFORTS TO EXPAND OUR OPERATIONS WILL RESULT IN NEW AND INCREASED RESPONSIBILITIESfor management PERSONNEL AND WILL PLACE A STRAIN UPON THE ENTIRE COMPANY. TO COMPETE EFFECTIVELY AND TO ACCOMMODATE GROWTH, IF ANY, WE MAY BE REQUIREDTO CONTINUE TO IMPLEMENT AND TO IMPROVE OUR MANAGEMENT, MANUFACTURING, SALES AND MARKETING, OPERATING AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS ONa timely basis and to expand, train, motivate and manage our employees. There can be no assurance that our personnel, systems, procedures, and controls willBE ADEQUATE TO SUPPORT OUR FUTURE OPERATIONS. IF THE PROXCELAN CS-131 SEED WERE TO RAPIDLY BECOME THE “SEED OF CHOICE,” IT IS UNLIKELY THAT WE COULD MEETDEMAND. WE COULD EXPERIENCE SIGNIFICANT CASH FLOW DIFFICULTIES AND MAY HAVE DIFFICULTY OBTAINING THE WORKING CAPITAL REQUIRED TO MANUFACTURE OUR productsand meet demand. This would cause customer discontent and invite competition. 29Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our Reporting Obligations As A Public Company Are Costly. OPERATING A PUBLIC COMPANY INVOLVES SUBSTANTIAL COSTS TO COMPLY WITH REPORTING OBLIGATIONSUNDER FEDERAL SECURITIES LAWS THAT ARE CONTINUING TO INCREASE AS PROVISIONS OF THE SARBANES OXLEY ACT OF 2002 ARE IMPLEMENTED. AS A SMALLER REPORTINGCOMPANY, THE COMPANY NEEDS TO IMPLEMENT ADDITIONAL PROVISIONS OF THE SARBANES OXLEY ACT DURING FISCAL YEAR 2010. THESE REPORTING OBLIGATIONS WILLincrease our operating costs.Our Stock Price Is Likely To Be Volatile. THERE IS GENERALLY SIGNIFICANT VOLATILITY IN THE MARKET PRICES AND LIMITED LIQUIDITY OF SECURITIES OF EARLY STAGECOMPANIES, AND PARTICULARLY OF EARLY STAGE MEDICAL PRODUCT COMPANIES. CONTRIBUTING TO THIS VOLATILITY ARE VARIOUS EVENTS THAT CAN AFFECT OUR STOCK PRICE IN APOSITIVE OR NEGATIVE MANNER. THESE EVENTS INCLUDE, BUT ARE NOT LIMITED TO: GOVERNMENTAL APPROVALS OF OR REFUSALS TO APPROVE REGULATIONS OR ACTIONS; MARKETACCEPTANCE AND SALES GROWTH OF OUR PRODUCTS; LITIGATION INVOLVING THE COMPANY OR OUR INDUSTRY; DEVELOPMENTS OR DISPUTES CONCERNING OUR PATENTS OR OTHERPROPRIETARY RIGHTS; CHANGES IN THE STRUCTURE OF HEALTHCARE PAYMENT SYSTEMS; DEPARTURE OF KEY PERSONNEL; FUTURE SALES OF OUR SECURITIES; FLUCTUATIONS IN OURFINANCIAL RESULTS OR THOSE OF COMPANIES THAT ARE PERCEIVED TO BE SIMILAR TO US; SWINGS IN SEASONAL DEMANDS OF PURCHASERS; INVESTORS’ GENERAL PERCEPTION OF US;and general economic, industry and market conditions. If any of these events occur, it could cause our stock price to fall.Our Reduced Stock Price May Adversely Affect Our Liquidity. OUR COMMON STOCK HAS BEEN TRADING AT LESS THAN $1.00 PER SHARE PERIODICALLY IN RECENTMONTHS. MANY MARKET MAKERS ARE RELUCTANT TO MAKE A MARKET IN STOCK WITH A TRADING PRICE OF LESS THAN $1.00 PER SHARE. TO THE EXTENT THAT WE HAVE FEWERmarket makers for our common stock, our volume and liquidity will likely decline, which could further depress our stock price.Future Sales By Shareholders, Or The Perception That Such Sales May Occur, May Depress The Price Of Our Common Stock. The sale or availability FOR SALEOF SUBSTANTIAL AMOUNTS OF OUR SHARES IN THE PUBLIC MARKET, INCLUDING SHARES ISSUABLE UPON CONVERSION OF OUTSTANDING PREFERRED STOCK OR EXERCISE OF commonSTOCK WARRANTS AND OPTIONS, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND ALSO COULD IMPAIROUR ABILITY TO RAISE CAPITAL THROUGH FUTURE OFFERINGS OF OUR SHARES. AS OF JUNE 30, 2009, WE HAD 22,942,088 OUTSTANDING SHARES OF COMMON STOCK, AND THEfollowing additional shares were reserved for issuance: 2,708,166 shares upon exercise of outstanding options, 3,216,644 shares upon exercise of outstandingWARRANTS, AND 59,065 SHARES UPON CONVERSION OF PREFERRED STOCK. ANY DECLINE IN THE PRICE OF OUR COMMON STOCK MAY ENCOURAGE SHORT SALES, WHICH COULD PLACEfurther downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.The Issuance Of Shares Upon Exercise Of Derivative Securities May Cause Immediate And Substantial Dilution To Our Existing Shareholders. THE ISSUANCEOF SHARES UPON CONVERSION OF THE PREFERRED STOCK AND THE EXERCISE OF COMMON STOCK WARRANTS AND OPTIONS MAY RESULT IN SUBSTANTIAL DILUTION TO THE INTERESTS OFother shareholders since these selling shareholders may ultimately convert or exercise and sell all or a portion of the full amount issuable upon EXERCISE. IF ALLDERIVATIVE SECURITIES WERE CONVERTED OR EXERCISED INTO SHARES OF COMMON STOCK, THERE WOULD BE APPROXIMATELY AN ADDITIONAL 6,000,000 SHARES OF COMMONSTOCK OUTSTANDING AS A RESULT. THE ISSUANCE OF THESE SHARES WILL HAVE THE EFFECT OF FURTHER DILUTING THE PROPORTIONATE EQUITY INTEREST AND VOTING POWER OFholders of our common stock.We Do Not Expect To Pay Any Dividends For The Foreseeable Future. WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS TO OUR SHAREHOLDERS FOR THE FORESEEABLEFUTURE. THE TERMS OF CERTAIN OF OUR AND OUR SUBSIDIARY'S OUTSTANDING INDEBTEDNESS SUBSTANTIALLY RESTRICT THE ABILITY OF EITHER COMPANY TO PAYDIVIDENDS. ACCORDINGLY, SHAREHOLDERS MUST BE PREPARED TO RELY ON SALES OF THEIR COMMON STOCK AFTER PRICE APPRECIATION TO EARN AN INVESTMENT RETURN, WHICHMAY NEVER OCCUR. ANY DETERMINATION TO PAY DIVIDENDS IN THE FUTURE WILL BE MADE AT THE DISCRETION OF OUR BOARD OF DIRECTORS AND WILL DEPEND ON OUR RESULTS OFoperations, financial conditions, contractual restrictions, restrictions imposed by applicable laws and other factors our Board deems relevant. 30Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Certain Provisions of Minnesota Law and Our Charter Documents Have an Anti-Takeover Effect. THERE EXIST CERTAIN MECHANISMS UNDER MINNESOTA LAW ANDOUR CHARTER DOCUMENTS THAT MAY DELAY, DEFER OR PREVENT A CHANGE OF CONTROL. ANTI-TAKEOVER PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND MINNESOTALAW COULD DIMINISH THE OPPORTUNITY FOR SHAREHOLDERS TO PARTICIPATE IN ACQUISITION PROPOSALS AT A PRICE ABOVE THE THEN-CURRENT MARKET PRICE OF OUR COMMONSTOCK. FOR EXAMPLE, WHILE WE HAVE NO PRESENT PLANS TO ISSUE ANY PREFERRED STOCK, OUR BOARD OF DIRECTORS, WITHOUT FURTHER SHAREHOLDER APPROVAL, MAY ISSUESHARES OF UNDESIGNATED PREFERRED STOCK AND FIX THE POWERS, PREFERENCES, RIGHTS AND LIMITATIONS OF SUCH CLASS OR SERIES, WHICH COULD ADVERSELY AFFECT THE VOTINGPOWER OF THE COMMON SHARES. IN ADDITION, OUR BYLAWS PROVIDE FOR AN ADVANCE NOTICE PROCEDURE FOR NOMINATION OF CANDIDATES TO OUR BOARD OF DIRECTORS thatCOULD HAVE THE EFFECT OF DELAYING, DETERRING OR PREVENTING A CHANGE IN CONTROL. FURTHER, AS A MINNESOTA CORPORATION, WE ARE SUBJECT TO PROVISIONS OF THEMINNESOTA BUSINESS CORPORATION ACT, OR MBCA, REGARDING “BUSINESS COMBINATIONS,” WHICH CAN DETER ATTEMPTED TAKEOVERS IN CERTAIN SITUATIONS. PURSUANT TOTHE TERMS OF A SHAREHOLDER RIGHTS PLAN ADOPTED IN FEBRUARY 2007, EACH OUTSTANDING SHARE OF COMMON STOCK HAS ONE ATTACHED RIGHT. THE RIGHTS WILL CAUSESUBSTANTIAL DILUTION OF THE OWNERSHIP OF A PERSON OR GROUP THAT ATTEMPTS TO ACQUIRE THE COMPANY ON TERMS NOT APPROVED BY THE BOARD OF DIRECTORS AND MAYHAVE THE EFFECT OF DETERRING HOSTILE TAKEOVER ATTEMPTS. THE EFFECT OF THESE ANTI-TAKEOVER PROVISIONS MAY BE TO DETER BUSINESS COMBINATION TRANSACTIONS NOTapproved by our Board of Directors, including acquisitions that may offer a premium over the market price TO SOME OR ALL SHAREHOLDERS. WE MAY, IN THE FUTURE,consider adopting ADDITIONAL ANTI-TAKEOVER MEASURES. THE AUTHORITY OF OUR BOARD TO ISSUE UNDESIGNATED PREFERRED OR OTHER CAPITAL STOCK AND THE ANTI-TAKEOVERPROVISIONS OF THE MBCA, AS WELL AS OTHER CURRENT AND ANY FUTURE ANTI-TAKEOVER MEASURES ADOPTED BY US, MAY, IN CERTAIN CIRCUMSTANCES, DELAY, DETER OR PREVENTtakeover attempts and other changes in control of the Company not approved by our Board of Directors.ITEM 1B – UNRESOLVED STAFF COMMENTSAs a smaller reporting company, the Company is not required to provide Item 1B disclosure in this Annual Report.ITEM 2 – PROPERTIESTHE COMPANY’S EXECUTIVE OFFICES ARE LOCATED AT 350 HILLS STREET, SUITE 106, RICHLAND, WA 99354, (509) 375-1202, WHERE ISORAY CURRENTLY LEASESAPPROXIMATELY 16,400 SQUARE FEET OF OFFICE AND LABORATORY SPACE FOR APPROXIMATELY $23,500 PER MONTH PLUS MONTHLY JANITORIAL EXPENSES OF APPROXIMATELY$460 FROM ENERGY NORTHWEST, THE OWNER OF THE APPLIED PROCESS ENGINEERING LABORATORY (THE APEL FACILITY). THE COMPANY IS NOT AFFILIATED WITH THISLESSOR. THE MONTHLY RENT IS SUBJECT TO ANNUAL INCREASES BASED ON THE CONSUMER PRICE INDEX. THE CURRENT LEASE WAS ENTERED INTO IN MAY 2007, EXPIRES ON APRIL30, 2010, and has two three-year renewal options.THE COMPANY’S MANAGEMENT BELIEVES THAT ALL FACILITIES OCCUPIED BY THE COMPANY ARE ADEQUATE FOR PRESENT REQUIREMENTS, AND THAT THE COMPANY’S CURRENTequipment is in good condition and is suitable for the operations involved.ITEM 3 – LEGAL PROCEEDINGSThe Company is not involved in any material legal proceedings as of the date of this Report.ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matter was submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year covered by this Annual Report. 31Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IIITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESTHE COMPANY’S ARTICLES OF INCORPORATION PROVIDE THAT THE COMPANY HAS THE AUTHORITY TO ISSUE 200,000,000 SHARES OF CAPITAL STOCK, WHICH ARE CURRENTLYdivided into TWO CLASSES AS FOLLOWS: 194,000,000 SHARES OF COMMON STOCK, PAR VALUE OF $0.001 PER SHARE; AND 6,000,000 SHARES OF PREFERRED STOCK, PAR VALUE OF$0.001 per share. As of September 14, 2009, we had 22,942,088 outstanding shares of Common Stock and 59,065 outstanding shares of Preferred Stock.On April 19, 2007, OUR COMMON STOCK BEGAN TRADING ON THE AMERICAN STOCK EXCHANGE (NOW THE NYSE AMEX) UNDER THE SYMBOL "ISR." EVEN THOUGH WE HAVEobtained our NYSE Amex listing, there is still limited trading activity in our securities.The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for our common stock as reported on the NYSE Amex.Year ended June 30, 2009 High Low First quarter $0.90 $0.35 Second quarter 0.70 0.20 Third quarter 0.32 0.15 Fourth quarter 0.39 0.19 Year ended June 30, 2008 High Low First quarter $5.20 $3.44 Second quarter 3.51 1.85 Third quarter 2.27 1.00 Fourth quarter 1.00 0.55 The Company has never paid any cash dividends on its Common Stock and does not plan to pay any cash dividends in the foreseeable future. On February 1,2007, THE BOARD OF DIRECTORS DECLARED A DIVIDEND ON THE SERIES B PREFERRED STOCK OF ALL OUTSTANDING AND CUMULATIVE DIVIDENDS THROUGH DECEMBER 31,2006. There is no Series A Preferred Stock OUTSTANDING. THE TOTAL SERIES B ACCRUED DIVIDENDS OF $38,458 WERE PAID ON FEBRUARY 15, 2007. AT JUNE 30, 2009,there were 59,065 Series B preferred shares outstanding and cumulative dividends in arrears were $26,565. There is no Series A Preferred Stock outstanding.As of September 14, 2009, we had approximately 320 shareholders of record, exclusive of shares held in street name.Equity Compensation PlansON MAY 27, 2005, THE COMPANY ADOPTED THE 2005 STOCK OPTION PLAN (THE OPTION PLAN) AND THE 2005 EMPLOYEE STOCK OPTION PLAN (THE EMPLOYEE PLAN),PURSUANT TO WHICH IT MAY GRANT EQUITY AWARDS TO ELIGIBLE PERSONS. ON AUGUST 15, 2006, THE COMPANY ADOPTED THE 2006 DIRECTOR STOCK OPTION PLAN (THEDIRECTOR PLAN) PURSUANT TO WHICH IT MAY GRANT EQUITY AWARDS TO ELIGIBLE PERSONS. EACH OF THE PLANS HAS SUBSEQUENTLY BEEN AMENDED. THE OPTION PLAN ALLOWSthe Board OF DIRECTORS TO GRANT OPTIONS TO PURCHASE UP TO 1,800,000 SHARES OF COMMON STOCK TO DIRECTORS, OFFICERS, KEY EMPLOYEES AND SERVICE PROVIDERS OF THECOMPANY, AND THE EMPLOYEE PLAN ALLOWS THE BOARD OF DIRECTORS TO GRANT OPTIONS TO PURCHASE UP TO 2,000,000 SHARES OF COMMON STOCK TO OFFICERS AND KEYEMPLOYEES OF THE COMPANY. THE DIRECTOR PLAN ALLOWS THE BOARD OF DIRECTORS TO GRANT OPTIONS TO PURCHASE UP TO 1,000,000 SHARES OF COMMON STOCK TOdirectors of the Company. Options granted under all of the Plans have a ten year maximum term, an exercise price equal to at least the fair market value of theCOMPANY’S COMMON STOCK (BASED ON THE TRADING PRICE ON THE NYSE AMEX) ON THE DATE OF THE GRANT, AND WITH VARYING VESTING PERIODS AS DETERMINED BY THEBoard. 32Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of June 30, 2009, the following options had been granted under the option plans. Number of Weighted- Number of securities to average securities be issued on exercise remaining exercise of price of available for outstanding outstanding future options, options, issuance warrants, warrants, under equity and rights and rights compensation Plan Category # $ plans Equity compensation plans approved by shareholders N/A N/A N/A Equity compensation plans not approved by shareholders 2,708,166 $2.08 1,225,051 Total 2,708,166 $2.08 1,225,051 Issuer Purchases of Equity SecuritiesIN JUNE 2008, THE BOARD OF DIRECTORS OF ISORAY AUTHORIZED THE REPURCHASE OF UP TO 1,000,000 SHARES OF THE COMPANY’S COMMON STOCK (FY2009 PLAN). THEFY2009 PLAN EXPIRED ON JUNE 30, 2009. THE TABLE BELOW SHOWS THE ACTIVITY IN THE FY2009 PLAN FROM INCEPTION TO JUNE 30, 2009. THERE WERE NO SHARESpurchased during fiscal year 2008 other than in June 2008 and no shares purchased during fiscal year 2009 other than in July 2009.FY 2009 PLAN TotalNumber ofSharesPurchased MaximumNumber ofShares that Period TotalNumber AveragePrice as Part ofPublicly May Yet bePurchased Beginning Ending of SharesPurchased Paidper Share AnnouncedPlan Under thePlan (1) June 1, 2008 June 30, 2008 5,000 $0.731 5,000 995,000 July 1, 2008 July 31, 2008 8,200 $0.577 13,200 986,800 Total 13,200 $0.636 13,200 986,800 (1)In June 2008, the Company announced a new stock repurchase plan to purchase up to 1,000,000 shares of the Company's common stock. The Planexpired on June 30, 2009.Sales of Unregistered SecuritiesAll sales of unregistered securities were previously reported.ITEM 6 – SELECTED FINANCIAL DATAAs a smaller reporting company, the Company is not required to provide Item 6 disclosure in this Annual Report. 33Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCritical Accounting Policies and EstimatesMANAGEMENT’S DISCUSSION AND ANALYSIS OF THE COMPANY’S FINANCIAL CONDITION AND RESULTS OF OPERATIONS IS BASED UPON ITS CONSOLIDATED FINANCIAL STATEMENTS,WHICH HAVE BEEN PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. THE PREPARATION OF THESE FINANCIALSTATEMENTS REQUIRES MANAGEMENT TO MAKE ESTIMATES AND JUDGMENTS THAT AFFECT THE REPORTED AMOUNTS OF ASSETS, LIABILITIES, REVENUES AND EXPENSES, AND RELATEDDISCLOSURES OF CONTINGENT LIABILITIES. ON AN ON-GOING BASIS, MANAGEMENT EVALUATES PAST JUDGMENTS AND ESTIMATES, INCLUDING THOSE RELATED TO BAD DEBTS,INVENTORIES, ACCRUED LIABILITIES, AND CONTINGENCIES. MANAGEMENT BASES ITS ESTIMATES ON HISTORICAL EXPERIENCE AND ON VARIOUS OTHER ASSUMPTIONS THAT AREbelieved to be reasonable UNDER THE CIRCUMSTANCES, THE RESULTS OF WHICH FORM THE BASIS FOR MAKING JUDGMENTS ABOUT THE CARRYING VALUES OF ASSETS AND LIABILITIESthat are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.THE COMPANY BELIEVES THE FOLLOWING CRITICAL ACCOUNTING POLICIES AFFECT ITS MORE SIGNIFICANT JUDGMENTS AND ESTIMATES USED IN THE PREPARATION OF ITSconsolidated financial statements.Short-Term InvestmentsTHE COMPANY INVESTS CERTAIN EXCESS CASH IN MARKETABLE SECURITIES CONSISTING PRIMARILY OF COMMERCIAL PAPER, AUCTION RATE SECURITIES, CERTIFICATES OF DEPOSIT,AND MONEY MARKET FUNDS. THE COMPANY CLASSIFIES ALL DEBT SECURITIES AS “AVAILABLE-FOR-SALE” AND RECORDS THE DEBT SECURITIES AT FAIR VALUE WITH UNREALIZED GAINSAND TEMPORARY UNREALIZED LOSSES INCLUDED IN OTHER COMPREHENSIVE INCOME/LOSS WITHIN SHAREHOLDERS’ EQUITY, IF MATERIAL. DECLINES IN FAIR VALUES THAT AREconsidered other than temporary are recorded in the Consolidated Statements of Operations.Fair Value of Financial InstrumentsEFFECTIVE JULY 1, 2008, THE COMPANY IMPLEMENTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 157, Fair Value Measurements. SFAS 157DEFINES FAIR VALUE, ESTABLISHES A FRAMEWORK FOR MEASURING FAIR VALUE IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES, ANDEXPANDS DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS. THE COMPANY ELECTED TO IMPLEMENT THIS STATEMENT WITH THE ONE-YEAR DEFERRAL PERMITTED BY FASB STAFFPOSITION (FSP) 157-2 FOR NONFINANCIAL ASSETS AND NONFINANCIAL LIABILITIES MEASURED AT FAIR VALUE, EXCEPT THOSE THAT ARE RECOGNIZED OR DISCLOSED ON A RECURRINGBASIS. THIS DEFERRAL APPLIES TO FIXED ASSETS AND INTANGIBLE ASSET IMPAIRMENT TESTING AND INITIAL RECOGNITION OF ASSET RETIREMENT OBLIGATIONS FOR WHICH FAIR VALUEIS USED. THE COMPANY DOES NOT EXPECT ANY SIGNIFICANT IMPACT TO OUR CONSOLIDATED FINANCIAL STATEMENTS WHEN WE IMPLEMENT SFAS 157 FOR THESE ASSETS ANDliabilities.SFAS 157 REQUIRES DISCLOSURES THAT CATEGORIZE ASSETS AND LIABILITIES MEASURED AT FAIR VALUE INTO ONE OF THREE DIFFERENT LEVELS DEPENDING ON THE OBSERVABILITY OFthe INPUTS EMPLOYED IN THE MEASUREMENT. LEVEL 1 INPUTS ARE QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS OR LIABILITIES. LEVEL 2 INPUTS ARE OBSERVABLEINPUTS OTHER THAN QUOTED PRICES INCLUDED WITHIN LEVEL 1 FOR THE ASSET OR LIABILITY, EITHER DIRECTLY OR INDIRECTLY THROUGH MARKET-CORROBORATED INPUTS. LEVEL 3INPUTS ARE UNOBSERVABLE INPUTS FOR THE ASSET OR LIABILITY REFLECTING SIGNIFICANT MODIFICATIONS TO OBSERVABLE RELATED MARKET DATA OR OUR ASSUMPTIONS ABOUTpricing by market participants.At June 30, 2009, all of the Company’s financial assets and liabilities are accounted and reported at fair value using Level 1 inputs. 34Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ALSO EFFECTIVE JULY 1, 2008, THE COMPANY ADOPTED SFAS NO. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including anAmendment of FASB Statement No. 115. THE STATEMENT ALLOWS ENTITIES TO VALUE MANY FINANCIAL INSTRUMENTS AND CERTAIN OTHER ITEMS AT FAIR VALUE. SFAS 159provides GUIDANCE OVER THE ELECTION OF THE FAIR VALUE OPTION, INCLUDING THE TIMING OF THE ELECTION AND SPECIFIC ITEMS ELIGIBLE FOR THE FAIR VALUE ACCOUNTING. IFTHE FAIR VALUE OPTION IS ELECTED THEN UNREALIZED GAINS AND LOSSES ARE REPORTED IN EARNINGS AT EACH SUBSEQUENT REPORTING DATE. THE COMPANY ELECTED NOT TOmeasure any additional financial INSTRUMENTS OR OTHER ITEMS AT FAIR VALUE AS OF JULY 1, 2008 IN ACCORDANCE WITH SFAS 159. ACCORDINGLY, THE ADOPTION OF SFAS159 DID NOT IMPACT OUR CONSOLIDATED FINANCIAL STATEMENTS. THE COMPANY DID ELECT TO FAIR VALUE ITS ARS RIGHTS THAT WERE RECEIVED IN OCTOBER 2008 ANDexercised in January 2009 in accordance with SFAS 159.Accounts ReceivableACCOUNTS RECEIVABLE ARE STATED AT THE AMOUNT THAT MANAGEMENT OF THE COMPANY EXPECTS TO COLLECT FROM OUTSTANDING BALANCES. MANAGEMENT PROVIDES FORprobable UNCOLLECTIBLE AMOUNTS THROUGH AN ALLOWANCE FOR DOUBTFUL ACCOUNTS. ADDITIONS TO THE ALLOWANCE FOR DOUBTFUL ACCOUNTS ARE BASED ON MANAGEMENT’SJUDGMENT, CONSIDERING HISTORICAL WRITE-OFFS, COLLECTIONS AND CURRENT CREDIT CONDITIONS. BALANCES WHICH REMAIN OUTSTANDING AFTER MANAGEMENT HAS USEDREASONABLE COLLECTION EFFORTS ARE WRITTEN OFF THROUGH A CHARGE TO THE ALLOWANCE FOR DOUBTFUL ACCOUNTS AND A CREDIT TO THE APPLICABLE accountsreceivable. Payments received subsequent to the time that an account is written off are considered bad debt recoveries.InventoryInventory IS REPORTED AT THE LOWER OF COST OR MARKET. COST OF RAW MATERIALS IS DETERMINED USING THE WEIGHTED AVERAGE METHOD. COST OF WORK IN PROCESS andfinished goods is computed using standard cost, which approximates actual cost, on a first-in, first-out basis.Fixed AssetsFixed assets are capitalized and carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense as incurred. WhenASSETS ARE SOLD OR OTHERWISE DISPOSED OF, THE COST AND ACCUMULATED DEPRECIATION ARE REMOVED FROM THE ACCOUNTS AND ANY RESULTING GAIN OR LOSS IS RECOGNIZED INoperations.Depreciation is computed using the straight-line method over the following estimated useful lives:Production equipment3 to 7 yearsOffice equipment2 to 5 yearsFurniture and fixtures2 to 5 yearsLeasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated useful life of the asset.Management OF THE COMPANY PERIODICALLY REVIEWS THE NET CARRYING VALUE OF ALL OF ITS EQUIPMENT ON AN ASSET BY ASSET BASIS. THESE REVIEWS CONSIDER THE NETrealizable value of each asset to determine whether an impairment in value has occurred, and the need for any asset impairment write-down.ALTHOUGH MANAGEMENT HAS MADE ITS BEST ESTIMATE OF THE FACTORS THAT AFFECT THE CARRYING VALUE BASED ON CURRENT CONDITIONS, IT IS REASONABLY POSSIBLE THATCHANGES COULD OCCUR WHICH COULD ADVERSELY AFFECT MANAGEMENT'S ESTIMATE OF NET CASH FLOWS EXPECTED TO BE GENERATED FROM ITS ASSETS, AND NECESSITATE ASSETimpairment write-downs.Deferred Financing CostsFinancing COSTS RELATED TO THE ACQUISITION OF DEBT ARE DEFERRED AND AMORTIZED OVER THE TERM OF THE RELATED DEBT USING THE EFFECTIVE INTEREST METHOD. DeferredFINANCING COSTS INCLUDE THE FAIR VALUE OF COMMON SHARES ISSUED TO CERTAIN SHAREHOLDERS FOR THEIR GUARANTEE OF CERTAIN COMPANY DEBT IN ACCORDANCE WITHACCOUNTING PRINCIPLES BOARD (APB) OPINION NO. 21, Interest on Receivables and Payables AND EMERGING ISSUES TASK FORCE (EITF) ISSUE NO. 95-13,Classification of Debt Issue Costs in the Statement of Cash Flows. THE VALUE OF THE SHARES ISSUED WAS THE ESTIMATED MARKET PRICE OF THE SHARES AS OF THE DATEof ISSUANCE. AMORTIZATION OF DEFERRED FINANCING COSTS, TOTALING $37,035 AND $30,504 FOR THE YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY, IS INCLUDED INfinancing expense on the statements of operations. 35Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. LicensesAmortization OF LICENSES IS COMPUTED USING THE STRAIGHT-LINE METHOD OVER THE ESTIMATED ECONOMIC USEFUL LIVES OF THE ASSETS. IN FISCAL YEAR 2006, THE COMPANYENTERED INTO AN AGREEMENT WITH IBT, SA, A BELGIAN COMPANY (IBT) TO USE IBT’S PROPRIETARY “INK JET” PRODUCTION PROCESS AND ITS PROPRIETARY POLYMER SEEDTECHNOLOGY FOR USE IN BRACHYTHERAPY PROCEDURES USING CESIUM-131 (CS-131). THE COMPANY PAID LICENSE FEES OF $225,000 AND $275,000 DURING FISCAL YEARS2008 AND 2006, RESPECTIVELY. DURING FISCAL YEAR 2009, THE COMPANY DETERMINED THAT THE ENTIRE REMAINING VALUE OF THE IBT LICENSE WAS IMPAIRED AND RECORDEDan impairment charge of $425,434.AMORTIZATION OF LICENSES WAS $30,067 AND $43,452 FOR THE YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. BASED ON THE LICENSES RECORDED AT JUNE 30,2009, AND ASSUMING NO SUBSEQUENT IMPAIRMENT OF THE UNDERLYING ASSETS, THE ANNUAL AMORTIZATION EXPENSE FOR EACH FISCAL YEAR ENDING JUNE 30 IS EXPECTED TObe as follows: $11,867 for 2010, $0 for all years thereafter.Other AssetsOTHER ASSETS, WHICH INCLUDE DEFERRED CHARGES AND PATENTS, ARE STATED AT COST, LESS ACCUMULATED AMORTIZATION. AMORTIZATION OF PATENTS IS COMPUTED USING theSTRAIGHT-LINE METHOD OVER THE ESTIMATED ECONOMIC USEFUL LIVES OF THE ASSETS. THE COMPANY PERIODICALLY REVIEWS THE CARRYING VALUES OF PATENTS AND ANYimpairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.Based on THE PATENTS AND OTHER INTANGIBLE ASSETS RECORDED IN OTHER ASSETS AT JUNE 30, 2009, AND ASSUMING NO SUBSEQUENT IMPAIRMENT OF THE UNDERLYING ASSETS,THE ANNUAL AMORTIZATION EXPENSE FOR EACH FISCAL YEAR ENDING JUNE 30 IS EXPECTED TO BE AS FOLLOWS: $16,861 FOR 2010, $15,139 FOR 2011, $15,139 FOR 2012,$15,139 for 2013, $15,139 for 2014, and $157,768 thereafter.Asset Retirement ObligationTHE FAIR VALUE OF THE FUTURE RETIREMENT COSTS OF THE COMPANY’S LEASED ASSETS ARE RECORDED AS A LIABILITY ON A DISCOUNTED BASIS WHEN THEY ARE INCURRED AND ANequivalent AMOUNT IS CAPITALIZED TO PROPERTY AND EQUIPMENT. THE INITIAL RECORDED OBLIGATION IS DISCOUNTED USING THE COMPANY’S CREDIT-ADJUSTED RISK FREE-RATEand IS REVIEWED PERIODICALLY FOR CHANGES IN THE ESTIMATED FUTURE COSTS UNDERLYING THE OBLIGATION. THE COMPANY AMORTIZES THE INITIAL AMOUNT CAPITALIZED toPROPERTY AND EQUIPMENT AND RECOGNIZES ACCRETION EXPENSE IN CONNECTION WITH THE DISCOUNTED LIABILITY OVER THE ESTIMATED REMAINING USEFUL LIFE OF THE LEASEDassets.IN FISCAL YEAR 2006, THE COMPANY ESTABLISHED AN INITIAL ASSET RETIREMENT OBLIGATION OF $63,040 WHICH REPRESENTED THE DISCOUNTED COST OF CLEANUP THAT THECompany ANTICIPATED IT WOULD HAVE TO INCUR AT THE END OF ITS EQUIPMENT AND PROPERTY LEASES IN ITS OLD PRODUCTION FACILITY. THIS AMOUNT WAS DETERMINED basedON DISCUSSIONS WITH QUALIFIED PRODUCTION PERSONNEL AND ON HISTORICAL EVIDENCE. DURING FISCAL YEAR 2007, THE COMPANY REEVALUATED ITS OBLIGATIONS BASED ONDISCUSSIONS WITH THE WASHINGTON DEPARTMENT OF HEALTH AND DETERMINED THAT THE INITIAL ASSET RETIREMENT OBLIGATION SHOULD BE INCREASED BY AN ADDITIONAL$56,120. DURING THE SECOND QUARTER OF FISCAL YEAR 2008, THE COMPANY REMOVED ALL RADIOACTIVE RESIDUALS AND TENANT IMPROVEMENTS FROM ITS OLD PRODUCTIONfacility and returned the facility to the lessor. The Company had an asset retirement obligation of $135,120 accrued for this facility but total costs incurred toDECOMMISSION THE FACILITY WERE $274,163 RESULTING IN AN ADDITIONAL EXPENSE OF $139,043 THAT IS INCLUDED IN COST OF PRODUCTS SOLD. THE ADDITIONAL EXPENSEWAS MAINLY DUE TO UNANTICIPATED CONSTRUCTION COSTS TO RETURN THE FACILITY TO ITS PREVIOUS STATE. THE COMPANY ORIGINALLY BELIEVED THAT THE LESSOR WOULD RETAINmany of the leasehold improvements in the building, but the lessor instead required their removal. 36Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IN SEPTEMBER 2007, ANOTHER ASSET RETIREMENT OBLIGATION OF $473,096 WAS ESTABLISHED REPRESENTING THE DISCOUNTED COST OF THE COMPANY’S ESTIMATE OF THEOBLIGATIONS TO REMOVE ANY RESIDUAL RADIOACTIVE MATERIALS AND ALL LEASEHOLD IMPROVEMENTS AT THE END OF THE LEASE TERM AT ITS NEW PRODUCTION FACILITY. THEESTIMATE WAS DEVELOPED BY QUALIFIED PRODUCTION PERSONNEL AND THE GENERAL CONTRACTOR OF THE NEW FACILITY. THE COMPANY HAS REVIEWED THE ESTIMATE AGAINbased on its experience with decommissioning its old facility and believes that the original estimate continues to be applicable.During the years ended June 30, 2009 and 2008, the asset retirement obligations changed as follows: 2009 2008 Beginning balance $506,005 $131,142 New obligation – 473,096 Settlement of existing obligation – (135,120)Accretion of discount 47,466 36,887 Ending balance $553,471 $506,005 Because THE COMPANY DOES NOT EXPECT TO INCUR ANY EXPENSES RELATED TO ITS ASSET RETIREMENT OBLIGATIONS IN FISCAL YEAR 2010, THE ENTIRE BALANCE AS OF JUNE 30,2009 is classified as a noncurrent liability.Financial InstrumentsThe COMPANY DISCLOSES THE FAIR VALUE OF FINANCIAL INSTRUMENTS, BOTH ASSETS AND LIABILITIES, RECOGNIZED AND NOT RECOGNIZED IN THE BALANCE SHEET, FOR WHICH IT ISPRACTICABLE TO ESTIMATE THE FAIR VALUE. THE FAIR VALUE OF A FINANCIAL INSTRUMENT IS THE AMOUNT AT WHICH THE INSTRUMENT COULD BE EXCHANGED IN A CURRENTtransaction between willing parties, other than a forced liquidation sale.THE CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS, INCLUDING CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, NOTESpayable, and capital lease obligations, approximated their fair values at June 30, 2009 and 2008.Revenue RecognitionTHE COMPANY APPLIES THE PROVISIONS OF SEC STAFF ACCOUNTING BULLETIN (SAB) NO. 104, Revenue Recognition. SAB NO. 104 PROVIDES GUIDANCE ON THErecognition, PRESENTATION AND DISCLOSURE OF REVENUE IN FINANCIAL STATEMENTS. SAB NO. 104 OUTLINES THE BASIC CRITERIA THAT MUST BE MET TO RECOGNIZE REVENUEAND PROVIDES GUIDANCE FOR THE DISCLOSURE OF REVENUE RECOGNITION POLICIES. THE COMPANY RECOGNIZES REVENUE RELATED TO PRODUCT SALES WHEN (I) PERSUASIVEevidence of an arrangement exists, (ii) shipment has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. Revenue FOR THE FISCAL YEARS ENDED JUNE 30, 2009 AND 2008 WAS DERIVED SOLELY FROM SALES OF THE PROXCELAN CS-131 BRACHYTHERAPY SEED, WHICH IS USED IN THETREATMENT OF CANCER. THE COMPANY RECOGNIZES REVENUE ONCE THE PRODUCT HAS BEEN SHIPPED TO THE CUSTOMER. PREPAYMENTS, IF ANY, RECEIVED FROM CUSTOMERSPRIOR TO THE TIME THAT PRODUCTS ARE SHIPPED ARE RECORDED AS DEFERRED REVENUE. IN THESE CASES, WHEN THE RELATED PRODUCTS ARE SHIPPED, THE AMOUNT RECORDED ASdeferred revenue is then recognized as revenue. The Company accrues for sales returns and other allowances at the time of SHIPMENT. ALTHOUGH THE COMPANYdoes not have an extensive operating HISTORY UPON WHICH TO DEVELOP SALES RETURNS ESTIMATES, WE HAVE USED THE EXPERTISE OF OUR MANAGEMENT TEAM, PARTICULARLYthose with extensive industry experience and knowledge, to develop a proper methodology. 37Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Stock-Based CompensationThe COMPANY MEASURES AND RECOGNIZES EXPENSE FOR ALL SHARE-BASED PAYMENTS AT FAIR VALUE. THE COMPANY USES THE BLACK-SCHOLES OPTION VALUATION MODEL TOESTIMATE FAIR VALUE FOR ALL STOCK OPTIONS ON THE DATE OF GRANT. FOR STOCK OPTIONS THAT VEST OVER TIME, THE COMPANY RECOGNIZES COMPENSATION COST ON A straight-line basis over the requisite service period for the entire award.Research and Development CostsRESEARCH AND DEVELOPMENT COSTS, INCLUDING SALARIES, RESEARCH MATERIALS, ADMINISTRATIVE EXPENSES AND CONTRACTOR FEES, ARE CHARGED TO OPERATIONS ASincurred. The cost of equipment used in research and development ACTIVITIES WHICH HAS ALTERNATIVE USES IS CAPITALIZED AS PART OF FIXED ASSETS AND NOT TREATED ASAN EXPENSE IN THE PERIOD ACQUIRED. DEPRECIATION OF CAPITALIZED EQUIPMENT USED TO PERFORM RESEARCH AND DEVELOPMENT IS CLASSIFIED AS RESEARCH ANDdevelopment expense in the year recognized.Legal ContingenciesIN THE ORDINARY COURSE OF BUSINESS, THE COMPANY IS INVOLVED IN LEGAL PROCEEDINGS INVOLVING CONTRACTUAL AND EMPLOYMENT RELATIONSHIPS, PRODUCT LIABILITYclaims, PATENT RIGHTS, ENVIRONMENTAL MATTERS, AND A VARIETY OF OTHER MATTERS. THE COMPANY IS ALSO SUBJECT TO VARIOUS LOCAL, STATE, AND FEDERAL ENVIRONMENTALREGULATIONS AND LAWS DUE TO THE ISOTOPES USED TO PRODUCE THE COMPANY’S PRODUCT. AS PART OF NORMAL OPERATIONS, AMOUNTS ARE EXPENDED TO ENSURE THAT THECOMPANY IS IN COMPLIANCE WITH THESE LAWS AND REGULATIONS. WHILE THERE HAVE BEEN NO REPORTABLE INCIDENTS OR COMPLIANCE ISSUES, THE COMPANY BELIEVES THATIF IT RELOCATES ITS CURRENT PRODUCTION FACILITIES THEN CERTAIN DECOMMISSIONING EXPENSES WILL BE INCURRED AND HAS RECORDED AN ASSET RETIREMENT OBLIGATION FORthese expenses.The COMPANY RECORDS CONTINGENT LIABILITIES RESULTING FROM ASSERTED AND UNASSERTED CLAIMS AGAINST IT, WHEN IT IS PROBABLE THAT A LIABILITY HAS BEEN INCURRED ANDTHE AMOUNT OF THE LOSS IS REASONABLY ESTIMABLE. ESTIMATING PROBABLE LOSSES REQUIRES ANALYSIS OF MULTIPLE FACTORS, IN SOME CASES INCLUDING JUDGMENTS ABOUT THEPOTENTIAL ACTIONS OF THIRD-PARTY CLAIMANTS AND COURTS. THEREFORE, ACTUAL LOSSES IN ANY FUTURE PERIOD ARE INHERENTLY UNCERTAIN. CURRENTLY, THE COMPANY DOES NOTBELIEVE ANY PROBABLE LEGAL PROCEEDINGS OR CLAIMS WILL HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL POSITION OR RESULTS OF OPERATIONS. HOWEVER, IF ACTUAL ORESTIMATED PROBABLE FUTURE LOSSES EXCEED THE COMPANY’S RECORDED LIABILITY FOR SUCH CLAIMS, IT WOULD RECORD ADDITIONAL CHARGES AS OTHER EXPENSE DURING THEperiod in which the actual loss or change in estimate occurred.Income TaxesIncome TAXES ARE ACCOUNTED FOR UNDER THE LIABILITY METHOD. UNDER THIS METHOD, THE COMPANY PROVIDES DEFERRED INCOME TAXES FOR TEMPORARY DIFFERENCES thatWILL RESULT IN TAXABLE OR DEDUCTIBLE AMOUNTS IN FUTURE YEARS BASED ON THE REPORTING OF CERTAIN COSTS IN DIFFERENT PERIODS FOR FINANCIAL STATEMENT AND INCOME TAXPURPOSES. THIS METHOD ALSO REQUIRES THE RECOGNITION OF FUTURE TAX BENEFITS SUCH AS NET OPERATING LOSS CARRYFORWARDS, TO THE EXTENT THAT REALIZATION OF SUCHBENEFITS IS MORE LIKELY THAN NOT. DEFERRED TAX ASSETS AND LIABILITIES ARE MEASURED USING ENACTED TAX RATES EXPECTED TO APPLY TO TAXABLE INCOME IN THE YEARS INWHICH THOSE TEMPORARY DIFFERENCES ARE EXPECTED TO BE RECOVERED OR SETTLED. THE EFFECT ON DEFERRED TAX ASSETS AND LIABILITIES OF A CHANGE IN TAX RATES ISrecognized in operations in the period that includes the enactment of the change.ON JULY 1, 2007, THE COMPANY ADOPTED FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 48, Accounting for Uncertainty in Income Taxes (FIN NO.48). FIN NO. 48 CLARIFIES THE ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES RECOGNIZED IN ACCORDANCE WITH SFAS NO. 109 Accounting for Income Taxes,PRESCRIBING A RECOGNITION THRESHOLD AND MEASUREMENT ATTRIBUTE FOR THE RECOGNITION AND MEASUREMENT OF A TAX POSITION TAKEN OR EXPECTED TO BE TAKEN IN A TAXRETURN. IN THE COURSE OF ITS ASSESSMENT, MANAGEMENT HAS DETERMINED THAT THE COMPANY, ITS SUBSIDIARY, AND ITS PREDECESSORS ARE SUBJECT TO EXAMINATION OF THEIRincome tax filings in the United States and state jurisdictions for the 2005 through 2008 tax YEARS. IN THE EVENT THAT THE COMPANY IS ASSESSED PENALTIES AND ORinterest, penalties will be charged to other operating expense and interest will be charged to interest expense. 38Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The COMPANY ADOPTED FIN NO. 48 USING THE MODIFIED PROSPECTIVE TRANSITION METHOD, WHICH REQUIRES THE APPLICATION OF THE ACCOUNTING STANDARD AS OF JULY 1,2007. THERE WAS NO IMPACT ON THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 2008 AS A RESULT OF THE ADOPTION OF FIN NO. 48. IN ACCORDANCEWITH THE MODIFIED PROSPECTIVE TRANSITION METHOD, THE FINANCIAL STATEMENTS FOR PRIOR PERIODS HAVE NOT BEEN RESTATED TO REFLECT, AND DO NOT INCLUDE, THE IMPACT OFFIN No. 48.Income (Loss) Per Common ShareBasic EARNINGS PER SHARE IS CALCULATED BY DIVIDING NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS BY THE WEIGHTED AVERAGE NUMBER OF COMMON SHARESOUTSTANDING, AND DOES NOT INCLUDE THE IMPACT OF ANY POTENTIALLY DILUTIVE COMMON STOCK EQUIVALENTS. COMMON STOCK EQUIVALENTS, INCLUDING WARRANTS ANDOPTIONS TO PURCHASE THE COMPANY'S COMMON STOCK, ARE EXCLUDED FROM THE CALCULATIONS WHEN THEIR EFFECT IS ANTIDILUTIVE. AT JUNE 30, 2009 AND 2008, THECALCULATION OF DILUTED WEIGHTED AVERAGE SHARES DOES NOT INCLUDE PREFERRED STOCK, COMMON STOCK WARRANTS OR OPTIONS THAT ARE POTENTIALLY CONVERTIBLE INTOcommon stock as those would be antidilutive due to the Company’s net loss position.Securities that could be dilutive in the future as of June 30, 2009 and 2008 are as follows: 2009 2008 Preferred stock 59,065 59,065 Common stock warrants 3,216,644 3,245,082 Common stock options 2,708,166 2,803,393 Total potential dilutive securities 5,983,875 6,107,540 Subsequent EventsEffective APRIL 1, 2009, THE COMPANY ADOPTED SFAS NO. 165, Subsequent Events. THIS STATEMENT ESTABLISHES THE ACCOUNTING FOR, AND DISCLOSURE OF, MATERIALEVENTS THAT OCCUR AFTER THE BALANCE SHEET DATE, BUT BEFORE THE FINANCIAL STATEMENTS ARE ISSUED. IN GENERAL, THESE EVENTS WILL BE RECOGNIZED IF THE CONDITIONEXISTED AT THE DATE OF THE BALANCE SHEET, AND WILL NOT BE RECOGNIZED IF THE CONDITION DID NOT EXIST AT THE BALANCE SHEET DATE. DISCLOSURE IS REQUIRED FORNONRECOGNIZED EVENTS IF REQUIRED TO KEEP THE FINANCIAL STATEMENTS FROM BEING MISLEADING. THE GUIDANCE IN THIS STATEMENT IS VERY SIMILAR TO CURRENT GUIDANCEPROVIDED IN ACCOUNTING LITERATURE AND, THEREFORE, WILL NOT RESULT IN SIGNIFICANT CHANGES IN PRACTICE. SUBSEQUENT EVENTS HAVE BEEN EVALUATED THROUGH THE DATEour financial statements were issued—the filing time and date of our 2009 Annual Report on Form 10-K.Use of EstimatesThe PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA REQUIRES MANAGEMENT OFthe COMPANY TO MAKE ESTIMATES AND ASSUMPTIONS THAT AFFECT THE AMOUNTS REPORTED IN THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES. ACCORDINGLY, ACTUALresults could differ from those estimates and affect the amounts reported in the financial statements.Results of OperationsFinancial PresentationThe FOLLOWING SETS FORTH A DISCUSSION AND ANALYSIS OF THE COMPANY’S FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE TWO YEARS ENDED JUNE 30, 2009 AND2008. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS ANNUAL REPORT onFORM 10-K. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN SUCHFORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN “ITEM 1A — RISKFactors,” beginning on page 24 of this Annual Report on Form 10-K. 39Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Year ended June 30, 2009 compared to year ended June 30, 2008Product sales. SALES FOR THE YEAR ENDED JUNE 30, 2009 WERE $5,417,815 COMPARED TO SALES OF $7,158,690 FOR THE YEAR ENDED JUNE 30, 2008. THEDECREASE OF $1,740,875 OR 24% WAS MAINLY DUE TO DECREASED SALES VOLUME OF THE COMPANY’S PROXCELAN CS-131 BRACHYTHERAPY SEEDS ALONG WITH ANincreased PERCENTAGE OF LOOSE SEED SALES AS COMPARED TO STRANDED AND A LOWER AVERAGE INVOICE PRICE DUE TO PHYSICIANS USING LESS SEEDS. LOOSE SEEDS(INCLUDING SEEDS LOADED IN MICK CARTRIDGES) SELL AT A LOWER PRICE THAN STRANDED DUE TO THE ADDITIONAL PROCESSING TIME AND EXPENSE REQUIRED FORstranded SEEDS. ABOUT 3% OF THE DECREASE IS DUE TO PHYSICIANS ORDERING LESS SEEDS PER IMPLANT AS THEY HAVE BECOME MORE EFFICIENT WITH USE OF THEISOTOPE AND ITS CHARACTERISTICS. THE COMPANY WILL NEED TO INCREASE THE NUMBER OF TOTAL IMPLANTS TO INCREASE SALES. MANAGEMENT BELIEVES THAT OTHERTREATMENT OPTIONS WITH HIGHER REIMBURSEMENT RATES, SUCH AS IMRT, PUT PRESSURE ON PROXCELAN CS-131 SEED SALES AS WELL AS OTHER BRACHYTHERAPY SEEDSALES. DURING THE YEAR ENDED JUNE 30, 2009 THE COMPANY SOLD ITS CS-131 SEEDS TO 72 DIFFERENT MEDICAL CENTERS AS COMPARED TO 99 CENTERS DURING thefiscal year ended June 30, 2008.Cost of product sales. COST OF PRODUCT SALES WERE $5,771,147 FOR THE YEAR ENDED JUNE 30, 2009 WHICH REPRESENTS A DECREASE OF $1,538,977 OR 21%compared to cost of product sales of $7,310,124 for the year ended June 30, 2008. Materials expense decreased approximately $631,000 mainly dueTO ORDERING AND USING LESS ISOTOPE IN THE YEAR ENDED JUNE 30, 2009 COMPARED TO THE YEAR ENDED JUNE 30, 2008. PERSONNEL EXPENSES, INCLUDINGPAYROLL, BENEFITS, AND RELATED TAXES, DECREASED APPROXIMATELY $603,000 DUE TO A REDUCTION IN THE AVERAGE PRODUCTION HEADCOUNT LEVELS. PRELOADEXPENSES DECREASED APPROXIMATELY $378,000 DUE TO LOWER SALES VOLUMES AND DUE TO INCREASED IN-HOUSE LOADING. SMALL TOOLS EXPENSES DECREASEDAPPROXIMATELY $90,000 MAINLY DUE TO EXPENSING ITEMS IN THE PRIOR YEAR THAT WERE PART OF EQUIPPING THE NEW FACILITY THAT BECAME OPERATIONAL INSeptember 2007. SHARE-BASED COMPENSATION DECREASED APPROXIMATELY $92,000 MAINLY DUE TO THE FORFEITURE OF UNVESTED OPTIONS BY THE COMPANY’Sformer EVP-Operations.THESE DECREASES WERE OFFSET BY AN IMPAIRMENT OF THE COMPANY’S IBT LICENSE FOR $425,434 THAT WAS RECORDED IN DECEMBER 2008. MANAGEMENTCOMPLETED ITS REVIEW OF THE LICENSE AND ASSOCIATED TECHNOLOGY RELATED TO THIS ALTERNATIVE SEED ENCAPSULATION PROCESS IN DECEMBER 2008 ANDDETERMINED THAT THE ADOPTION OF THIS PROCESS WOULD ENTAIL AN OVERHAUL OF THE COMPANY’S EXISTING MANUFACTURING PROCEDURES. IN ADDITION, THERE IS NOassurance that physicians would accept this new technology without extensive education and marketing. As there are no anticipated future revenuesfrom the license and the Company cannot sell or transfer the license, its entire value was written off in the accompanying financial statements.During THE YEAR ENDED JUNE 30, 2008, THE COMPANY REMOVED ALL RADIOACTIVE RESIDUALS AND TENANT IMPROVEMENTS FROM ITS OLD PRODUCTION FACILITY ANDRETURNED THE FACILITY TO THE LESSOR. THE COMPANY HAD AN ASSET RETIREMENT OBLIGATION OF $135,120 ACCRUED FOR THIS FACILITY BUT TOTAL COSTS INCURRED TOdecommission the FACILITY WERE $274,163 RESULTING IN AN ADDITIONAL EXPENSE OF $139,043 THAT IS INCLUDED IN COST OF PRODUCTS SOLD FOR THE YEAR ENDEDJUNE 30, 2008. THIS ADDITIONAL EXPENSE INCURRED IN THE YEAR ENDED JUNE 30, 2008 WAS MAINLY DUE TO UNANTICIPATED CONSTRUCTION COSTS TO RETURN THEfacility TO ITS PREVIOUS STATE. THE COMPANY ORIGINALLY BELIEVED THAT THE LESSOR WOULD RETAIN MANY OF THE LEASEHOLD IMPROVEMENTS IN THE BUILDING, BUTinstead required their removal.Gross loss. GROSS LOSS WAS $353,332 FOR THE YEAR ENDED JUNE 30, 2009. THIS REPRESENTS AN INCREASE OF $201,898 OR 133% OVER THE PRIOR YEAR’S GROSSloss of $151,434. INCLUDED IN THE GROSS LOSS FOR THE YEAR ENDED JUNE 30, 2009 IS THE ONE-TIME IBT LICENSE IMPAIRMENT LOSS OF $425,434. WITHOUT THISONE-TIME EXPENSE, THE COMPANY WOULD HAVE RECOGNIZED A GROSS MARGIN OF $72,102 FOR THE YEAR ENDED JUNE 30, 2009. INCLUDED IN THE GROSS LOSS FORTHE YEAR ENDED JUNE 30, 2008 IS THE ONE-TIME DECOMMISSIONING EXPENSE OF $139,043. WITHOUT THIS ONE-TIME EXPENSE, THE COMPANY WOULD HAVErecognized a gross loss of $12,391 for the year ended June 30, 2008. 40Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Research and development expenses. RESEARCH AND DEVELOPMENT EXPENSES FOR THE YEAR ENDED JUNE 30, 2009 WERE $958,665 WHICH REPRESENTS ADECREASE OF $399,410 OR 29% LESS THAN THE RESEARCH AND DEVELOPMENT EXPENSES OF $1,358,075 FOR THE YEAR ENDED JUNE 30, 2008. THE MAJORCOMPONENTS OF THE DECREASE WERE PERSONNEL, CONSULTING, AND TRAVEL EXPENSES. PERSONNEL EXPENSES, INCLUDING PAYROLL, BENEFITS, AND RELATED TAXES,DECREASED APPROXIMATELY $172,000 DUE TO LOWER HEADCOUNT. CONSULTING EXPENSES DECREASED APPROXIMATELY $455,000 AS THE COMPANY’S PROJECT TOIMPROVE THE EFFICIENCY OF ISOTOPE PRODUCTION IS CURRENTLY PROGRESSING SLOWLY AND THE COMPANY HAS DISCONTINUED MOST FUNDING UNTIL THE FINALPROTOTYPE TESTING TRIAL. TRAVEL EXPENSES DECREASED APPROXIMATELY $44,000 DUE TO LESS INTERNATIONAL TRAVEL THAN OCCURRED IN THE PRIOR YEAR. THESEDECREASES WERE PARTIALLY OFFSET BY AN INCREASE IN PROTOCOL EXPENSES OF APPROXIMATELY $217,000 MAINLY DUE TO THE COMPANY’S DUAL-THERAPY STUDY ANDITS CONTINUED MONITORING AND UPDATING OF THE MONO-THERAPY STUDY. ALSO IN THE YEAR ENDED JUNE 30, 2009, THE COMPANY FINALIZED ITS ON-GOINGSTRATEGY REGARDING FOREIGN PATENTS AND TRADEMARKS AND WROTE-OFF $85,818 OF PREVIOUSLY CAPITALIZED COSTS. THE COMPANY HAD PURSUED PROSECUTION OFTHESE PATENTS AND TRADEMARKS IN VARIOUS FOREIGN COUNTRIES INCLUDING AUSTRALIA, JAPAN, AND CHINA; HOWEVER, THE COMPANY NO LONGER BELIEVES thatpursuing patents and trademarks in these foreign countries is fundamental to its business strategy.Sales and marketing expenses. SALES AND MARKETING EXPENSES WERE $2,365,973 FOR THE YEAR ENDED JUNE 30, 2009. THIS REPRESENTS A DECREASE OF$1,359,191 or 36% COMPARED TO THE YEAR ENDED JUNE 30, 2008 WHEN SALES AND MARKETING EXPENSES WERE $3,725,164. PERSONNEL EXPENSES, INCLUDINGpayroll, benefits, and RELATED TAXES, DECREASED APPROXIMATELY $603,000 DUE TO A LOWER SALES HEADCOUNT AND LOWER COMMISSIONS DUE TO LOWER REVENUESAND A REVISED SALES COMPENSATION PLAN THAT WAS ORIGINALLY INTRODUCED IN APRIL 2008 AND SUBSEQUENTLY AMENDED IN OCTOBER 2008. TRAVEL EXPENSESalso decreased approximately $148,000 DUE TO THE DECREASE IN AVERAGE HEADCOUNT. CONSULTING EXPENSES DECREASED APPROXIMATELY $214,000, MAINLYdue to reduced reliance on THIRD-PARTIES AS PART OF THE COMPANY’S EXPENSE REDUCTION INITIATIVES. MARKETING AND ADVERTISING DECREASED APPROXIMATELY$179,000 AS DURING THE PRIOR YEAR THE COMPANY UPDATED ITS MARKETING LITERATURE TO INCORPORATE NEW DATA PUBLISHED FROM THE PROTOCOLS, DEVELOPEDadditional WEBSITES FOR PATIENTS AND DOCTORS, AND UPDATED ITS SALES BOOTH. SHARE-BASED COMPENSATION DECREASED APPROXIMATELY $90,000 DUE TO THEforfeiture of unvested options.General and administrative expenses. GENERAL AND ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED JUNE 30, 2009 WERE $2,792,611 COMPARED TO GENERALAND ADMINISTRATIVE EXPENSES OF $3,568,048 FOR THE YEAR ENDED JUNE 30, 2008. THE DECREASE OF $775,437 OR 22% IS PRIMARILY DUE TO DECREASES INpersonnel costs, public COMPANY EXPENSES, SHARE-BASED COMPENSATION, LEGAL EXPENSES, AND TRAVEL EXPENSES PARTIALLY OFFSET BY INCREASES IN CONSULTINGand bad debt ALLOWANCE. PERSONNEL COSTS DECREASED APPROXIMATELY $452,000 MAINLY DUE TO THE RESIGNATION OF THE COMPANY’S CEO IN FEBRUARY 2008AND LOWER HEADCOUNTS. THE COMPANY’S NEW CEO WAS A CONSULTANT FROM MARCH 2008 THROUGH FEBRUARY 2009 AND BECAME AN EMPLOYEE IN MARCH2009. PUBLIC COMPANY EXPENSES DECREASED APPROXIMATELY $124,000 DUE TO LOWER INVESTOR RELATIONS COSTS PARTIALLY OFFSET BY INCREASED BOARDCOMPENSATION. LEGAL EXPENSES DECREASED BY APPROXIMATELY $211,000 AS IN THE YEAR ENDED JUNE 30, 2008 THE COMPANY INCURRED LEGAL FEES FORcontract DRAFTING AND REVIEW OF THE COMPANY’S INTEREST IN URALDIAL, THE IBT STRATEGIC GLOBAL ALLIANCE AGREEMENTS, SETTLEMENT AGREEMENTS WITH FORMEROFFICERS AND DIRECTORS, AND FOR MEDIATION COSTS. THESE DECREASED LEGAL COSTS WERE PARTIALLY OFFSET BY LEGAL FEES INCURRED IN SETTLING A LAWSUIT WITH Aformer EMPLOYEE. TRAVEL EXPENSES ALSO DECREASED APPROXIMATELY $65,000. THESE DECREASES WERE PARTIALLY OFFSET BY INCREASED EXPENSE RELATED TO BADDEBT ALLOWANCE OF APPROXIMATELY $54,000 AND INCREASED CONSULTING EXPENSES OF APPROXIMATELY $100,000 MAINLY DUE TO COMPENSATION PAID TO THECompany’s interim CEO and the costs of the Company’s ISO 13458 and CE mark audit that was conducted in July 2008. 41Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Operating loss. THE COMPANY CONTINUES TO FOCUS ITS RESOURCES ON IMPROVING SALES WHILE RETAINING THE NECESSARY ADMINISTRATIVE INFRASTRUCTURE TOincrease the level of demand for the Company’s product. These objectives and resulting costs have resulted IN OPERATING LOSSES SINCE THE COMPANY’Sinception. For the year ended JUNE 30, 2009, THE COMPANY HAD AN OPERATING LOSS OF $6,470,581 WHICH IS A DECREASE OF $2,332,140 OR 26% BELOW THEoperating loss of $8,802,721 for the year ended June 30, 2008.Interest income. INTEREST INCOME WAS $111,047 FOR THE YEAR ENDED JUNE 30, 2009 COMPARED TO INTEREST INCOME OF $612,077 FOR THE YEAR ENDED JUNE30, 2008. INTEREST AND INVESTMENT INCOME IS MAINLY DERIVED FROM EXCESS FUNDS HELD IN MONEY MARKET AND INVESTMENT ACCOUNTS. THE DECREASE OF$501,030 OR 82% WAS DUE TO THE LOWER AVERAGE CASH AND SHORT-TERM INVESTMENT BALANCES DURING THE YEAR ENDED JUNE 30, 2009 AND DECREASED INTERESTrates.Gain (loss) on the fair value of short-term investments. THE GAIN OF $274,000 FOR THE YEAR ENDED JUNE 30, 2009 IS DUE TO THE RECEIPT OF THECompany’s rights RELATED TO ITS AUCTION RATE SECURITIES (ARS) ISSUED BY ITS BROKER IN OCTOBER 2008. THE GAIN IS CALCULATED AS THE FAIR VALUE AMOUNT OFthe put rights as estimated on the date of receipt plus the changes in their fair value offset by additional realized losses on the Company’s ARS.Financing and interest expense. FINANCING AND INTEREST EXPENSE FOR THE YEAR ENDED JUNE 30, 2009 WAS $75,307 OR A DECREASE OF $17,556 OR 19%COMPARED TO FINANCING EXPENSE OF $92,863 FOR THE YEAR ENDED JUNE 30, 2008. INCLUDED IN FINANCING EXPENSE IS INTEREST EXPENSE OF APPROXIMATELY$38,000 AND $62,000 FOR THE YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. THE DECREASE IS DUE TO THE LOWER AVERAGE DEBT BALANCES IN THE YEARended June 30, 2009. The remaining balance of financing expense represents the amortization of deferred financing costs.Liquidity and capital resources. WE HAVE HISTORICALLY FINANCED OUR OPERATIONS THROUGH THE SALE OF COMMON STOCK AND RELATED WARRANTS. DURING FISCAL year2009, the Company primarily used existing cash reserves to fund its operations and capital expenditures.Cash flows from operating activitiesCash used IN OPERATING ACTIVITIES WAS APPROXIMATELY $3.9 MILLION IN FISCAL YEAR 2009 COMPARED TO APPROXIMATELY $7.7 MILLION IN FISCAL YEAR 2008, A DECREASEof approximately $3.8 million. Cash used by operating activities is net loss adjusted for non-cash items and changes in operating assets and liabilities.Cash flows from investing activitiesCASH PROVIDED BY INVESTING ACTIVITIES WAS APPROXIMATELY $2.2 MILLION AND $2.5 MILLION FOR THE YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. CASHEXPENDITURES FOR FIXED ASSETS WERE APPROXIMATELY $58,000 IN FISCAL YEAR 2009 AND APPROXIMATELY $3.1 MILLION IN FISCAL YEAR 2008 (DUE TO COMPLETING OURcurrent PRODUCTION FACILITY). THE COMPANY SOLD ITS REMAINING AUCTION RATE SECURITIES IN JANUARY 2009 WHICH GENERATED $4.0 MILLION OF CASH PROCEEDS. THECOMPANY REINVESTED MOST OF THESE PROCEEDS IN MONEY MARKET FUNDS AND CERTIFICATES OF DEPOSIT WITH MATURITIES OF LESS THAN 3 MONTHS WHICH ARE CLASSIFIED AScash equivalents on the balance sheet.Cash flows from financing activitiesCash used in financing activities was approximately $102,000 for the year ended June 30, 2009 and was used mainly for payments of debt and capital leases. 42Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Projected 2010 Liquidity and Capital ResourcesAT JUNE 30, 2009, CASH AND CASH EQUIVALENTS AMOUNTED TO $2,990,744 AND SHORT-TERM INVESTMENTS AMOUNTED TO $1,679,820 COMPARED TO $4,820,033 OF CASHand cash equivalents and $3,726,000 of short-term investments at June 30, 2008.THE COMPANY HAD APPROXIMATELY $3.3 MILLION OF CASH AND $960,000 OF SHORT-TERM INVESTMENTS AS OF SEPTEMBER 14, 2009. AS OF THAT DATE MANAGEMENTBELIEVED THAT THE COMPANY’S MONTHLY REQUIRED CASH OPERATING EXPENDITURES WERE APPROXIMATELY $350,000 WHICH REPRESENTS A SIGNIFICANT DECREASE OFAPPROXIMATELY $150,000 TO $200,000 FROM AVERAGE MONTHLY EXPENSES IN FISCAL YEAR 2008. MANAGEMENT BELIEVES THAT LESS THAN $100,000 WILL BE SPENT ONcapital expenditures for the entire fiscal year 2010, but there is no assurance that unanticipated needs for capital equipment may not arise.The COMPANY’S LOAN WITH BFEDD MATURES IN FISCAL YEAR 2010 AND WILL BE PAID IN FULL BY THE END OF THE SECOND QUARTER. THE BALANCE OF THE LOAN AT JUNE 30,2009 was $115,898 and is included in current liabilities.IF THE COMPANY IS ABLE TO COMPLETE ITS MAJOR RESEARCH AND DEVELOPMENT PROJECT TO DEVELOP A PROPRIETARY SEPARATION PROCESS TO MANUFACTURE ENRICHED BARIUM,THIS PROCESS SHOULD IMPROVE ISOTOPE PRODUCTION EFFICIENCY DURING FISCAL YEAR 2010. THE COMPANY WILL OWE AN ADDITIONAL $56,610 TO THE CONTRACTOR uponCOMPLETION OF A SUCCESSFUL DEMONSTRATION OF THE ENRICHMENT PROCESS. ONCE A SUCCESSFUL DEMONSTRATION OF THE ENRICHMENT PROCESS HAS OCCURRED, THE COMPANYWILL HAVE TO DECIDE IF THE SMALLER TEST MODEL WILL PRODUCE SUFFICIENT QUANTITIES OF ENRICHED BARIUM OR IF AN ADDITIONAL INVESTMENT OF $100,000 TO $150,000 WILLbe required to build a larger production model.During FISCAL YEAR 2010, THE COMPANY INTENDS TO CONTINUE ITS EXISTING PROTOCOL STUDIES AND BEGIN NEW PROTOCOL STUDIES ON LUNG CANCER TREATMENT USING Cs-131. CURRENTLY, THE COMPANY HAS BUDGETED APPROXIMATELY $220,000 IN FISCAL YEAR 2010 FOR PROTOCOL EXPENSES RELATING TO LUNG CANCER AS WELL AS continuedwork on the dual therapy and mono therapy prostate protocols.Assuming operating costs expand proportionately with revenue increases, we continue pursuing other applications for seed usage outside the prostate market,PROTOCOLS ARE CONTINUED SUPPORTING THE INTEGRITY OF OUR PRODUCT AND SALES AND MARKETING EXPENSES REMAIN STEADY, MANAGEMENT BELIEVES THE COMPANY WILLreach breakeven with revenues of approximately $1.0 million per month.Based on THE FOREGOING ASSUMPTIONS, MANAGEMENT BELIEVES CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS ON HAND AT JUNE 30, 2009 WILL BE SUFFICIENT TOMEET OUR ANTICIPATED CASH REQUIREMENTS FOR OPERATIONS, DEBT SERVICE, AND CAPITAL EXPENDITURE REQUIREMENTS THROUGH AT LEAST THE NEXT TWELVEMONTHS. MANAGEMENT’S PLANS TO ATTAIN BREAKEVEN AND GENERATE ADDITIONAL CASH FLOWS INCLUDE INCREASING REVENUES FROM BOTH NEW AND EXISTING customers(THROUGH OUR DIRECT SALES CHANNELS AND THROUGH OUR DISTRIBUTORS), EXPANDING INTO OTHER MARKET APPLICATIONS WHICH INITIALLY WILL INCLUDE HEAD AND NECK ANDLUNG, AND MAINTAINING COST CONTROL. HOWEVER, THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL ATTAIN PROFITABILITY OR THAT THE COMPANY WILL BE ABLE TO ATTAINITS REVENUE TARGETS. IF WE DO NOT EXPERIENCE THE NECESSARY INCREASES IN SALES OR IF WE EXPERIENCE UNFORESEEN MANUFACTURING CONSTRAINTS, WE MAY NEED TO OBTAINadditional funding.THE COMPANY EXPECTS TO FINANCE ITS FUTURE CASH NEEDS THROUGH SOLICITATION OF WARRANT HOLDERS TO EXERCISE THEIR WARRANTS, THE SALE OF EQUITY SECURITIES ANDPOSSIBLY STRATEGIC COLLABORATIONS OR DEBT FINANCING OR THROUGH OTHER SOURCES THAT MAY BE DILUTIVE TO EXISTING SHAREHOLDERS. IF THE COMPANY NEEDS TO RAISEADDITIONAL MONEY TO FUND ITS OPERATIONS, FUNDING MAY NOT BE AVAILABLE TO IT ON ACCEPTABLE TERMS, OR AT ALL. IF THE COMPANY IS UNABLE TO RAISE ADDITIONAL FUNDSWHEN NEEDED, IT MAY NOT BE ABLE TO MARKET ITS PRODUCTS AS PLANNED OR CONTINUE DEVELOPMENT AND REGULATORY APPROVAL OF ITS FUTURE PRODUCTS. IF THE Companyraises additional funds through warrant exercises or equity sales, these sales may be dilutive to existing investors. 43Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Long-Term Debt and Capital Lease AgreementsThe COMPANY HAS TWO LOAN FACILITIES IN PLACE AS OF JUNE 30, 2009. THE FIRST LOAN IS FROM THE BENTON-FRANKLIN ECONOMIC DEVELOPMENT DISTRICT (BFEDD) IN anORIGINAL PRINCIPAL AMOUNT OF $230,000 AND WAS FUNDED IN DECEMBER 2004. IT BEARS INTEREST AT EIGHT PERCENT AND HAS A FINAL BALLOON PAYMENT DUE IN OCTOBER2009, WHICH THE COMPANY INTENDS TO PAY IN FULL AT THAT TIME. AS OF JUNE 30, 2009, THE PRINCIPAL BALANCE OWED WAS $115,898. THIS LOAN IS SECURED BY CERTAINEQUIPMENT, MATERIALS AND INVENTORY OF ISORAY, AND ALSO REQUIRED PERSONAL GUARANTEES, FOR WHICH THE GUARANTORS WERE ISSUED APPROXIMATELY 70,455 SHARES OFCOMMON STOCK. THE SECOND LOAN IS FROM THE HANFORD AREA ECONOMIC INVESTMENT FUND COMMITTEE (HAEIFC) AND WAS ORIGINATED IN JUNE 2006. THE LOANORIGINALLY HAD A TOTAL FACILITY OF $1,400,000 WHICH WAS REDUCED IN SEPTEMBER 2007 TO THE AMOUNT OF THE COMPANY’S INITIAL DRAW OF $418,670. THE principalBALANCE OWED ON THE LOAN AS OF JUNE 30, 2009 WAS $221,562. THIS LOAN IS SECURED BY RECEIVABLES, EQUIPMENT, MATERIALS AND INVENTORY, AND CERTAIN LIFEinsurance policies and also required personal guarantees. The final payment on the HAEIFC loan will be due in September 2013.The COMPANY IS IN VIOLATION OF CERTAIN COVENANTS OF THE BFEDD LOAN AS OF JUNE 30, 2009. THE COMPANY HAS NOT REQUESTED A WAIVER AS THE LOAN IS DUE IN lessTHAN SIX MONTHS AND IS CLASSIFIED AS CURRENT ON THE COMPANY’S BALANCE SHEET. THE COMPANY IS CURRENTLY IN VIOLATION OF THE COVENANTS REGARDING PAYINGOFFICERS IN EXCESS OF $100,000 PER YEAR, PAYING RENT IN EXCESS OF $45,000 PER YEAR AT ITS CURRENT LOCATION, AND REPURCHASING ANY OF ITS OUTSTANDING STOCK. UNDERTHE TERMS OF THE LOAN AGREEMENT, BFEDD CAN RAISE THE INTEREST RATE TO 13 PERCENT OR REQUEST REPAYMENT OF THE ENTIRE AMOUNT OUTSTANDING AFTER GIVING THECompany 15 days notice. If BFEDD were to take these measures, the Company would immediately repay the remaining balance of the loan.HAEIFC has granted the Company a waiver from enforcing a fixed charge coverage ratio. The waiver is effective through June 30, 2010.The Company no longer has any capital leases as of June 30, 2009.Other Commitments and ContingenciesON MAY 2, 2007, MEDICAL ENTERED INTO A LEASE FOR ITS NEW PRODUCTION FACILITY WITH ENERGY NORTHWEST, THE OWNER OF THE APPLIED PROCESS ENGINEERINGLABORATORY (THE APEL LEASE). THE APEL LEASE HAS A THREE-YEAR TERM EXPIRING ON APRIL 30, 2010, AN OPTION TO RENEW FOR TWO ADDITIONAL THREE-YEAR TERMS, ANDORIGINAL MONTHLY RENT OF APPROXIMATELY $26,700, SUBJECT TO ANNUAL INCREASES BASED ON THE CONSUMER PRICE INDEX, PLUS MONTHLY JANITORIAL EXPENSES OFapproximately $700. THIS NEW FACILITY BECAME OPERATIONAL IN SEPTEMBER 2007. DUE TO A REDUCTION IN SOME LAB AND OFFICE SPACE AT APEL, THE RENT HAS BEENreduced to approximately $23,500 per month plus monthly janitorial expenses of approximately $460.Future minimum lease payments under operating leases, including the two three-year renewals of the APEL lease, are as follows:Year ending June 30, 2010 $305,908 2011 302,235 2012 290,993 2013 288,467 2014 288,467 Thereafter 528,857 $2,004,927 IN FEBRUARY 2006, THE COMPANY SIGNED A LICENSE AGREEMENT WITH INTERNATIONAL BRACHYTHERAPY SA (IBT), A BELGIAN COMPANY, COVERING NORTH AMERICA ANDPROVIDING THE COMPANY WITH ACCESS TO IBT’S INK JET PRODUCTION PROCESS AND ITS PROPRIETARY POLYMER SEED TECHNOLOGY FOR USE IN BRACHYTHERAPY PROCEDURESusing Cs-131. Under the original agreement royalty payments were to be paid on net sales revenue incorporating the technology. 44Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ON OCTOBER 12, 2007, THE COMPANY ENTERED INTO AMENDMENT NO. 1 (THE AMENDMENT) TO ITS LICENSE AGREEMENT DATED FEBRUARY 2, 2006 WITH IBT. THECOMPANY PAID LICENSE FEES OF $275,000 (UNDER THE ORIGINAL AGREEMENT) AND $225,000 (UNDER THE AMENDMENT) DURING FISCAL YEARS 2006 AND 2008,RESPECTIVELY. THE AMENDMENT ELIMINATES THE PREVIOUSLY REQUIRED ROYALTY PAYMENTS BASED ON NET SALES REVENUE, AND THE PARTIES ORIGINALLY INTENDED TONEGOTIATE TERMS FOR FUTURE PAYMENTS BY THE COMPANY FOR POLYMER SEED COMPONENTS TO BE PURCHASED AT IBT'S COST PLUS A TO-BE-DETERMINED PROFITPERCENTAGE. MANAGEMENT NO LONGER BELIEVES THAT INTRODUCING CS-131 POLYMER SEEDS IS A VIABLE STRATEGY DUE TO CONCERNS REGARDING PHYSICIAN ACCEPTANCE ANDTHE COSTS TO REVAMP THE COMPANY’S EXISTING MANUFACTURING PROCEDURES TO INCORPORATE THIS TECHNOLOGY. IN DECEMBER 2008, THE COMPANY RECORDED ANimpairment charge to write down this license based on its current intentions to not utilize this technology.IN NOVEMBER 2008, A SUBSIDIARY OF THE COMPANY ENTERED INTO A WRITTEN CONTRACT WITH A CONTRACTOR BASED IN THE UKRAINE TO FORMALIZE A RESEARCH ANDDEVELOPMENT PROJECT ORIGINALLY BEGUN OVER THREE YEARS AGO TO DEVELOP A PROPRIETARY SEPARATION PROCESS TO MANUFACTURE ENRICHED BARIUM. THERE IS NOASSURANCE THAT THIS PROCESS CAN BE DEVELOPED. THE CONTRACT CALLED FOR AN INITIAL PAYMENT OF $17,800 AND A PAYMENT OF $56,610 UPON COMPLETION OF ASUCCESSFUL DEMONSTRATION. THE COMPANY’S INITIAL DEMONSTRATION HAS BEEN POSTPONED DUE TO AN ELECTRICAL PROBLEM THAT DAMAGED EQUIPMENT AND DUE TOECONOMIC DIFFICULTIES IN THE UKRAINE THAT HAVE PROTRACTED THE CONTRACTOR’S EFFORTS. THE COMPANY ANTICIPATES THAT THE DEVICE WILL BE TESTED IN THE FALL OF 2009BUT THERE IS NO ASSURANCE THIS TESTING WILL OCCUR BY THEN OR WHETHER IT WILL BE SUCCESSFUL. AFTER A SUCCESSFUL DEMONSTRATION, THE COMPANY WILL DECIDE IF THEPROTOTYPE MODEL WILL PRODUCE SUFFICIENT QUANTITIES OF ENRICHED BARIUM OR IF A LARGER PRODUCTION MODEL WILL NEED TO BE BUILT FOR AN ADDITIONAL $100,000 TO$150,000.THE COMPANY IS SUBJECT TO VARIOUS LOCAL, STATE, AND FEDERAL ENVIRONMENTAL REGULATIONS AND LAWS DUE TO THE ISOTOPES USED TO PRODUCE THE COMPANY’Sproduct. As part of normal operations, amounts are expended to ensure THAT THE COMPANY IS IN COMPLIANCE WITH THESE LAWS AND REGULATIONS. WHILE THERE HAVEBEEN NO REPORTABLE INCIDENTS OR COMPLIANCE ISSUES, THE COMPANY BELIEVES THAT IF IT RELOCATES ITS CURRENT PRODUCTION FACILITIES THEN CERTAIN DECOMMISSIONINGEXPENSES WILL BE INCURRED. AN ASSET RETIREMENT OBLIGATION WAS ESTABLISHED IN THE FIRST QUARTER OF FISCAL YEAR 2008 FOR THE COMPANY’S OBLIGATIONS AT ITS NEWPRODUCTION FACILITY. THIS ASSET RETIREMENT OBLIGATION WILL BE FOR OBLIGATIONS TO REMOVE ANY RESIDUAL RADIOACTIVE MATERIALS AND TO REMOVE ALL LEASEHOLDimprovements.The INDUSTRY THAT THE COMPANY OPERATES IN IS SUBJECT TO PRODUCT LIABILITY LITIGATION. THROUGH ITS PRODUCTION AND QUALITY ASSURANCE PROCEDURES, THE COMPANYworks to mitigate the risk of any lawsuits concerning its product. The Company also carries product liability insurance to help protect it from this risk.The Company has no off-balance sheet arrangements.InflationMANAGEMENT DOES NOT BELIEVE THAT THE CURRENT LEVELS OF INFLATION IN THE UNITED STATES HAVE HAD A SIGNIFICANT IMPACT ON THE OPERATIONS OF THE COMPANY. IFcurrent levels of inflation hold steady, management does not believe future operations will be negatively impacted.New Accounting StandardsIN DECEMBER 2007, THE FASB ISSUED STATEMENT NO. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51(SFAS 160). THE STATEMENT REQUIRES NONCONTROLLING INTERESTS OR MINORITY INTERESTS TO BE TREATED AS A SEPARATE COMPONENT OF EQUITY, NOT AS A LIABILITY OR otherITEM OUTSIDE OF PERMANENT EQUITY. UPON A LOSS OF CONTROL, THE INTEREST SOLD, AS WELL AS ANY INTEREST RETAINED, IS REQUIRED TO BE MEASURED AT FAIR VALUE, WITH ANYGAIN OR LOSS RECOGNIZED IN EARNINGS. BASED ON SFAS 160, ASSETS AND LIABILITIES WILL NOT CHANGE FOR SUBSEQUENT PURCHASE OR SALES TRANSACTIONS WITHNONCONTROLLING INTERESTS AS LONG AS CONTROL IS MAINTAINED. DIFFERENCES BETWEEN THE FAIR VALUE OF CONSIDERATION PAID OR RECEIVED AND THE CARRYING VALUE OFNONCONTROLLING INTERESTS ARE TO BE RECOGNIZED AS AN ADJUSTMENT TO THE PARENT INTEREST’S EQUITY. SFAS 160 IS EFFECTIVE FOR FISCAL YEARS BEGINNING ON OR AFTERDECEMBER 15, 2008 AND EARLIER ADOPTION IS PROHIBITED. THE ADOPTION OF THIS STATEMENT IS NOT EXPECTED TO HAVE A MATERIAL EFFECT ON THE COMPANY’S FINANCIALstatements. 45Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IN MAY 2008, FASB ISSUED SFAS NO. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 IDENTIFIES THE SOURCES OF accountingPRINCIPLES AND THE FRAMEWORK FOR SELECTING THE PRINCIPLES TO BE USED IN THE PREPARATION OF FINANCIAL STATEMENTS OF NONGOVERNMENTAL ENTITIES THAT ARE presentedIN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES. IT WAS EFFECTIVE NOVEMBER 15, 2008, FOLLOWING THE SEC’S APPROVAL OF THEPUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD AMENDMENTS TO AU SECTION 411, The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles. The adoption of this statement did not have a material effect on the Company’s financial statements.THE FASB ISSUED SFAS NO. 168, The FASB Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement ofFASB Statement 162, IN LATE JUNE 2009. THE FASB ACCOUNTING STANDARDS CODIFICATION WILL BECOME THE SOURCE OF AUTHORITATIVE U.S. GENERALLY ACCEPTEDACCOUNTING PRINCIPLES (GAAP) AND WILL SUPERSEDE ALL THEN-EXISTING NON-SEC ACCOUNTING AND REPORTING STANDARDS ON THE EFFECTIVE DATE, SEPTEMBER 15,2009. THE CODIFICATION WILL NOT CHANGE GAAP, BUT CONSOLIDATES IT INTO A LOGICAL AND CONSISTENT STRUCTURE. THE COMPANY WILL BE REQUIRED TO REVISE OURreferences to GAAP in our financial statements beginning with the first quarter of fiscal year 2010.ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAs a smaller reporting company, the Company is not required to provide Item 7A disclosure in this Annual Report.ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe required accompanying financial statements begin on page F-1 of this document. ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREThere were no disagreements or reportable events with DeCoria, Maichel & Teague, P.S. ITEM 9A – CONTROLS AND PROCEDURESDisclosure Controls and ProceduresUNDER THE SUPERVISION AND WITH THE PARTICIPATION OF OUR MANAGEMENT, INCLUDING OUR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER, WE CONDUCTEDAN EVALUATION OF THE DESIGN AND OPERATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES, AS SUCH TERM IS DEFINED UNDER RULES 13A-14(C) AND 15D-14(C)PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), AS OF JUNE 30, 2009. BASED ON THAT EVALUATION, OUR PRINCIPALEXECUTIVE OFFICER AND OUR PRINCIPAL FINANCIAL OFFICER CONCLUDED THAT THE DESIGN AND OPERATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES WERE EFFECTIVE INTIMELY ALERTING THEM TO MATERIAL INFORMATION REQUIRED TO BE INCLUDED IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE SEC UNDER THE EXCHANGE ACT. THEDESIGN OF ANY SYSTEM OF CONTROLS IS BASED IN PART UPON CERTAIN ASSUMPTIONS ABOUT THE LIKELIHOOD OF FUTURE EVENTS, AND THERE CAN BE NO ASSURANCE THAT ANYDESIGN WILL SUCCEED IN ACHIEVING ITS STATED GOALS UNDER ALL POTENTIAL FUTURE CONDITIONS, REGARDLESS OF HOW REMOTE. HOWEVER, MANAGEMENT BELIEVES THAT OURsystem of disclosure controls and procedures is designed to provide a reasonable level of assurance that the objectives of the system will be met. 46Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Management’s Report on Internal Control over Financial ReportingOur MANAGEMENT IS RESPONSIBLE FOR ESTABLISHING AND MAINTAINING ADEQUATE INTERNAL CONTROL OVER FINANCIAL REPORTING, AS SUCH TERM IS DEFINED IN RULE 13A-15(F)of THE EXCHANGE ACT. UNDER THE SUPERVISION AND WITH THE PARTICIPATION OF OUR MANAGEMENT, INCLUDING OUR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL financialOFFICER, WE CONDUCTED AN EVALUATION OF THE EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON THE FRAMEWORK IN Internal Control –Integrated Framework ISSUED BY THE COMMITTEE OF SPONSORING ORGANIZATIONS OF THE TREADWAY COMMISSION. BASED ON OUR EVALUATION UNDER THE FRAMEWORK INInternal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of June 30, 2009.THIS ANNUAL REPORT DOES NOT INCLUDE AN ATTESTATION REPORT OF OUR REGISTERED PUBLIC ACCOUNTING FIRM REGARDING INTERNAL CONTROL OVER FINANCIALREPORTING. MANAGEMENT’S REPORT WAS NOT SUBJECT TO ATTESTATION BY OUR REGISTERED PUBLIC ACCOUNTING FIRM PURSUANT TO TEMPORARY RULES OF THE SECURITIES andExchange Commission that permit us to provide only management’s report in this annual report.Changes in Internal Control over Financial ReportingTHERE HAVE NOT BEEN ANY CHANGES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING (AS SUCH TERM IS DEFINED IN RULES 13A-15(E) AND 15D-15(E) UNDER THEEXCHANGE ACT) DURING THE MOST RECENT FISCAL QUARTER THAT HAVE MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, OUR INTERNAL CONTROL OVERfinancial reporting.Limitations on the Effectiveness of ControlsOur MANAGEMENT, INCLUDING OUR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER, DOES NOT EXPECT THAT OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLSwill PREVENT ALL ERRORS AND ALL FRAUD. A CONTROL SYSTEM, NO MATTER HOW WELL CONCEIVED AND OPERATED, CAN PROVIDE ONLY REASONABLE, NOT ABSOLUTE, ASSURANCE THATTHE OBJECTIVES OF THE CONTROL SYSTEM ARE MET. FURTHER, THE DESIGN OF A CONTROL SYSTEM MUST REFLECT THE FACT THAT THERE ARE RESOURCE CONSTRAINTS, AND THE BENEFITS OFCONTROLS MUST BE CONSIDERED RELATIVE TO THEIR COSTS. BECAUSE OF THE INHERENT LIMITATIONS IN ALL CONTROL SYSTEMS, NO EVALUATION OF CONTROLS CAN PROVIDE ABSOLUTEASSURANCE THAT ALL CONTROL ISSUES AND INSTANCES OF FRAUD, IF ANY, WITHIN THE COMPANY HAVE BEEN DETECTED. THESE INHERENT LIMITATIONS INCLUDE THE REALITIES THATjudgments in decision making can be faulty, and that breakdowns can occur BECAUSE OF A SIMPLE ERROR OR MISTAKE. ADDITIONALLY, CONTROLS CAN BE circumventedby the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.The DESIGN OF ANY SYSTEM OF CONTROLS ALSO IS BASED IN PART UPON CERTAIN ASSUMPTIONS ABOUT THE LIKELIHOOD OF FUTURE EVENTS, AND THERE CAN BE NO ASSURANCE THATany DESIGN WILL SUCCEED IN ACHIEVING ITS STATED GOALS UNDER ALL POTENTIAL FUTURE CONDITIONS; OVER TIME, CONTROLS MAY BECOME INADEQUATE BECAUSE OF CHANGES INCONDITIONS, OR THE DEGREE OF COMPLIANCE WITH THE POLICIES OR PROCEDURES MAY DETERIORATE. BECAUSE OF THE INHERENT LIMITATIONS IN A COST-EFFECTIVE controlsystem, misstatements due to error or fraud may occur and not be detected.ITEM 9B – OTHER INFORMATIONTHERE WERE NO ITEMS REQUIRED TO BE DISCLOSED IN A REPORT ON FORM 8-K DURING THE FOURTH QUARTER OF THE FISCAL YEAR ENDED JUNE 30, 2009 THAT HAVE NOT BEENalready disclosed on a Form 8-K filed with the SEC.PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEEach member of the Board of Directors serves a one-year term and is subject to reelection at the Company’s Annual Meeting of Shareholders held each year. 47Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Board CommitteesTHE BOARD HAS ESTABLISHED AN AUDIT COMMITTEE CONSISTING OF THOMAS LAVOY (CHAIRMAN), ROBERT KAUFFMAN, AND ALBERT SMITH; A COMPENSATION COMMITTEECONSISTING OF ALBERT SMITH (CHAIRMAN) AND ROBERT KAUFFMAN; AND A NOMINATING COMMITTEE CONSISTING OF ROBERT KAUFFMAN (CHAIRMAN), THOMAS LAVOY, ANDAlbert Smith. No other committees have been formed.Audit CommitteeTHE AUDIT COMMITTEE WAS ESTABLISHED ON DECEMBER 8, 2006, THE DATE ON WHICH ITS CHARTER WAS ADOPTED. THE AUDIT COMMITTEE CHARTER LISTS THE PURPOSES OFTHE AUDIT COMMITTEE AS OVERSEEING THE ACCOUNTING AND FINANCIAL REPORTING PROCESSES OF THE COMPANY AND AUDITS OF THE FINANCIAL STATEMENTS OF THE COMPANYand providing ASSISTANCE TO THE BOARD OF DIRECTORS IN MONITORING (1) THE INTEGRITY OF THE COMPANY’S FINANCIAL STATEMENTS, (2) THE COMPANY’S COMPLIANCE WITHLEGAL AND REGULATORY REQUIREMENTS, (3) THE INDEPENDENT AUDITOR’S QUALIFICATIONS AND INDEPENDENCE, AND (4) THE PERFORMANCE OF THE COMPANY’S INTERNAL AUDITfunction, if any, and independent auditor.THE BOARD OF DIRECTORS HAS DETERMINED THAT MR. LAVOY AND MR. KAUFFMAN ARE EACH AN “AUDIT COMMITTEE FINANCIAL EXPERT” AS DEFINED IN ITEM 407(D)(5) OFREGULATION S-K PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION, AND EACH AUDIT COMMITTEE MEMBER IS INDEPENDENT. THE BOARD’S CONCLUSIONSregarding THE QUALIFICATIONS OF MR. LAVOY AS AN AUDIT COMMITTEE FINANCIAL EXPERT WERE BASED ON HIS SERVICE AS A CHIEF FINANCIAL OFFICER OF A PUBLIC COMPANY,HIS EXPERIENCE AS A CERTIFIED PUBLIC ACCOUNTANT AND HIS DEGREE IN ACCOUNTING. THE BOARD’S CONCLUSIONS REGARDING THE QUALIFICATIONS OF MR. KAUFFMAN AS ANAUDIT COMMITTEE FINANCIAL EXPERT WERE BASED ON HIS SERVICE AS A CHIEF EXECUTIVE OFFICER OF MULTIPLE PUBLIC COMPANIES, HIS ACTIVE SUPERVISION OF THE PRINCIPALfinancial and accounting officers of the public companies for which he served as chief executive officer, and his M.B.A. in Finance.Executive Officers and DirectorsThe executive officers and directors serving the Company as of June 30, 2009 were as follows:Name Age Position Held Term* Dwight Babcock 61 Chairman, Chief Executive Officer AnnualJonathan Hunt 42 Chief Financial Officer, Treasurer Lori Woods 47 Chief Operating Officer Robert Kauffman 68 Vice-Chairman AnnualThomas LaVoy 49 Director AnnualAlbert Smith 65 Director Annual* For directors onlyDwight BABCOCK – MR. BABCOCK WAS APPOINTED CEO OF THE COMPANY ON FEBRUARY 18, 2009. HE WAS PREVIOUSLY APPOINTED CHAIRMAN AND INTERIM CEO OF THECOMPANY ON FEBRUARY 26, 2008 AND HAS SERVED AS A DIRECTOR OF THE COMPANY SINCE 2006. MR. BABCOCK HAS SERVED AS CHAIRMAN AND CHIEF EXECUTIVE OFFICEROF APEX DATA SYSTEMS, INC., AN INFORMATION TECHNOLOGY COMPANY, SINCE 1975. APEX DATA SYSTEMS AUTOMATES THE ADMINISTRATION AND CLAIMS adjudicationNEEDS OF INSURANCE COMPANIES BOTH NATIONALLY AND INTERNATIONALLY. MR. BABCOCK WAS FORMERLY PRESIDENT AND CEO OF BABCOCK INSURANCE CORPORATION (BIC)FROM 1974 UNTIL 1985. BIC WAS A NATIONALLY RECOGNIZED THIRD PARTY ADMINISTRATOR OPERATING WITHIN 35 STATES. MR. BABCOCK HAS KNOWLEDGE AND EXPERIENCE INTHE EQUITY ARENA AND HAS PARTICIPATED IN VARIOUS ACTIVITIES WITHIN THE VENTURE CAPITAL, PRIVATE AND INSTITUTIONAL CAPITAL MARKETS. MR. BABCOCK STUDIEDmarketing and economics at the University of Arizona where he currently serves on the University of Arizona Astronomy Board. 48Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. JONATHAN HUNT – MR. HUNT HAS OVER 15 YEARS OF FINANCE AND ACCOUNTING EXPERIENCE, INCLUDING FINANCIAL REPORTING, SEC KNOWLEDGE, AND OPERATIONALANALYSIS. BEFORE JOINING ISORAY IN 2006, HE WAS EMPLOYED BY HYPERCOM CORPORATION, A GLOBAL PROVIDER OF ELECTRONIC PAYMENT SOLUTIONS AND MANUFACTURER ofCREDIT CARD TERMINALS, SERVING AS ITS ASSISTANT CORPORATE CONTROLLER FROM 2005 TO 2006. HIS FINANCE BACKGROUND ALSO INCLUDES SERVING AS BOTH A MANAGER ANDDIRECTOR OF FINANCIAL REPORTING AND A DIRECTOR OF OPERATIONAL PLANNING AND ANALYSIS FOR CIRCLE K CORPORATION AND ITS AFFILIATES FROM 2000 TO 2005 ANDWORKING FOR PRICEWATERHOUSECOOPERS LLP FROM 1992 TO 1999 WHERE HIS LAST POSITION HELD WAS BUSINESS ASSURANCE MANAGER. MR. HUNT HOLDS MASTERS ofAccountancy and Bachelor of Science degrees from Brigham Young University and is a Certified Public Accountant.Lori WOODS – MS. WOODS JOINED THE COMPANY IN JULY 2006, WAS APPOINTED ACTING CHIEF OPERATING OFFICER ON FEBRUARY 26, 2008, AND WAS APPOINTED CHIEFOperating OFFICER ON FEBRUARY 18, 2009. MS. WOODS HAS OVER 20 YEARS EXPERIENCE IN MEDICAL DEVICE TECHNOLOGY AND HEALTHCARE SERVICES. MS. WOODS servedAS THE CEO OF PRO-QURA, A MEDICAL SERVICES COMPANY FOCUSING ON BRACHYTHERAPY QUALITY ASSURANCE AND EDUCATION, FROM 2002 UNTIL JOINING THECOMPANY. DURING HER TENURE AT PRO-QURA, MS. WOODS DEVELOPED ITS BUSINESS STRATEGY, EXPANDED ITS BUSINESS PORTFOLIO IN QUALITY ASSURANCE BEYOND prostateBRACHYTHERAPY INTO OTHER AREAS OF CANCER, AND INCREASED FUNDING BY 50%. PRIOR TO THIS, SHE SERVED AS THE VICE PRESIDENT OF SALES AT ATI MEDICAL IN 2002, VICEPRESIDENT OF SALES – WEST AND VICE PRESIDENT OF MARKETING AND BUSINESS DEVELOPMENT FOR IMAGYN MEDICAL TECHNOLOGIES FROM 2000 TO 2002, DIRECTOR OFBUSINESS DEVELOPMENT FOR SEATTLE PROSTATE INSTITUTE FROM 1998 TO 2000, AND REGIONAL VICE PRESIDENT AND REGIONAL MANAGER OF INTERDENT FROM 1994 TO1998. Ms. Woods holds a Bachelor of Science degree in Business Administration – Marketing from Loma Linda University.ROBERT KAUFFMAN – MR. KAUFFMAN HAS BEEN A DIRECTOR OF THE COMPANY SINCE 2005 AND WAS APPOINTED VICE-CHAIRMAN OF THE COMPANY ON FEBRUARY 26,2008. MR. KAUFFMAN HAS SERVED AS CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF ALANCO TECHNOLOGIES, INC. (NASDAQ: ALAN), AN Arizona-basedinformation technology company, since July 1, 1998. Mr. Kauffman was formerly President and Chief Executive OFFICER OF NASDAQ-LISTED PHOTOCOMM, INC.,FROM 1988 UNTIL 1997 (SINCE RENAMED KYOCERA SOLAR, INC.). PHOTOCOMM WAS THE NATION’S LARGEST PUBLICLY OWNED MANUFACTURER AND MARKETER OF WIRELESS SOLARELECTRIC POWER SYSTEMS WITH ANNUAL REVENUES IN EXCESS OF $35 MILLION. PRIOR TO PHOTOCOMM, MR. KAUFFMAN WAS A SENIOR EXECUTIVE OF THE ATLANTIC RICHFIELDCOMPANY (ARCO) WHOSE VARIED RESPONSIBILITIES INCLUDED SENIOR VICE PRESIDENT OF ARCO SOLAR, INC., PRESIDENT OF ARCO PLASTICS COMPANY AND VICEPRESIDENT OF ARCO CHEMICAL COMPANY. MR. KAUFFMAN EARNED AN M.B.A. IN FINANCE AT THE WHARTON SCHOOL OF THE UNIVERSITY OF PENNSYLVANIA, AND HOLDS AB.S. in Chemical Engineering from Lafayette College, Easton, Pennsylvania.Thomas LAVOY – MR. LAVOY HAS BEEN A DIRECTOR OF THE COMPANY SINCE 2005. MR. LAVOY HAS SERVED AS CHIEF FINANCIAL OFFICER OF SUPERSHUTTLE INTERNATIONAL,Inc., SINCE JULY 1997 AND AS SECRETARY SINCE MARCH 1998. SUPERSHUTTLE IS ONE OF THE LARGEST PROVIDERS OF SHUTTLE SERVICES IN MAJOR CITIES THROUGHOUT THE WestAND SOUTHWEST REGIONS OF THE UNITED STATES. HE HAS ALSO SERVED AS A DIRECTOR OF ALANCO TECHNOLOGIES, INC. (NASDAQ: ALAN) SINCE 1998. FROM SEPTEMBER1987 TO FEBRUARY 1997, MR. LAVOY SERVED AS CHIEF FINANCIAL OFFICER OF NASDAQ-LISTED PHOTOCOMM, INC. MR. LAVOY WAS A CERTIFIED PUBLIC ACCOUNTANT WITHthe firm of KPMG Peat Marwick from 1980 to 1983. Mr. LaVoy has a Bachelor of Science degree in Accounting from St. Cloud University, Minnesota, and isa Certified Public Accountant.Albert SMITH – MR. SMITH HAS BEEN A DIRECTOR OF THE COMPANY SINCE 2006. MR. SMITH WAS THE CO-FOUNDER OF AND SERVED AS VICE CHAIRMAN OF CSI LEASING, INC.,a PRIVATE COMPUTER LEASING COMPANY FROM 1972 UNTIL MARCH 2005. HE FOUNDED EXTREME VIDEO SOLUTIONS, LLC, A PRIVATE VIDEO CONFERENCING COMPANY WITHHEADQUARTERS IN SCOTTSDALE, ARIZONA IN DECEMBER 2005. IN JANUARY 2008, HE FORMED FACE TO FACE LIVE, INC. (SUCCESSOR TO EXTREME VIDEO SOLUTIONS) WHERE HEPRESENTLY SERVES AS CEO. MR. SMITH PRESENTLY SERVES AS CHAIRMAN OF THE BOARD FOR DOULOS MINISTRIES, INC. MR. SMITH HAS EXTENSIVE EXPERIENCE IN MARKETINGAND SALES HAVING MANAGED A NATIONAL SALES FORCE OF OVER FIFTY PEOPLE WHILE AT CSI LEASING, INC. MR. SMITH HOLDS A BS IN BUSINESS ADMINISTRATION FROM FERRISState College. 49Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The COMPANY’S DIRECTORS, AS NAMED ABOVE, WILL SERVE UNTIL THE NEXT ANNUAL MEETING OF THE COMPANY’S SHAREHOLDERS OR UNTIL THEIR SUCCESSORS ARE DULY ELECTEDAND HAVE QUALIFIED. DIRECTORS WILL BE ELECTED FOR ONE-YEAR TERMS AT THE ANNUAL SHAREHOLDERS MEETING. THERE IS NO ARRANGEMENT OR UNDERSTANDING BETWEEN ANYOF THE DIRECTORS OR OFFICERS OF THE COMPANY AND ANY OTHER PERSON PURSUANT TO WHICH ANY DIRECTOR OR OFFICER WAS OR IS TO BE SELECTED AS A DIRECTOR OR OFFICER, ANDTHERE IS NO ARRANGEMENT, PLAN OR UNDERSTANDING AS TO WHETHER NON-MANAGEMENT SHAREHOLDERS WILL EXERCISE THEIR VOTING RIGHTS TO CONTINUE TO ELECT THE CURRENTDIRECTORS TO THE COMPANY’S BOARD. THERE ARE ALSO NO arrangements, agreements or understandings between non-management shareholders THAT MAY DIRECTLY ORindirectly participate in or influence the management of the Company’s affairs.There are NO AGREEMENTS OR UNDERSTANDINGS FOR ANY OFFICER OR DIRECTOR TO RESIGN AT THE REQUEST OF ANOTHER PERSON, AND NONE OF THE OFFICERS OR DIRECTORS ARE ACTINGon behalf of, or will act at the direction of, any other person. There are no family relationships among our executive officers and directors.Significant EmployeesCERTAIN SIGNIFICANT EMPLOYEES OF OUR SUBSIDIARY, ISORAY MEDICAL, INC., AND THEIR RESPECTIVE AGES AS OF THE DATE OF THIS REPORT ARE SET FORTH IN THE TABLEbelow. Also provided is a brief description of the experience of each significant employee during the past five years.Name Age Position Held and TenureFredric Swindler 61 VP, Regulatory Affairs and Quality AssuranceLane Bray 81 ChemistAnthony Pasqualone 54 VP, Business DevelopmentFredric SWINDLER – MR. SWINDLER JOINED THE COMPANY IN OCTOBER 2006 AND HAS OVER 30 YEARS EXPERIENCE IN MANUFACTURING AND REGULATORY COMPLIANCE. MR.Swindler SERVED AS VP, QUALITY ASSURANCE AND REGULATORY AFFAIRS FOR MEDISYSTEMS CORPORATION, A MANUFACTURER AND DISTRIBUTOR OF MEDICAL DEVICES, FROM 1994until JOINING THE COMPANY. DURING HIS TENURE AT MEDISYSTEMS CORPORATION, MR. SWINDLER DEVELOPED A QUALITY SYSTEM TO ACCOMMODATE VERTICALLY INTEGRATEDMANUFACTURING, DEVELOPED REGULATORY STRATEGIES, POLICIES AND PROCEDURES, AND SUBMITTED NINE PRE-MARKET NOTIFICATIONS (510(K)) TO THE FDA. PRIOR TO THIS, MR.SWINDLER HELD VARIOUS POSITIONS WITH MARQUEST MEDICAL PRODUCTS FROM 1989 TO 1994, SHERWOOD MEDICAL PRODUCTS FROM 1978 TO 1989, OAK PARKPHARMACEUTICALS IN 1978, AND MEAD JOHNSON & COMPANY FROM 1969 TO 1978. MR. SWINDLER HOLDS A BACHELOR OF SCIENCE DEGREE IN BIOMEDICAL Engineeringfrom Rose Hulman Institute of Technology and a Masters of Business Administration from the University of Evansville.LANE BRAY – MR. BRAY IS KNOWN NATIONALLY AND INTERNATIONALLY AS A TECHNICAL EXPERT IN SEPARATIONS, RECOVERY, AND PURIFICATION OF ISOTOPES AND IS A NOTEDAUTHORITY IN THE USE OF CESIUM AND STRONTIUM ION EXCHANGE FOR DEPARTMENT OF ENERGY’S WEST VALLEY AND HANFORD NUCLEAR WASTE CLEANUP EFFORTS. IN 2000,MR. BRAY RECEIVED THE ’RADIATION SCIENCE AND TECHNOLOGY’ AWARD FROM THE AMERICAN NUCLEAR SOCIETY. MR. BRAY HAS AUTHORED OR CO-AUTHORED OVER 110RESEARCH PUBLICATIONS, 12 ARTICLES FOR NINE TECHNICAL BOOKS, AND HOLDS 24 U.S. AND FOREIGN PATENTS. MR. BRAY PATENTED THE USDOE/PNNL PROCESS FOR PURIFYINGMEDICAL GRADE YTTRIUM-90 THAT WAS SUCCESSFULLY COMMERCIALIZED IN 1999. MR. BRAY ALSO INVENTED AND PATENTED THE PROPRIETARY ISOTOPE SEPARATION ANDPURIFICATION PROCESS THAT IS ASSIGNED TO ISORAY. MR. BRAY WAS ELECTED ‘TRI-CITIAN OF THE YEAR’ IN 1988, NOMINATED FOR ‘ENGINEER OF THE YEAR’ BY THE AMERICANNUCLEAR SOCIETY IN 1995, AND WAS ELECTED ‘CHEMIST OF THE YEAR FOR 1997’ BY THE AMERICAN CHEMICAL SOCIETY, EASTERN WASHINGTON SECTION. MR. BRAY RETIREDfrom the Pacific NORTHWEST NATIONAL LABORATORY IN 1998. SINCE RETIRING IN 1998, MR. BRAY WORKED PART TIME FOR PNNL ON SPECIAL PROJECTS UNTIL DEVOTING ALL ofHIS EFFORTS TO ISORAY IN 2004. MR. BRAY HAS BEEN A WASHINGTON STATE LEGISLATOR, A RICHLAND CITY COUNCILMAN, AND A MAYOR OF RICHLAND. MR. BRAY HAS A B.A.in Chemistry from Lake Forest College. 50Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Anthony PASQUALONE – MR. PASQUALONE JOINED THE COMPANY IN NOVEMBER 2008 AND HAS BEEN INVOLVED IN MARKETING BRACHYTHERAPY EXTENSIVELY SINCE 1989when brachytherapy STARTED TO GAIN ATTENTION AS A VIABLE TREATMENT OPTION FOR PROSTATE CANCER. PRIOR TO JOINING ISORAY, MR. PASQUALONE SERVED AS THE NationalONCOLOGY DEVELOPMENT MANAGER AT CALYPSO MEDICAL FROM APRIL 2007 TO NOVEMBER 2008. PRIOR TO THAT MR. PASQUALONE WAS A CONSULTANT WITHBRACHYSCIENCES FROM DECEMBER 2005 TO APRIL 2007. HE ALSO SERVED AS A VP OF STRATEGIC MARKETS FROM MAY 2003 TO DECEMBER 2005 IN THE UROLOGY DIVISIONof CR Bard. From April 1997 to May 2003 he was a principal and Vice PRESIDENT OF SALES AT SOURCETECH MEDICAL, WHICH DEVELOPED AND INTRODUCED SeedLinkTO THE BRACHYTHERAPY MARKET IN 2003. HE STARTED HIS CAREER MANAGING BRACHYTHERAPY SALES AS THE NATIONAL SALES MANAGER AT THERAGENICS CORPORATION, WHEREHE HELPED DEVELOP MARKET ACCEPTANCE OF PD-103. IN 1995 HE BROUGHT THE FIRST STRANDED PRODUCT TO MARKET WHILE WORKING WITH THE TEAM AT ONCURA (AMERSHAMCorporation). Mr. Pasqualone is an alumnus of Fordham University with a BS in Science.Section 16(a) Beneficial Ownership Reporting ComplianceSECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE EXCHANGE ACT) REQUIRES THE COMPANY’S DIRECTORS AND EXECUTIVE OFFICERS, AND PERSONS WHOBENEFICIALLY OWN MORE THAN TEN PERCENT OF A REGISTERED CLASS OF OUR EQUITY SECURITIES, TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION (THE COMMISSION)INITIAL REPORTS OF BENEFICIAL OWNERSHIP AND REPORTS OF CHANGES IN BENEFICIAL OWNERSHIP OF OUR COMMON STOCK. THE RULES PROMULGATED BY THE COMMISSIONUNDER SECTION 16(A) OF THE EXCHANGE ACT REQUIRE THOSE PERSONS TO FURNISH US WITH COPIES OF ALL REPORTS FILED WITH THE COMMISSION PURSUANT TO SECTION16(a). The information in this section is based solely upon a review of Forms 3, Forms 4, and Forms 5 received by us.We BELIEVE THAT ISORAY’S EXECUTIVE OFFICERS, DIRECTORS AND 10% SHAREHOLDERS TIMELY COMPLIED WITH THEIR FILING REQUIREMENTS DURING THE YEAR ENDED JUNE 30,2009 EXCEPT AS FOLLOWS: DWIGHT BABCOCK (TWO FORM 4S), JONATHAN HUNT (ONE FORM 4), AL SMITH (ONE FORM 4), AND LORI WOODS (ONE FORM 4). WE BELIEVE ALL OFthese forms have been filed as of the date of this Report.Code of EthicsWe have ADOPTED A CODE OF CONDUCT AND ETHICS THAT APPLIES TO ALL OF OUR OFFICERS, DIRECTORS AND EMPLOYEES AND A SEPARATE CODE OF ETHICS FOR CHIEF EXECUTIVEOFFICER AND SENIOR FINANCIAL OFFICERS THAT SUPPLEMENTS OUR CODE OF CONDUCT AND ETHICS. THE CODE OF CONDUCT AND ETHICS WAS PREVIOUSLY FILED AS Exhibit14.1 to our Form 10-KSB for the period ended June 30, 2006, and the Code OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS WAS previouslyFILED AS EXHIBIT 14.2 TO THIS SAME REPORT. THE CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS IS ALSO AVAILABLE TO THE PUBLIC ON OURWEBSITE AT HTTP://WWW.ISORAY.COM/ETHICSFORCEO.HTM. EACH OF THESE POLICIES COMPRISES WRITTEN STANDARDS THAT ARE REASONABLY DESIGNED TO DETER WRONGDOINGand to promote the behavior described in Item 406 of Regulation S-K promulgated by the Securities and Exchange Commission.Nominating ProceduresThere have been no material changes to the procedures by which our shareholders may recommend nominees to the Board of Directors during our last fiscalyear.ITEM 11 – EXECUTIVE COMPENSATIONThe FOLLOWING SUMMARY COMPENSATION TABLE SETS FORTH INFORMATION CONCERNING COMPENSATION FOR SERVICES RENDERED IN ALL CAPACITIES DURING OUR PAST TWO FISCALYEARS AWARDED TO, EARNED BY OR PAID TO EACH OF THE FOLLOWING INDIVIDUALS. SALARY AND OTHER COMPENSATION FOR THESE OFFICERS, EMPLOYEES AND FORMER OFFICERS AREset by the Compensation Committee of the Board of Directors, except for employee compensation which is set by officers of the Company. 51Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Summary Compensation TableName and principal position Year Salary($) Bonus($) Stockawards($) Optionawards($) (1) Nonequityincentive plancompensation($) Nonqualifieddeferredcompensationearnings($) All othercompensation($) Total($) Dwight Babcock, Chairman and CEO (2) 2009 140,308 - - 50,000 - - - 190,308 2008 22,000 - - 70,000 - - - 92,000 Jonathan Hunt, Chief Financial Officer 2009 144,119 - - 21,900 - - - 166,019 2008 139,616 - - - - - - 139,616 Lori Woods, Chief Operating Officer 2009 185,296 - - 21,900 - - - 207,196 2008 179,615 - - - - - - 179,615 Robert Bilella, Territory Sales Manager 2009 86,722 106,550 - 2,448 - - - 195,720 2008 117,283 121,150 - - - - - 238,433 (1)Amounts REPRESENT THE FAS 123R VALUATION FOR THE FISCAL YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. ALL SUCH OPTIONS WERE AWARDED UNDER ONEOF THE COMPANY’S STOCK OPTION PLANS. ALL OPTIONS AWARDED (WITH THE EXCEPTION OF MR. BABCOCK’S STOCK OPTION GRANTS THAT WERE IMMEDIATELY VESTED ONTHE GRANT DATE) VEST IN THREE EQUAL ANNUAL INSTALLMENTS BEGINNING WITH THE FIRST ANNIVERSARY FROM THE DATE OF GRANT AND EXPIRE TEN YEARS AFTER THE DATE OFGRANT. ALL OPTIONS WERE GRANTED AT THE FAIR MARKET VALUE OF THE COMPANY’S STOCK ON THE DATE OF GRANT AND THE COMPANY USED A BLACK-SCHOLESmethodology as discussed in the footnotes to the financial statements to value the options.(2)Mr. BABCOCK BECAME THE CHAIRMAN AND INTERIM CEO ON FEBRUARY 26, 2008 AND WAS APPOINTED CEO ON FEBRUARY 18, 2009. HE WAS SERVING AS INTERIMCEO ON A CONTRACT BASIS. MR. BABCOCK ALSO RECEIVED COMPENSATION AS A DIRECTOR OF THE COMPANY UNTIL HIS APPOINTMENT AS CEO ON FEBRUARY 18, 2009which is disclosed in the Non-Employee Director Compensation table.Ms. Woods HAS AN EMPLOYMENT CONTRACT WITH THE COMPANY DATED FEBRUARY 14, 2007. THE AGREEMENT WAS FOR AN INITIAL TERM OF TWO YEARS, WAS EXTENDED FOR ANADDITIONAL YEAR, AND WILL BE AUTOMATICALLY EXTENDED FOR AN ADDITIONAL YEAR ON EACH ANNIVERSARY DATE UNLESS TERMINATED IN ACCORDANCE WITH THE PROVISIONS OFthe agreement. The agreement entitles Ms. Woods to a salary of at least $160,000 with increases as determined by the Compensation COMMITTEE OF THE BOARDAND ANNUAL BONUS PAYMENTS UNDER A BONUS PLAN AS ESTABLISHED BY THE COMPENSATION COMMITTEE. IN THE EVENT THAT MS. WOODS IS TERMINATED WITHOUT CAUSE,BECOMES DISABLED, OR TERMINATES HER EMPLOYMENT FOR GOOD REASON, SHE WILL BE ENTITLED TO HER SALARY AND BENEFITS FOR THE REMAINING TERM OF THE AGREEMENT OR 18MONTHS, WHICHEVER IS SHORTER. GOOD REASON IS DEFINED IN THE AGREEMENT TO MEAN A REDUCTION OF SALARY OR BENEFITS, A CHANGE IN MS. WOODS’ TITLE, POSITION,authority, or RESPONSIBILITIES, CAUSING MS. WOODS TO RELOCATE, OR ANY BREACH BY THE COMPANY OF THIS AGREEMENT. IF MS. WOODS IS TERMINATED WITHIN ONE YEAR OFa CHANGE OF CONTROL THEN SHE SHALL BE ENTITLED TO HER SALARY AND BENEFITS FOR THE REMAINING TERM OF THE AGREEMENT OR 18 MONTHS, WHICHEVER IS LONGER, IN ADDITIONTO A ONE-TIME PAYMENT EQUAL TO HER MOST RECENTLY RECEIVED BONUS. IN THE EVENT OF MS. WOODS’ TERMINATION WITHOUT CAUSE OR TERMINATION WITHIN ONE YEAR OF ACHANGE OF CONTROL, ALL OF HER UNVESTED STOCK OPTIONS SHALL IMMEDIATELY VEST IN FULL AND SHALL BE EXERCISABLE AS PROVIDED IN THE APPLICABLE STOCK OPTIONPLAN. THE AGREEMENT ALSO INCLUDES CERTAIN RESTRICTIVE COVENANTS THAT PROHIBIT MS. WOODS FROM PROVIDING SERVICES TO A COMPETING BUSINESS FOR THE PERIOD OFthis agreement plus one year.Mr. Hunt HAS AN EMPLOYMENT CONTRACT WITH THE COMPANY DATED MAY 19, 2009. THE AGREEMENT IS FOR AN INITIAL TERM OF ONE YEAR AND WILL EXTEND AUTOMATICALLYfor ADDITIONAL ONE-YEAR TERMS ON EACH ANNIVERSARY OF THE EFFECTIVE DATE OF THE AGREEMENT UNLESS TERMINATED BY EITHER PARTY WITH 90 DAYS PRIOR NOTICE. IN THEEVENT THAT MR. HUNT IS TERMINATED WITHOUT CAUSE, BECOMES DISABLED, OR TERMINATES HIS EMPLOYMENT FOR GOOD REASON, HE WILL BE ENTITLED TO HIS SALARY ANDBENEFITS FOR 12 MONTHS. GOOD REASON IS DEFINED IN THE AGREEMENT TO MEAN A REDUCTION OF SALARY OR BENEFITS, A CHANGE IN MR. HUNT’S TITLE, POSITION, AUTHORITY, ORRESPONSIBILITIES, CAUSING MR. HUNT TO RELOCATE, OR ANY BREACH BY THE COMPANY OF THIS AGREEMENT. IF MR. HUNT IS TERMINATED WITHIN ONE YEAR OF A CHANGE OFcontrol then he shall be entitled TO HIS SALARY AND BENEFITS FOR 18 MONTHS. IN THE EVENT OF MR. HUNT’S TERMINATION WITHOUT CAUSE OR TERMINATION WITHIN ONE YEAROF A CHANGE OF CONTROL, ALL OF HIS UNVESTED STOCK OPTIONS SHALL IMMEDIATELY VEST IN FULL AND SHALL BE EXERCISABLE AS PROVIDED IN THE APPLICABLE STOCK OPTIONPLAN. THE AGREEMENT ALSO INCLUDES CERTAIN RESTRICTIVE COVENANTS THAT PROHIBIT MR. HUNT FROM PROVIDING SERVICES TO A COMPETING BUSINESS FOR THE PERIOD OF THISagreement plus one year. 52Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Outstanding Equity Awards at Fiscal Year-End Option awardsName Number ofsecuritiesunderlyingunexercisedoptions(#)exercisable Number ofsecuritiesunderlyingunexercisedoptions(#)unexercisable Equityincentive planawards:Number ofsecuritiesunderlyingunexercisedunearnedoptions(#) Optionexerciseprice($) Optionexpirationdate Dwight Babcock, Chairman and CEO 50,000 - - 6.30 3/31/2016 50,000 - - 3.80 6/23/2016 50,000 - - 3.11 8/15/2016 100,000 - - 0.75 5/13/2018 200,000 - - 0.26 6/1/2019 Jonathan Hunt, Chief Financial Officer 30,000 - - 5.50 5/1/2016 33,333 16,667(2) - 3.10 10/17/2016 10,000 5,000(3) - 4.40 3/2/2017 13,333 6,667(4) - 4.14 6/1/2017 - 10,000(5) - 0.65 7/1/2018 - 100,000(6) - 0.26 6/1/2019 Lori Woods, Chief Operating Officer 33,333 16,667(1) - 3.50 7/5/2016 33,333 16,667(2) - 3.10 10/17/2016 10,000 5,000(3) - 4.40 3/2/2017 13,333 6,667(4) - 4.14 6/1/2017 - 10,000(5) - 0.65 7/1/2018 - 100,000(6) - 0.26 6/1/2019 Robert Bilella, Territory Sales Manager 84,236 - - 4.15 6/23/2015 - 18,000(6) - 0.26 6/1/2019 (1)Represents A JULY 5, 2006 GRANT, ONE-THIRD OF WHICH BECAME EXERCISABLE ON JULY 1, 2007, ONE-THIRD OF WHICH BECAME EXERCISABLE ON JULY 1, 2008, ANDthe final third will become exercisable on July 1, 2009.(2)Represents THE OCTOBER 17, 2006 GRANT, ONE-THIRD OF WHICH BECAME EXERCISABLE ON OCTOBER 17, 2007, ONE-THIRD OF WHICH BECAME EXERCISABLE ON OCTOBER17, 2008, and the final third will become exercisable on October 17, 2009.(3)REPRESENTS THE MARCH 2, 2007 GRANT, ONE-THIRD OF WHICH BECAME EXERCISABLE ON MARCH 2, 2008, ONE-THIRD OF WHICH BECAME EXERCISABLE ON MARCH 2,2009, and the final third will become exercisable on March 2, 2010.(4)Represents the June 1, 2007 grant, one-third of which became exercisable on June 1, 2008, one-third of which became exercisable on June 1, 2009, andthe final third will become exercisable on June 1, 2010.(5)Represents A JULY 1, 2008 GRANT, ONE-THIRD OF WHICH BECAME EXERCISABLE ON JULY 1, 2009, ONE-THIRD OF WHICH WILL BECOME EXERCISABLE ON JULY 1, 2010,and the final third will become exercisable on July 1, 2011.(6)Represents A JUNE 1, 2009 GRANT, ONE-THIRD OF WHICH WILL BECOME EXERCISABLE ON JUNE 1, 2010, ONE-THIRD OF WHICH WILL BECOME EXERCISABLE ON JUNE 1,2011, and the final third will become exercisable on June 1, 2012.The COMPANY HAS A 401(K) PLAN THAT COVERS ALL ELIGIBLE FULL-TIME EMPLOYEES OF THE COMPANY. CONTRIBUTIONS TO THE 401(K) PLAN ARE MADE BY PARTICIPANTS TOTHEIR INDIVIDUAL ACCOUNTS THROUGH PAYROLL WITHHOLDING. ADDITIONALLY, THE 401(K) PLAN PROVIDES FOR THE COMPANY TO MAKE CONTRIBUTIONS TO THE 401(K) PLAN INamounts at the discretion of management. The Company has not MADE ANY CONTRIBUTIONS TO THE 401(K) PLAN AND DOES NOT MAINTAIN ANY OTHER RETIREMENT PLANSfor its executives or employees. 53Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Non-Employee Director CompensationName Feesearned orpaid in cash($) Stockawards($) Optionawards($) Non-equityincentive plancompensation($) Non-qualifieddeferredcompensationearnings($) All othercompensation($) Total($) Dwight Babcock 50,500 - - - - - 50,500 Robert Kauffman 64,500 - - - - - 64,500 Thomas LaVoy 52,500 - - - - - 52,500 Albert Smith 38,500 - - - - - 38,500 BEGINNING IN FISCAL YEAR 2008, EACH NON-EMPLOYEE DIRECTOR RECEIVED CASH COMPENSATION OF $3,000 PER MONTH. IN ADDITION, EACH NON-EMPLOYEE DIRECTORRECEIVED $1,000 PER BOARD MEETING ATTENDED IN PERSON OR $500 PER BOARD MEETING ATTENDED VIA TELEPHONE AND $500 PER COMMITTEE MEETINGattended. Beginning in MARCH 2008, MR. BABCOCK (UNTIL HIS APPOINTMENT AS CEO ON FEBRUARY 18, 2009) BEGAN RECEIVING AN ADDITIONAL $3,000 PER MONTH FORSERVING AS CHAIRMAN, MR. KAUFFMAN BEGAN RECEIVING AN ADDITIONAL $2,000 PER MONTH FOR SERVING AS VICE-CHAIRMAN, AND MR. LAVOY BEGAN RECEIVING ANadditional $1,000 per month for serving as Audit Committee Chairman.Each DIRECTOR HAD STOCK OPTIONS TO PURCHASE 150,000 SHARES OF THE COMPANY’S COMMON STOCK OUTSTANDING AS OF JUNE 30, 2009, EXCEPT FOR MR. BABCOCK WHOWAS GRANTED OPTIONS TO PURCHASE AN ADDITIONAL 100,000 SHARES OF THE COMPANY’S COMMON STOCK ON MAY 13, 2008 FOR SERVING AS INTERIM CEO AND ANadditional 200,000 shares of THE COMPANY’S COMMON STOCK ON JUNE 1, 2009 FOR SERVING AS CEO. THESE GRANTS OF 100,000 AND 200,000 SHARES ARE NOTED IN THEexecutives’ Outstanding Equity Awards at Fiscal Year-End table above.Compensation Committee Interlocks and Insider ParticipationAs a smaller reporting company, the Company is not required to provide this disclosure.Compensation Committee ReportAs a smaller reporting company, the Company is not required to provide this disclosure.ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The FOLLOWING TABLES SET FORTH CERTAIN INFORMATION REGARDING THE BENEFICIAL OWNERSHIP OF THE COMPANY’S COMMON STOCK AND PREFERRED STOCK AS OF SEPTEMBER14, 2009 FOR (A) EACH PERSON KNOWN BY THE COMPANY TO BE A BENEFICIAL OWNER OF FIVE PERCENT OR MORE OF THE OUTSTANDING COMMON OR PREFERRED STOCK OF THECOMPANY, (B) EACH EXECUTIVE OFFICER, DIRECTOR AND NOMINEE FOR DIRECTOR OF THE COMPANY, AND (C) DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AS AGROUP. AS OF SEPTEMBER 14, 2009, THE COMPANY HAD 22,942,088 SHARES OF COMMON STOCK AND 59,065 SHARES OF PREFERRED STOCK OUTSTANDING. EXCEPT ASotherwise indicated below, the address for each listed beneficial owner is c/o IsoRay, Inc., 350 Hills Street, Suite 106, Richland, Washington 99354. 54Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Common Stock Share Ownership Common Stock Options Common Shares Exercisable Within Common Percent of Name of Beneficial Owner Owned 60 Days Warrants Class (1) Dwight Babcock (2) 130,856 450,000 12,500 2.54%Lori Woods 8,000 126,665 - —%Jonathan Hunt - 106,665 - —%Robert Kauffman 63,802 150,000 - —%Thomas LaVoy 40,423 150,000 - —%Albert Smith 198,101 150,000 - 1.51%Directors and Executive Officers as a group 441,182 1,133,330 12,500 6.59%(1)PERCENTAGE OWNERSHIP IS BASED ON 22,942,088 SHARES OF COMMON STOCK OUTSTANDING ON SEPTEMBER 14, 2009. SHARES OF COMMON STOCK SUBJECT TOSTOCK OPTIONS OR WARRANTS WHICH ARE CURRENTLY EXERCISABLE OR WILL BECOME EXERCISABLE WITHIN 60 DAYS AFTER SEPTEMBER 14, 2009 ARE DEEMEDoutstanding FOR COMPUTING THE PERCENTAGE OWNERSHIP OF THE PERSON OR GROUP HOLDING SUCH OPTIONS OR WARRANTS, BUT ARE NOT DEEMED OUTSTANDING FORcomputing the percentage ownership of any other person or group.(2)Mr. Babcock’s common shares owned include 2,695 shares owned by his spouse.Preferred Stock Share Ownership Preferred Shares Percent of Name of Beneficial Owner Owned Class (1) Aissata Sidibe (2) 20,000 33.86%William and Karen Thompson Trust (3) 14,218 24.07%Jamie Granger (4) 10,529 17.83%Hostetler Living Trust (5) 9,479 16.05%Leslie Fernandez (6) 3,688 6.24%(1)Percentage ownership is based on 59,065 shares of Preferred Stock outstanding on September 14, 2009.(2)The address of Ms. Sidibe is 229 Lasiandra Ct, Richland, WA 99352.(3)The address of the William and Karen Thompson Trust is 285 Dondero Way, San Jose, CA 95119.(4)The address of Jamie Granger is 53709 South Nine Canyon Road, Kennewick, WA 99337.(5)The address of the Hostetler Living Trust is 9257 NE 175th Street, Bothell, WA 98011.(6)The address of Leslie Fernandez is 2615 Scottsdale Place, Richland, WA 99352.No officers or directors beneficially own shares of Preferred Stock.ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEIsoRay Medical, Inc.’s patent rights to its Cs-131 process were acquired from Lane Bray, a shareholder and employee of the Company, and are subject to a 1%royalty ON GROSS PROFITS AND CERTAIN CONTRACTUAL RESTRICTIONS. PURSUANT TO THE ROYALTY AGREEMENT, THE COMPANY MUST ALSO PAY A ROYALTY OF 2% OF GROSS SALES, asDEFINED, FOR ANY SUB-ASSIGNMENTS OF THE AFORESAID PATENTED PROCESS TO ANY THIRD PARTIES. THE ROYALTY AGREEMENT WILL REMAIN IN FORCE UNTIL THE EXPIRATION OF THEPATENTS ON THE ASSIGNED TECHNOLOGY, UNLESS EARLIER TERMINATED IN ACCORDANCE WITH THE TERMS OF THE UNDERLYING AGREEMENT. THE COMPANY RECORDED ROYALTYexpense of $20,063 and $21,219 for the years ended June 30, 2009 and 2008, respectively, related to these payments. 55Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Roger GIRARD, THE COMPANY’S FORMER CHAIRMAN AND CEO, HAD PERSONALLY GUARANTEED $20,000 OF THE BFEDD LOAN, WHICH WAS FUNDED IN DECEMBER 2004. INEXCHANGE FOR HIS PERSONAL GUARANTY, MR. GIRARD RECEIVED 5,728 SHARES OF COMMON STOCK. AS A CONDITION OF HIS RESIGNATION IN FEBRUARY 2008, THE CompanyPREPAID $20,000 ON THE BFEDD LOAN AND OBTAINED MR. GIRARD’S RELEASE AND MR. GIRARD IN TURN SURRENDERED THE 5,728 SHARES TO THE COMPANY. AS PART OF HISSETTLEMENT, MR. GIRARD ALSO SURRENDERED 30,072 SHARES OF COMMON STOCK HE HAD RECEIVED IN 2004 FOR PERSONALLY GUARANTEEING A PORTION OF A LINE OF CREDIT FORthe Company.MR. GIRARD AND DAVID SWANBERG, THE COMPANY’S FORMER EXECUTIVE VP – OPERATIONS, PERSONALLY GUARANTEED A PORTION OF THE HAEIFC LOAN. AS PART OF THEIRresignations, the Company obtained their releases from these personal guarantees by prepaying $60,000 and $40,000, respectively.Patent and Know-How Royalty License AgreementEffective AUGUST 1, 1998, PACIFIC MANAGEMENT ASSOCIATES CORPORATION (PMAC) TRANSFERRED ITS ENTIRE RIGHT, TITLE AND INTEREST IN AN EXCLUSIVE LICENSE AGREEMENTWITH DONALD LAWRENCE TO ISORAY, LLC (A PREDECESSOR COMPANY) IN EXCHANGE FOR A MEMBERSHIP INTEREST. THE TERMS OF THE LICENSE AGREEMENT REQUIRE THEPAYMENT OF A ROYALTY BASED ON THE NET FACTORY SALES PRICE, AS DEFINED IN THE AGREEMENT, OF LICENSED PRODUCT SALES. BECAUSE THE LICENSOR’S PATENT APPLICATIONwas ULTIMATELY ABANDONED, ONLY A 1% “KNOW-HOW” ROYALTY BASED ON NET FACTORY SALES PRICE, AS DEFINED, REMAINS APPLICABLE. TO DATE, MANAGEMENT BELIEVESthat there have been no product sales incorporating the “know-how” and that therefore no royalty is due pursuant to the terms of the agreement. Managementbelieves that ultimately no royalties should be paid under this agreement as there is no intent to use this “know-how” in the future.The LICENSOR OF THE LAWRENCE “KNOW-HOW” HAS DISPUTED MANAGEMENT’S CONTENTION THAT IT IS NOT USING THIS “KNOW-HOW”. ON SEPTEMBER 25, 2007 AND AGAIN ONOCTOBER 31, 2007, THE COMPANY PARTICIPATED IN NONBINDING MEDIATION REGARDING THIS MATTER; HOWEVER, NO SETTLEMENT WAS REACHED WITH THE LAWRENCE FAMILYTRUST. AFTER ADDITIONAL SETTLEMENT DISCUSSIONS WHICH ENDED IN APRIL 2008, THE PARTIES STILL FAILED TO REACH A SETTLEMENT. THE PARTIES MAY DEMAND BINDINGarbitration at any time.Director Independence USING THE STANDARDS OF THE NYSE AMEX, THE COMPANY'S BOARD HAS DETERMINED THAT MR. KAUFFMAN, MR. LAVOY, AND MR. SMITH EACH QUALIFY UNDER suchSTANDARDS AS AN INDEPENDENT DIRECTOR. MR. KAUFFMAN, MR. LAVOY AND MR. SMITH EACH MEET THE NYSE AMEX LISTING STANDARDS FOR INDEPENDENCE BOTH AS ADIRECTOR AND AS A MEMBER OF THE AUDIT COMMITTEE, AND MR. KAUFFMAN AND MR. SMITH EACH MEET THE NYSE AMEX LISTING STANDARDS FOR INDEPENDENCE BOTH AS ADIRECTOR AND AS A MEMBER OF THE COMPENSATION COMMITTEE. NO OTHER DIRECTORS ARE INDEPENDENT UNDER THESE STANDARDS. THE COMPANY DID NOT CONSIDER ANYrelationship or transaction between itself and these independent directors not already disclosed in this report in making this determination. ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company paid or accrued the following fees in each of the prior two fiscal years to its principal accountant, DeCoria, Maichel & Teague, P.S.: Year ended Year ended June 30, June 30, 2009 2008 1. Audit fees $32,047 $42,107 2. Audit-related fees – – 3. Tax fees 7,900 7,750 4. All other fees – – Totals $39,947 $49,857 56Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Audit FEES INCLUDE FEES FOR THE AUDIT OF OUR ANNUAL FINANCIAL STATEMENTS, REVIEWS OF OUR QUARTERLY FINANCIAL STATEMENTS, AND RELATED CONSENTS FOR DOCUMENTS FILEDwith the SEC. Tax fees include fees for the preparation of our federal and state income tax returns. AS PART OF ITS RESPONSIBILITY FOR OVERSIGHT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS, THE AUDIT COMMITTEE HAS ESTABLISHED A PRE-APPROVAL POLICY FORengaging audit and permitted non-audit services provided by our independent registered public accountants, DeCoria, Maichel & Teague, P.S. In accordanceWITH THIS POLICY, EACH TYPE OF AUDIT, AUDIT-RELATED, TAX AND OTHER PERMITTED SERVICE TO BE PROVIDED BY THE INDEPENDENT AUDITORS IS SPECIFICALLY DESCRIBED ANDEACH SUCH SERVICE, TOGETHER WITH A FEE LEVEL OR BUDGETED AMOUNT FOR SUCH SERVICE, IS PRE-APPROVED BY THE AUDIT COMMITTEE. THE AUDIT COMMITTEE HASDELEGATED AUTHORITY TO ITS CHAIRMAN TO PRE-APPROVE ADDITIONAL NON-AUDIT SERVICES (PROVIDED SUCH SERVICES ARE NOT PROHIBITED BY APPLICABLE LAW) UP TO A PRE-ESTABLISHED AGGREGATE DOLLAR LIMIT. ALL SERVICES PRE-APPROVED BY THE CHAIRMAN OF THE AUDIT COMMITTEE MUST BE PRESENTED AT THE NEXT AUDIT COMMITTEEMEETING FOR REVIEW AND RATIFICATION. ALL OF THE SERVICES PROVIDED BY DECORIA, MAICHEL & TEAGUE, P.S. DESCRIBED ABOVE WERE APPROVED BY OUR AUDITCommittee.The COMPANY’S PRINCIPAL ACCOUNTANT, DECORIA, MAICHEL & TEAGUE P.S., DID NOT ENGAGE ANY OTHER PERSONS OR FIRMS OTHER THAN THE PRINCIPAL ACCOUNTANT’S full-time, permanent employees. ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(Except as otherwise indicated, all exhibits were previously filed) Exhibit # Description 2.1 Merger Agreement dated as of May 27, 2005, by and among Century Park Pictures Corporation, Century Park Transitory Subsidiary, Inc.,certain shareholders and IsoRay Medical, Inc. incorporated by reference to the Form 8-K filed on August 3, 2005.2.2 CERTIFICATE OF MERGER, FILED WITH THE DELAWARE SECRETARY OF STATE ON JULY 28, 2005 INCORPORATED BY REFERENCE TO THE FORM 8-K FILED ONAugust 3, 2005.3.1 ARTICLES OF INCORPORATION AND BY-LAWS ARE INCORPORATED BY REFERENCE TO THE EXHIBITS TO THE COMPANY'S REGISTRATION STATEMENT OFSeptember 15, 1983.3.2 Certificate OF DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A AND B CONVERTIBLE PREFERRED STOCK, FILED WITH THE MINNESOTASecretary of State on June 29, 2005 incorporated by reference to the Form 8-K filed on August 3, 2005.3.3 Restated and Amended Articles of Incorporation incorporated by reference to the Form 10-KSB filed on October 11, 2005.3.4 TEXT OF AMENDMENTS TO THE AMENDED AND RESTATED BY-LAWS OF THE COMPANY, INCORPORATED BY REFERENCE TO THE FORM 8-K FILED ONFebruary 7, 2007.3.5 Amended and Restated By-Laws of the Company dated as of January 8, 2008, INCORPORATED BY REFERENCE TO THE FORM 8-K FILED ON JANUARY14, 2008.4.2 Intentionally Omitted.4.3 Intentionally Omitted.4.4 Intentionally Omitted.4.5 Intentionally Omitted.4.6 Intentionally Omitted.4.7 Amended and Restated 2005 Stock Option Plan incorporated by reference to the Form S-8 filed on August 19, 2005.4.8 Amended and Restated 2005 Employee Stock Option Plan incorporated by reference to the Form S-8 filed on August 19, 2005.4.9 Intentionally Omitted.4.10 Intentionally Omitted.4.11 Form of IsoRay, Inc. Common Stock Purchase Warrant, incorporated by reference to the Form SB-2/A1 filed on March 24, 2006. 57Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 4.12 2006 Director Stock Option Plan, incorporated by reference to the Form S-8 filed on August 18, 2006.4.13 Intentionally Omitted.4.14 Form OF ISORAY, INC. COMMON STOCK PURCHASE WARRANT, DATED AUGUST 9, 2006, INCORPORATED BY REFERENCE TO THE FORM 8-K FILED ON AUGUST18, 2006.4.15 Intentionally Omitted.4.16 Amended and Restated 2006 Director Stock Option Plan, incorporated by reference to the Form S-8/A1 filed on December 18, 2006.4.17 Amended and Restated 2005 Stock Option Plan, incorporated by reference to the Form S-8/A1 filed on December 18, 2006.4.18 Intentionally Omitted.4.19 RIGHTS AGREEMENT, DATED AS OF FEBRUARY 1, 2007, BETWEEN THE COMPUTERSHARE TRUST COMPANY N.A., AS RIGHTS AGENT, INCORPORATED BYreference to Exhibit 1 to the Company’s Registration Statement on Form 8-A filed on February 7, 2007.4.20 CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES C JUNIOR PARTICIPATING PREFERRED STOCK, INCORPORATED BYreference to Exhibit 1 to the Company’s Registration Statement on Form 8-A filed February 7, 2007.4.21 2008 Employee Stock Option Plan, incorporated by reference to the Form S-8 filed on January 14, 2008.10.2 UNIVERSAL LICENSE AGREEMENT, DATED NOVEMBER 26, 1997 BETWEEN DONALD C. LAWRENCE AND WILLIAM J. STOKES OF PACIFIC MANAGEMENTAssociates Corporation, incorporated by reference to the Form SB-2 filed on November 10, 2005.10.3 Royalty AGREEMENT OF INVENTION AND PATENT APPLICATION, DATED JULY 12, 1999 BETWEEN LANE A. BRAY AND ISORAY LLC, INCORPORATED BYreference to the Form SB-2 filed on November 10, 2005.10.4 Intentionally Omitted.10.5 SECTION 510(K) CLEARANCE FROM THE FOOD AND DRUG ADMINISTRATION TO MARKET LAWRENCE CSERION MODEL CS-1, DATED MARCH 28, 2003,incorporated by reference to the Form SB-2 filed on November 10, 2005.10.6 Intentionally Omitted.10.7 Intentionally Omitted.10.8 Intentionally Omitted.10.9 Development LOAN AGREEMENT FOR $230,000, DATED SEPTEMBER 15, 2004 BETWEEN BENTON-FRANKLIN ECONOMIC DEVELOPMENT DISTRICT ANDIsoRay Medical, Inc., incorporated by reference to the Form SB-2/A2 filed on April 27, 2006.10.10 REGISTRY OF RADIOACTIVE SEALED SOURCES AND DEVICES SAFETY EVALUATION OF SEALED SOURCE, DATED SEPTEMBER 17, 2004, INCORPORATED BYreference to the Form SB-2/A2 filed on April 27, 2006.10.11 Intentionally Omitted.10.12 Intentionally Omitted.10.13 Intentionally Omitted.10.14 Intentionally Omitted.10.15 Intentionally Omitted.10.16 Intentionally Omitted.10.17 Intentionally Omitted.10.18 STATE OF WASHINGTON RADIOACTIVE MATERIALS LICENSE DATED OCTOBER 6, 2005, INCORPORATED BY REFERENCE TO THE FORM SB-2 FILED ONNovember 10, 2005.10.19 Express PRICING AGREEMENT NUMBER 219889, DATED OCTOBER 5, 2005 BETWEEN FEDEX AND ISORAY MEDICAL, INC., INCORPORATED BY REFERENCEto the Form 10-QSB filed on November 21, 2005.10.20 Intentionally Omitted.10.21 Intentionally Omitted.10.22 Agreement DATED AUGUST 9, 2005 BETWEEN THE CURATORS OF THE UNIVERSITY OF MISSOURI AND ISORAY MEDICAL, INC., INCORPORATED BY REFERENCEto the Form SB-2/A2 filed on April 27, 2006 (confidential treatment requested). 58Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10.23 Intentionally Omitted.10.24 Intentionally Omitted.10.25 Economic DEVELOPMENT AGREEMENT, DATED DECEMBER 14, 2005, BY AND BETWEEN ISORAY, INC. AND THE POCATELLO DEVELOPMENT AUTHORITY,incorporated by reference to the Form 8-K filed on December 20, 2005.10.26 License AGREEMENT, DATED FEBRUARY 2, 2006, BY AND BETWEEN ISORAY MEDICAL, INC. AND IBT SA, INCORPORATED BY REFERENCE TO THE FORM 8-Kfiled on March 24, 2006 (confidential treatment requested).10.27 Intentionally Omitted.10.28 Service AGREEMENT BETWEEN ISORAY, INC. AND ADVANCED CARE MEDICAL, INC., DATED MARCH 1, 2006, INCORPORATED BY REFERENCE TO THE FORMSB-2/A2 filed on April 27, 2006.10.29 Intentionally Omitted.10.30 Intentionally Omitted.10.31 LOAN AGREEMENT, DATED JUNE 15, 2006, BY AND BETWEEN ISORAY MEDICAL, INC. AND THE HANFORD AREA ECONOMIC INVESTMENT FUNDCommittee, incorporated by reference to the Form 8-K filed on June 21, 2006.10.32 Commercial SECURITY AGREEMENT, DATED JUNE 15, 2006, BY AND BETWEEN ISORAY MEDICAL, INC. AND THE HANFORD AREA ECONOMIC INVESTMENTFund Committee, incorporated by reference to the Form 8-K filed on June 21, 2006.10.33 COMMON STOCK AND WARRANT PURCHASE AGREEMENT AMONG ISORAY, INC. AND THE OTHER SIGNATORIES THERETO, DATED AUGUST 9, 2006,incorporated by reference to the Form 8-K filed on August 18, 2006.10.34 Intentionally Omitted.10.35 Form OF OFFICER AND DIRECTOR INDEMNIFICATION AGREEMENT, INCORPORATED BY REFERENCE TO THE FORM SB-2 POST EFFECTIVE AMENDMENT NO. 2filed on October 13, 2006.10.36 Intentionally Omitted.10.37 Intentionally Omitted.10.38 Form OF SECURITIES PURCHASE AGREEMENT BY AND AMONG ISORAY, INC. AND THE BUYERS DATED MARCH 22, 2007, INCORPORATED BY REFERENCE TOthe Form 8-K filed on March 23, 2007.10.39 Form of Common Stock Purchase Warrant dated March 21, 2007, incorporated by reference to the Form 8-K filed on March 23, 2007.10.40 Intentionally Omitted.10.41 Intentionally Omitted.10.42 Intentionally Omitted.10.43 Intentionally Omitted.10.44 Intentionally Omitted.10.45 Intentionally Omitted.10.46 AMENDMENT NO. 1 TO LICENSE AGREEMENT, DATED OCTOBER 12, 2007, BY AND BETWEEN ISORAY MEDICAL, INC. AND IBT, SA, INCORPORATED BYreference to the Form 8-K filed on October 17, 2007.10.47 Intentionally Omitted.10.48 Intentionally Omitted.10.49 Contract, DATED DECEMBER 10, 2008, BY AND BETWEEN ISORAY MEDICAL, INC. AND URALDIAL LLC, INCORPORATED BY REFERENCE TO THE FORM 8-Kfiled on December 12, 2008 (confidential treatment requested for redacted portions).10.50 DISTRIBUTION AGREEMENT, DATED FEBRUARY 18, 2009, BY AND BETWEEN ISORAY MEDICAL, INC. AND BIOCOMPATIBLES, INC., INCORPORATED BYreference to the Form 8-K filed on February 24, 2009 (confidential treatment requested for redacted portions).10.51 AMENDMENT NO. 1 TO SERVICE AGREEMENT, DATED FEBRUARY 18, 2009, BY AND BETWEEN ISORAY MEDICAL, INC. AND BIOCOMPATIBLES, INC.,incorporated by reference to the Form 8-K filed on February 24, 2009 (confidential treatment requested for redacted portions).10.52 Executive EMPLOYMENT AGREEMENT BETWEEN ISORAY, INC. AND JONATHAN HUNT, DATED MAY 19, 2009, INCORPORATED BY REFERENCE TO THE FORM8-K filed on May 26, 2009.10.53 Loan Covenant Waiver Letter dated August 24, 2009 from the Hanford Area Economic Investment Fund Committee, filed herewith. 59Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 21.1 Subsidiaries of the Company, filed herewith.23.1 Consent of DeCoria, Maichel & Teague, P.S., filed herewith.31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer, filed herewith.31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer, filed herewith.32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.Reports on Form 8-KOn May 18, 2009, the Company filed a Current Report on Form 8-K announcing its financial results for the third quarter of fiscal year 2009.On May 26, 2009, the Company filed a Current Report on Form 8-K announcing an employment agreement entered into with Mr. Hunt. 60Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc.Index to Financial Statements Page Report of Independent Registered Public Accounting FirmF-2 Financial Statements: Consolidated Balance Sheets as of June 30, 2009 and 2008F-3Consolidated Statements of Operations for the years ended June 30, 2009 and 2008F-4Consolidated Statement of Changes in Shareholders’ Equity for the years ended June 30, 2009 and 2008F-5Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008F-6Notes to Consolidated Financial StatementsF-7 F-1Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Report of Independent Registered Public Accounting FirmBoard of Directors and ShareholdersIsoRay, Inc.Richland, WashingtonWe have audited the accompanying consolidated balance sheets of IsoRay, Inc. and SUBSIDIARIES (“THE COMPANY”) (SEE NOTE 1) AS OF JUNE 30, 2009 AND 2008,and the RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN SHAREHOLDERS’ EQUITY AND CASH FLOWS FOR THE YEARS THEN ENDED. THESE FINANCIAL STATEMENTS AREthe responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We CONDUCTED OUR AUDITS IN ACCORDANCE WITH THE STANDARDS OF THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (UNITED STATES). THOSE STANDARDS REQUIRE THATWE PLAN AND PERFORM THE AUDIT TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDESEXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTINGPRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITSprovide a reasonable basis for our opinion.IN OUR OPINION THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF ISORAY, INC. ANDSUBSIDIARIES AS OF JUNE 30, 2009 AND 2008, AND THE CONSOLIDATED RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR THE YEARS THEN ENDED, IN CONFORMITY WITHaccounting principles generally accepted in the United States of America./s/ DeCoria, Maichel & Teague, P.S.Spokane, WashingtonSeptember 22, 2009 F-2Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc. and SubsidiariesConsolidated Balance Sheets June 30, 2009 2008 ASSETS Current assets: Cash and cash equivalents $2,990,744 $4,820,033 Short-term investments 1,679,820 3,726,000 Accounts receivable, net of allowance for doubtful accounts of $86,931 and $33,031, respectively 746,568 1,016,495 Inventory 789,246 899,964 Prepaid expenses and other current assets 151,077 267,001 Total current assets 6,357,455 10,729,493 Fixed assets, net of accumulated depreciation and amortization 4,891,484 6,040,641 Deferred financing costs, net of accumulated amortization 28,186 65,221 Licenses, net of accumulated amortization 11,867 455,646 Restricted cash 178,615 175,852 Other assets, net of accumulated amortization 273,959 345,040 Total assets $11,741,566 $17,811,893 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $698,882 $751,402 Accrued payroll and related taxes 188,703 344,612 Notes payable, due within one year 161,437 64,486 Capital lease obligations, due within one year - 25,560 Total current liabilities 1,049,022 1,186,060 Notes payable, due after one year 176,023 344,898 Asset retirement obligation, noncurrent 553,471 506,005 Total liabilities 1,778,516 2,036,963 Commitments and contingencies (Note 18) Shareholders' equity: Preferred stock, $.001 par value; 6,000,000 shares authorized: Series A: 1,000,000 shares allocated; no shares issued and outstanding - - Series B: 5,000,000 shares allocated; 59,065 shares issued and outstanding 59 59 Common stock, $.001 par value; 194,000,000 shares authorized; 22,942,088 shares issued and outstanding 22,942 22,942 Treasury stock, at cost, 13,200 and 5,000 shares (8,390) (3,655)Additional paid-in capital 47,818,203 47,464,507 Accumulated deficit (37,869,764) (31,708,923) Total shareholders' equity 9,963,050 15,774,930 Total liabilities and shareholders' equity $11,741,566 $17,811,893 The accompanying notes are an integral part of these financial statements. F-3Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc. and SubsidiariesConsolidated Statements of Operations June 30, 2009 2008 Product sales $5,417,815 $7,158,690 Cost of product sales 5,771,147 7,310,124 Gross loss (353,332) (151,434) Operating expenses: Research and development expenses 958,665 1,358,075 Sales and marketing expenses 2,365,973 3,725,164 General and administrative expenses 2,792,611 3,568,048 Total operating expenses 6,117,249 8,651,287 Operating loss (6,470,581) (8,802,721) Non-operating income (expense): Interest income 111,047 612,077 Gain (loss) on fair value of short-term investments 274,000 (274,000)Financing and interest expense (75,307) (92,863) Non-operating income, net 309,740 245,214 Net loss $(6,160,841) $(8,557,507) Basic and diluted loss per share $(0.27) $(0.37) Weighted average shares used in computing net loss per share: Basic and diluted 22,942,088 23,028,075 The accompanying notes are an integral part of these financial statements. F-4Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc. and SubsidiariesConsolidated Statement of Changes in Shareholders' Equity Series B Preferred Stock Common Stock Treasury Stock Additional Paid- Accumulated Shares Amount Shares Amount Shares Amount in Capital Deficit Total Balances at June 30, 2007 59,065 $59 22,789,324 $22,789 - $- $45,844,793 $(23,151,416) $22,716,225 Issuance of common stock pursuant toexercise of warrants 290,876 291 1,010,622 1,010,913 Issuance of common stock pursuant toexercise of options 10,000 10 11,890 11,900 Repurchase of Company common stock(see Note 13) 5,000 (3,655) (3,655)Cancellation of shares (see Note 12) (148,112) (148) 148 - Share-based compensation 597,054 597,054 Net loss (8,557,507) (8,557,507) Balances at June 30, 2008 59,065 $59 22,942,088 $22,942 5,000 $(3,655) $47,464,507 $(31,708,923) $15,774,930 Repurchase of Company common stock(see Note 13) 8,200 (4,735) (4,735)Share-based compensation 353,696 353,696 Net loss (6,160,841) (6,160,841) Balances at June 30, 2009 59,065 $59 22,942,088 $22,942 13,200 $(8,390) $47,818,203 $(37,869,764) $9,963,050 The accompanying notes are an integral part of these financial statements. F-5Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc. and SubsidiariesConsolidated Statements of Cash Flows Year ended June 30, 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(6,160,841) $(8,557,507)Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization of fixed assets 1,206,935 1,103,940 Impairment of IBt license 425,434 - Write-off of certain foreign patents and trademarks 85,818 - Impairment of fixed assets - 85,000 Amortization of deferred financing costs and other assets 79,563 107,555 Amortization of discount on short-term investments - (150,621)(Gain) loss on fair value of short-term investments (274,000) 274,000 Settlement of asset retirement obligation - (135,120)Accretion of asset retirement obligation 47,466 36,887 Share-based compensation 353,696 597,054 Changes in operating assets and liabilities: Accounts receivable, net 269,927 76,430 Inventory 110,718 (19,130)Prepaid expenses and other current assets 114,777 191,122 Accounts payable and accrued expenses (52,520) (1,196,578)Accrued payroll and related taxes (155,909) (114,456)Deferred revenue - (23,874) Net cash used by operating activities (3,948,936) (7,725,298) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets (57,778) (3,090,934)Additions to licenses and other assets (37,773) (293,303)Change in restricted cash (2,763) (175,852)Purchase of short-term investments (1,679,820) (13,273,653)Proceeds from the sale or maturity of short-term investments 4,000,000 19,367,114 Net cash provided by investing activities 2,221,866 2,533,372 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable (71,924) (168,074)Principal payments on capital lease obligations (25,560) (194,855)Proceeds from cash sales of common stock, pursuant to exercise of warrants - 1,010,913 Proceeds from cash sales of common stock, pursuant to exercise of options - 11,900 Repurchase of Company common stock (4,735) (3,655) Net cash (used) provided by financing activities (102,219) 656,229 Net decrease in cash and cash equivalents (1,829,289) (4,535,697)Cash and cash equivalents, beginning of year 4,820,033 9,355,730 CASH AND CASH EQUIVALENTS, END OF YEAR $2,990,744 $4,820,033 Supplemental disclosures of cash flow information: Cash paid for interest $38,752 $63,818 Non-cash investing and financing activities: Increase in fixed assets related to asset retirement obligation $- $473,096 The accompanying notes are an integral part of these financial statements. F-6Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.IsoRay, Inc.Notes to Consolidated Financial StatementsFor the years ended June 30, 2008 and 20071.OrganizationCentury PARK PICTURES CORPORATION (CENTURY) WAS ORGANIZED UNDER MINNESOTA LAW IN 1983. CENTURY HAD NO OPERATIONS DURING THE PERIOD FROM SEPTEMBER 30,1999 through June 30, 2005.On July 28, 2005, ISORAY MEDICAL, INC. (MEDICAL) BECAME A WHOLLY-OWNED SUBSIDIARY OF CENTURY PURSUANT TO A MERGER. CENTURY CHANGED ITS NAME TO ISORAY,Inc. (IsoRay or the Company). In the merger, the Medical stockholders received approximately 82% of the then outstanding securities of the Company.Medical, A DELAWARE CORPORATION, WAS INCORPORATED EFFECTIVE JUNE 15, 2004 TO DEVELOP, MANUFACTURE AND SELL ISOTOPE-BASED MEDICAL PRODUCTS AND DEVICES FORthe treatment of cancer and other malignant diseases. Medical is headquartered in Richland, Washington.ISORAY INTERNATIONAL LLC, A WASHINGTON LIMITED LIABILITY COMPANY, WAS FORMED ON NOVEMBER 27, 2007 TO SERVE AS AN OWNER IN A RUSSIAN LLC THAT WILLdistribute the Company’s products to the Russian market and also license the Company’s technology for use in manufacturing Cs-131 brachytherapy seeds inRussia. During fiscal year 2009, the Company divested its ownership in the Russian LLC.2.Summary of Significant Accounting PoliciesConsolidationTHE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS OF THE COMPANY AND ITS WHOLLY-OWNED SUBSIDIARIES (COLLECTIVELY THECompany). All significant intercompany accounts and transactions have been eliminated.Cash EquivalentsThe Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.Short-Term InvestmentsTHE COMPANY INVESTS CERTAIN EXCESS CASH IN MARKETABLE SECURITIES CONSISTING PRIMARILY OF COMMERCIAL PAPER, AUCTION RATE SECURITIES, CERTIFICATES OF DEPOSIT,AND MONEY MARKET FUNDS. THE COMPANY CLASSIFIES ALL DEBT SECURITIES AS “AVAILABLE-FOR-SALE” AND RECORDS THE DEBT SECURITIES AT FAIR VALUE WITH UNREALIZED GAINSAND TEMPORARY UNREALIZED LOSSES INCLUDED IN OTHER COMPREHENSIVE INCOME/LOSS WITHIN SHAREHOLDERS’ EQUITY, IF MATERIAL. DECLINES IN FAIR VALUES THAT AREconsidered other than temporary are recorded in the Consolidated Statements of Operations.Fair Value of Financial InstrumentsEFFECTIVE JULY 1, 2008, THE COMPANY IMPLEMENTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 157, Fair Value Measurements. SFAS 157DEFINES FAIR VALUE, ESTABLISHES A FRAMEWORK FOR MEASURING FAIR VALUE IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES, ANDEXPANDS DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS. THE COMPANY ELECTED TO IMPLEMENT THIS STATEMENT WITH THE ONE-YEAR DEFERRAL PERMITTED BY FASB STAFFPOSITION (FSP) 157-2 FOR NONFINANCIAL ASSETS AND NONFINANCIAL LIABILITIES MEASURED AT FAIR VALUE, EXCEPT THOSE THAT ARE RECOGNIZED OR DISCLOSED ON A RECURRINGBASIS. THIS DEFERRAL APPLIES TO FIXED ASSETS AND INTANGIBLE ASSET IMPAIRMENT TESTING AND INITIAL RECOGNITION OF ASSET RETIREMENT OBLIGATIONS FOR WHICH FAIR VALUEIS USED. THE COMPANY DOES NOT EXPECT ANY SIGNIFICANT IMPACT TO OUR CONSOLIDATED FINANCIAL STATEMENTS WHEN WE IMPLEMENT SFAS 157 FOR THESE ASSETS ANDliabilities. F-7Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SFAS 157 REQUIRES DISCLOSURES THAT CATEGORIZE ASSETS AND LIABILITIES MEASURED AT FAIR VALUE INTO ONE OF THREE DIFFERENT LEVELS DEPENDING ON THE OBSERVABILITY OFthe INPUTS EMPLOYED IN THE MEASUREMENT. LEVEL 1 INPUTS ARE QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS OR LIABILITIES. LEVEL 2 INPUTS ARE OBSERVABLEINPUTS OTHER THAN QUOTED PRICES INCLUDED WITHIN LEVEL 1 FOR THE ASSET OR LIABILITY, EITHER DIRECTLY OR INDIRECTLY THROUGH MARKET-CORROBORATED INPUTS. LEVEL 3INPUTS ARE UNOBSERVABLE INPUTS FOR THE ASSET OR LIABILITY REFLECTING SIGNIFICANT MODIFICATIONS TO OBSERVABLE RELATED MARKET DATA OR OUR ASSUMPTIONS ABOUTpricing by market participants.At June 30, 2009, all of the Company’s financial assets and liabilities are accounted and reported at fair value using Level 1 inputs.ALSO EFFECTIVE JULY 1, 2008, THE COMPANY ADOPTED SFAS NO. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including anAmendment of FASB Statement No. 115. THE STATEMENT ALLOWS ENTITIES TO VALUE MANY FINANCIAL INSTRUMENTS AND CERTAIN OTHER ITEMS AT FAIR VALUE. SFAS 159provides GUIDANCE OVER THE ELECTION OF THE FAIR VALUE OPTION, INCLUDING THE TIMING OF THE ELECTION AND SPECIFIC ITEMS ELIGIBLE FOR THE FAIR VALUE ACCOUNTING. IFTHE FAIR VALUE OPTION IS ELECTED THEN UNREALIZED GAINS AND LOSSES ARE REPORTED IN EARNINGS AT EACH SUBSEQUENT REPORTING DATE. THE COMPANY ELECTED NOT TOmeasure any additional financial INSTRUMENTS OR OTHER ITEMS AT FAIR VALUE AS OF JULY 1, 2008 IN ACCORDANCE WITH SFAS 159. ACCORDINGLY, THE ADOPTION OF SFAS159 DID NOT IMPACT OUR CONSOLIDATED FINANCIAL STATEMENTS. THE COMPANY DID ELECT TO FAIR VALUE ITS ARS RIGHTS THAT WERE RECEIVED IN OCTOBER 2008 ANDexercised in January 2009 in accordance with SFAS 159 (see Note 3).Accounts ReceivableACCOUNTS RECEIVABLE ARE STATED AT THE AMOUNT THAT MANAGEMENT OF THE COMPANY EXPECTS TO COLLECT FROM OUTSTANDING BALANCES. MANAGEMENT PROVIDES FORprobable UNCOLLECTIBLE AMOUNTS THROUGH AN ALLOWANCE FOR DOUBTFUL ACCOUNTS. ADDITIONS TO THE ALLOWANCE FOR DOUBTFUL ACCOUNTS ARE BASED ON MANAGEMENT’SJUDGMENT, CONSIDERING HISTORICAL WRITE-OFFS, COLLECTIONS AND CURRENT CREDIT CONDITIONS. BALANCES WHICH REMAIN OUTSTANDING AFTER MANAGEMENT HAS USEDREASONABLE COLLECTION EFFORTS ARE WRITTEN OFF THROUGH A CHARGE TO THE ALLOWANCE FOR DOUBTFUL ACCOUNTS AND A CREDIT TO THE APPLICABLE accountsreceivable. Payments received subsequent to the time that an account is written off are considered bad debt recoveries.InventoryInventory IS REPORTED AT THE LOWER OF COST OR MARKET. COST OF RAW MATERIALS IS DETERMINED USING THE WEIGHTED AVERAGE METHOD. COST OF WORK IN PROCESS andfinished goods is computed using standard cost, which approximates actual cost, on a first-in, first-out basis.Fixed AssetsFixed assets are capitalized and carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense as incurred. WhenASSETS ARE SOLD OR OTHERWISE DISPOSED OF, THE COST AND ACCUMULATED DEPRECIATION ARE REMOVED FROM THE ACCOUNTS AND ANY RESULTING GAIN OR LOSS IS RECOGNIZED INoperations.Depreciation is computed using the straight-line method over the following estimated useful lives:Production equipment3 to 7 yearsOffice equipment2 to 5 yearsFurniture and fixtures2 to 5 yearsLeasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated useful life of the asset. F-8Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Management OF THE COMPANY PERIODICALLY REVIEWS THE NET CARRYING VALUE OF ALL OF ITS EQUIPMENT ON AN ASSET BY ASSET BASIS. THESE REVIEWS CONSIDER THE NETrealizable value of each asset to determine whether an impairment in value has occurred, and the need for any asset impairment write-down.ALTHOUGH MANAGEMENT HAS MADE ITS BEST ESTIMATE OF THE FACTORS THAT AFFECT THE CARRYING VALUE BASED ON CURRENT CONDITIONS, IT IS REASONABLY POSSIBLE THATCHANGES COULD OCCUR WHICH COULD ADVERSELY AFFECT MANAGEMENT'S ESTIMATE OF NET CASH FLOWS EXPECTED TO BE GENERATED FROM ITS ASSETS, AND NECESSITATE ASSETimpairment write-downs.Deferred Financing CostsFinancing COSTS RELATED TO THE ACQUISITION OF DEBT ARE DEFERRED AND AMORTIZED OVER THE TERM OF THE RELATED DEBT USING THE EFFECTIVE INTEREST METHOD. DeferredFINANCING COSTS INCLUDE THE FAIR VALUE OF COMMON SHARES ISSUED TO CERTAIN SHAREHOLDERS FOR THEIR GUARANTEE OF CERTAIN COMPANY DEBT (SEE NOTE 10) INaccordance with Accounting PRINCIPLES BOARD (APB) OPINION NO. 21, Interest on Receivables and Payables AND EMERGING ISSUES TASK FORCE (EITF) ISSUE NO.95-13, Classification of Debt Issue Costs in the Statement of Cash Flows. The value of the shares issued WAS THE ESTIMATED MARKET PRICE OF THE SHARES AS OF THEDATE OF ISSUANCE. AMORTIZATION OF DEFERRED FINANCING COSTS, TOTALING $37,035 AND $30,504 FOR THE YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY, ISincluded in financing expense on the statements of operations.LicensesAmortization OF LICENSES IS COMPUTED USING THE STRAIGHT-LINE METHOD OVER THE ESTIMATED ECONOMIC USEFUL LIVES OF THE ASSETS. IN FISCAL YEAR 2006, THE COMPANYENTERED INTO AN AGREEMENT WITH IBT, SA, A BELGIAN COMPANY (IBT) TO USE IBT’S PROPRIETARY “INK JET” PRODUCTION PROCESS AND ITS PROPRIETARY POLYMER SEEDTECHNOLOGY FOR USE IN BRACHYTHERAPY PROCEDURES USING CESIUM-131 (CS-131). THE COMPANY PAID LICENSE FEES OF $225,000 AND $275,000 DURING FISCAL YEARS2008 AND 2006, RESPECTIVELY. DURING FISCAL YEAR 2009, THE COMPANY DETERMINED THAT THE ENTIRE REMAINING VALUE OF THE IBT LICENSE WAS IMPAIRED AND RECORDEDan impairment charge of $425,434 (see Note 7).AMORTIZATION OF LICENSES WAS $30,067 AND $43,452 FOR THE YEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. BASED ON THE LICENSES RECORDED AT JUNE 30,2009, AND ASSUMING NO SUBSEQUENT IMPAIRMENT OF THE UNDERLYING ASSETS, THE ANNUAL AMORTIZATION EXPENSE FOR EACH FISCAL YEAR ENDING JUNE 30 IS EXPECTED TObe as follows: $11,867 for 2010, $0 for all years thereafter.Other AssetsOTHER ASSETS, WHICH INCLUDE DEFERRED CHARGES AND PATENTS, ARE STATED AT COST, LESS ACCUMULATED AMORTIZATION. AMORTIZATION OF PATENTS IS COMPUTED USING theSTRAIGHT-LINE METHOD OVER THE ESTIMATED ECONOMIC USEFUL LIVES OF THE ASSETS. THE COMPANY PERIODICALLY REVIEWS THE CARRYING VALUES OF PATENTS AND ANYimpairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.Based on THE PATENTS AND OTHER INTANGIBLE ASSETS RECORDED IN OTHER ASSETS AT JUNE 30, 2009, AND ASSUMING NO SUBSEQUENT IMPAIRMENT OF THE UNDERLYING ASSETS,THE ANNUAL AMORTIZATION EXPENSE FOR EACH FISCAL YEAR ENDING JUNE 30 IS EXPECTED TO BE AS FOLLOWS: $16,861 FOR 2010, $15,139 FOR 2011, $15,139 FOR 2012,$15,139 for 2013, $15,139 for 2014, and $157,768 thereafter.Asset Retirement ObligationTHE FAIR VALUE OF THE FUTURE RETIREMENT COSTS OF THE COMPANY’S LEASED ASSETS ARE RECORDED AS A LIABILITY ON A DISCOUNTED BASIS WHEN THEY ARE INCURRED AND ANequivalent AMOUNT IS CAPITALIZED TO PROPERTY AND EQUIPMENT. THE INITIAL RECORDED OBLIGATION IS DISCOUNTED USING THE COMPANY’S CREDIT-ADJUSTED RISK FREE-RATEand IS REVIEWED PERIODICALLY FOR CHANGES IN THE ESTIMATED FUTURE COSTS UNDERLYING THE OBLIGATION. THE COMPANY AMORTIZES THE INITIAL AMOUNT CAPITALIZED toPROPERTY AND EQUIPMENT AND RECOGNIZES ACCRETION EXPENSE IN CONNECTION WITH THE DISCOUNTED LIABILITY OVER THE ESTIMATED REMAINING USEFUL LIFE OF THE LEASEDassets. F-9Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IN FISCAL YEAR 2006, THE COMPANY ESTABLISHED AN INITIAL ASSET RETIREMENT OBLIGATION OF $63,040 WHICH REPRESENTED THE DISCOUNTED COST OF CLEANUP THAT THECompany ANTICIPATED IT WOULD HAVE TO INCUR AT THE END OF ITS EQUIPMENT AND PROPERTY LEASES IN ITS OLD PRODUCTION FACILITY. THIS AMOUNT WAS DETERMINED basedON DISCUSSIONS WITH QUALIFIED PRODUCTION PERSONNEL AND ON HISTORICAL EVIDENCE. DURING FISCAL YEAR 2007, THE COMPANY REEVALUATED ITS OBLIGATIONS BASED ONDISCUSSIONS WITH THE WASHINGTON DEPARTMENT OF HEALTH AND DETERMINED THAT THE INITIAL ASSET RETIREMENT OBLIGATION SHOULD BE INCREASED BY AN ADDITIONAL$56,120. DURING THE SECOND QUARTER OF FISCAL YEAR 2008, THE COMPANY REMOVED ALL RADIOACTIVE RESIDUALS AND TENANT IMPROVEMENTS FROM ITS OLD PRODUCTIONfacility and returned the facility to the lessor. The Company had an asset retirement obligation of $135,120 accrued for this facility but total costs incurred toDECOMMISSION THE FACILITY WERE $274,163 RESULTING IN AN ADDITIONAL EXPENSE OF $139,043 THAT IS INCLUDED IN COST OF PRODUCTS SOLD. THE ADDITIONAL EXPENSEWAS MAINLY DUE TO UNANTICIPATED CONSTRUCTION COSTS TO RETURN THE FACILITY TO ITS PREVIOUS STATE. THE COMPANY ORIGINALLY BELIEVED THAT THE LESSOR WOULD RETAINmany of the leasehold improvements in the building, but the lessor instead required their removal.IN SEPTEMBER 2007, ANOTHER ASSET RETIREMENT OBLIGATION OF $473,096 WAS ESTABLISHED REPRESENTING THE DISCOUNTED COST OF THE COMPANY’S ESTIMATE OF THEOBLIGATIONS TO REMOVE ANY RESIDUAL RADIOACTIVE MATERIALS AND ALL LEASEHOLD IMPROVEMENTS AT THE END OF THE LEASE TERM AT ITS NEW PRODUCTION FACILITY. THEESTIMATE WAS DEVELOPED BY QUALIFIED PRODUCTION PERSONNEL AND THE GENERAL CONTRACTOR OF THE NEW FACILITY. THE COMPANY HAS REVIEWED THE ESTIMATE AGAINbased on its experience with decommissioning its old facility and believes that the original estimate continues to be applicable.During the years ended June 30, 2009 and 2008, the asset retirement obligations changed as follows: 2009 2008 Beginning balance $506,005 $131,142 New obligation – 473,096 Settlement of existing obligation – (135,120)Accretion of discount 47,466 36,887 Ending balance $553,471 $506,005 Because THE COMPANY DOES NOT EXPECT TO INCUR ANY EXPENSES RELATED TO ITS ASSET RETIREMENT OBLIGATIONS IN FISCAL YEAR 2010, THE ENTIRE BALANCE AS OF JUNE 30,2009 is classified as a noncurrent liability.Financial InstrumentsThe COMPANY DISCLOSES THE FAIR VALUE OF FINANCIAL INSTRUMENTS, BOTH ASSETS AND LIABILITIES, RECOGNIZED AND NOT RECOGNIZED IN THE BALANCE SHEET, FOR WHICH IT ISPRACTICABLE TO ESTIMATE THE FAIR VALUE. THE FAIR VALUE OF A FINANCIAL INSTRUMENT IS THE AMOUNT AT WHICH THE INSTRUMENT COULD BE EXCHANGED IN A CURRENTtransaction between willing parties, other than a forced liquidation sale.THE CARRYING AMOUNTS OF FINANCIAL INSTRUMENTS, INCLUDING CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, NOTESpayable, and capital lease obligations, approximated their fair values at June 30, 2009 and 2008.Revenue RecognitionTHE COMPANY APPLIES THE PROVISIONS OF SEC STAFF ACCOUNTING BULLETIN (SAB) NO. 104, Revenue Recognition. SAB NO. 104 PROVIDES GUIDANCE ON THErecognition, PRESENTATION AND DISCLOSURE OF REVENUE IN FINANCIAL STATEMENTS. SAB NO. 104 OUTLINES THE BASIC CRITERIA THAT MUST BE MET TO RECOGNIZE REVENUEAND PROVIDES GUIDANCE FOR THE DISCLOSURE OF REVENUE RECOGNITION POLICIES. THE COMPANY RECOGNIZES REVENUE RELATED TO PRODUCT SALES WHEN (I) PERSUASIVEevidence of an arrangement exists, (ii) shipment has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. F-10Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Revenue FOR THE FISCAL YEARS ENDED JUNE 30, 2009 AND 2008 WAS DERIVED SOLELY FROM SALES OF THE PROXCELAN CS-131 BRACHYTHERAPY SEED, WHICH IS USED IN THETREATMENT OF CANCER. THE COMPANY RECOGNIZES REVENUE ONCE THE PRODUCT HAS BEEN SHIPPED TO THE CUSTOMER. PREPAYMENTS, IF ANY, RECEIVED FROM CUSTOMERSPRIOR TO THE TIME THAT PRODUCTS ARE SHIPPED ARE RECORDED AS DEFERRED REVENUE. IN THESE CASES, WHEN THE RELATED PRODUCTS ARE SHIPPED, THE AMOUNT RECORDED ASdeferred revenue is then recognized as revenue. The Company accrues for sales returns and other allowances at the time of SHIPMENT. ALTHOUGH THE COMPANYdoes not have an extensive operating HISTORY UPON WHICH TO DEVELOP SALES RETURNS ESTIMATES, WE HAVE USED THE EXPERTISE OF OUR MANAGEMENT TEAM, PARTICULARLYthose with extensive industry experience and knowledge, to develop a proper methodology.Shipping and Handling CostsSHIPPING COSTS INCLUDE CHARGES ASSOCIATED WITH DELIVERY OF GOODS FROM THE COMPANY’S FACILITIES TO ITS CUSTOMERS AND ARE REFLECTED IN COST OF PRODUCTsales. Shipping costs paid to the Company by our customers are classified as product sales.Stock-Based CompensationThe COMPANY MEASURES AND RECOGNIZES EXPENSE FOR ALL SHARE-BASED PAYMENTS AT FAIR VALUE. THE COMPANY USES THE BLACK-SCHOLES OPTION VALUATION MODEL TOESTIMATE FAIR VALUE FOR ALL STOCK OPTIONS ON THE DATE OF GRANT. FOR STOCK OPTIONS THAT VEST OVER TIME, THE COMPANY RECOGNIZES COMPENSATION COST ON A straight-line basis over the requisite service period for the entire award.Research and Development CostsRESEARCH AND DEVELOPMENT COSTS, INCLUDING SALARIES, RESEARCH MATERIALS, ADMINISTRATIVE EXPENSES AND CONTRACTOR FEES, ARE CHARGED TO OPERATIONS ASincurred. The cost of equipment used in research and development ACTIVITIES WHICH HAS ALTERNATIVE USES IS CAPITALIZED AS PART OF FIXED ASSETS AND NOT TREATED ASAN EXPENSE IN THE PERIOD ACQUIRED. DEPRECIATION OF CAPITALIZED EQUIPMENT USED TO PERFORM RESEARCH AND DEVELOPMENT IS CLASSIFIED AS RESEARCH ANDdevelopment expense in the year recognized.Advertising and Marketing CostsADVERTISING COSTS ARE EXPENSED AS INCURRED EXCEPT FOR THE COST OF TRADESHOWS AND RELATED MARKETING MATERIALS WHICH ARE DEFERRED UNTIL THE TRADESHOWOCCURS. ADVERTISING AND MARKETING COSTS EXPENSED (INCLUDING TRADESHOWS) WERE $376,319 AND $598,663 FOR THE YEARS ENDED JUNE 30, 2009 AND 2008,respectively. Marketing costs of $5,800 were included in prepaid expenses at June 30, 2009.Legal ContingenciesIN THE ORDINARY COURSE OF BUSINESS, THE COMPANY IS INVOLVED IN LEGAL PROCEEDINGS INVOLVING CONTRACTUAL AND EMPLOYMENT RELATIONSHIPS, PRODUCT LIABILITYclaims, PATENT RIGHTS, ENVIRONMENTAL MATTERS, AND A VARIETY OF OTHER MATTERS. THE COMPANY IS ALSO SUBJECT TO VARIOUS LOCAL, STATE, AND FEDERAL ENVIRONMENTALREGULATIONS AND LAWS DUE TO THE ISOTOPES USED TO PRODUCE THE COMPANY’S PRODUCT. AS PART OF NORMAL OPERATIONS, AMOUNTS ARE EXPENDED TO ENSURE THAT THECOMPANY IS IN COMPLIANCE WITH THESE LAWS AND REGULATIONS. WHILE THERE HAVE BEEN NO REPORTABLE INCIDENTS OR COMPLIANCE ISSUES, THE COMPANY BELIEVES THATIF IT RELOCATES ITS CURRENT PRODUCTION FACILITIES THEN CERTAIN DECOMMISSIONING EXPENSES WILL BE INCURRED AND HAS RECORDED AN ASSET RETIREMENT OBLIGATION FORthese expenses.The COMPANY RECORDS CONTINGENT LIABILITIES RESULTING FROM ASSERTED AND UNASSERTED CLAIMS AGAINST IT, WHEN IT IS PROBABLE THAT A LIABILITY HAS BEEN INCURRED ANDTHE AMOUNT OF THE LOSS IS REASONABLY ESTIMABLE. ESTIMATING PROBABLE LOSSES REQUIRES ANALYSIS OF MULTIPLE FACTORS, IN SOME CASES INCLUDING JUDGMENTS ABOUT THEPOTENTIAL ACTIONS OF THIRD-PARTY CLAIMANTS AND COURTS. THEREFORE, ACTUAL LOSSES IN ANY FUTURE PERIOD ARE INHERENTLY UNCERTAIN. CURRENTLY, THE COMPANY DOES NOTBELIEVE ANY PROBABLE LEGAL PROCEEDINGS OR CLAIMS WILL HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL POSITION OR RESULTS OF OPERATIONS. HOWEVER, IF ACTUAL ORESTIMATED PROBABLE FUTURE LOSSES EXCEED THE COMPANY’S RECORDED LIABILITY FOR SUCH CLAIMS, IT WOULD RECORD ADDITIONAL CHARGES AS OTHER EXPENSE DURING THEperiod in which the actual loss or change in estimate occurred. F-11Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Income TaxesIncome TAXES ARE ACCOUNTED FOR UNDER THE LIABILITY METHOD. UNDER THIS METHOD, THE COMPANY PROVIDES DEFERRED INCOME TAXES FOR TEMPORARY DIFFERENCES thatWILL RESULT IN TAXABLE OR DEDUCTIBLE AMOUNTS IN FUTURE YEARS BASED ON THE REPORTING OF CERTAIN COSTS IN DIFFERENT PERIODS FOR FINANCIAL STATEMENT AND INCOME TAXPURPOSES. THIS METHOD ALSO REQUIRES THE RECOGNITION OF FUTURE TAX BENEFITS SUCH AS NET OPERATING LOSS CARRYFORWARDS, TO THE EXTENT THAT REALIZATION OF SUCHBENEFITS IS MORE LIKELY THAN NOT. DEFERRED TAX ASSETS AND LIABILITIES ARE MEASURED USING ENACTED TAX RATES EXPECTED TO APPLY TO TAXABLE INCOME IN THE YEARS INWHICH THOSE TEMPORARY DIFFERENCES ARE EXPECTED TO BE RECOVERED OR SETTLED. THE EFFECT ON DEFERRED TAX ASSETS AND LIABILITIES OF A CHANGE IN TAX RATES ISrecognized in operations in the period that includes the enactment of the change.ON JULY 1, 2007, THE COMPANY ADOPTED FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 48, Accounting for Uncertainty in Income Taxes (FIN NO.48). FIN NO. 48 CLARIFIES THE ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES RECOGNIZED IN ACCORDANCE WITH SFAS NO. 109 Accounting for Income Taxes,PRESCRIBING A RECOGNITION THRESHOLD AND MEASUREMENT ATTRIBUTE FOR THE RECOGNITION AND MEASUREMENT OF A TAX POSITION TAKEN OR EXPECTED TO BE TAKEN IN A TAXRETURN. IN THE COURSE OF ITS ASSESSMENT, MANAGEMENT HAS DETERMINED THAT THE COMPANY, ITS SUBSIDIARY, AND ITS PREDECESSORS ARE SUBJECT TO EXAMINATION OF THEIRincome tax filings in the United States and state jurisdictions for the 2005 through 2008 tax YEARS. IN THE EVENT THAT THE COMPANY IS ASSESSED PENALTIES AND ORinterest, penalties will be charged to other operating expense and interest will be charged to interest expense.The COMPANY ADOPTED FIN NO. 48 USING THE MODIFIED PROSPECTIVE TRANSITION METHOD, WHICH REQUIRES THE APPLICATION OF THE ACCOUNTING STANDARD AS OF JULY 1,2007. THERE WAS NO IMPACT ON THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 2008 AS A RESULT OF THE ADOPTION OF FIN NO. 48. IN ACCORDANCEWITH THE MODIFIED PROSPECTIVE TRANSITION METHOD, THE FINANCIAL STATEMENTS FOR PRIOR PERIODS HAVE NOT BEEN RESTATED TO REFLECT, AND DO NOT INCLUDE, THE IMPACT OFFIN No. 48.Income (Loss) Per Common ShareBasic EARNINGS PER SHARE IS CALCULATED BY DIVIDING NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS BY THE WEIGHTED AVERAGE NUMBER OF COMMON SHARESOUTSTANDING, AND DOES NOT INCLUDE THE IMPACT OF ANY POTENTIALLY DILUTIVE COMMON STOCK EQUIVALENTS. COMMON STOCK EQUIVALENTS, INCLUDING WARRANTS ANDOPTIONS TO PURCHASE THE COMPANY'S COMMON STOCK, ARE EXCLUDED FROM THE CALCULATIONS WHEN THEIR EFFECT IS ANTIDILUTIVE. AT JUNE 30, 2009 AND 2008, THECALCULATION OF DILUTED WEIGHTED AVERAGE SHARES DOES NOT INCLUDE PREFERRED STOCK, COMMON STOCK WARRANTS OR OPTIONS THAT ARE POTENTIALLY CONVERTIBLE INTOcommon stock as those would be antidilutive due to the Company’s net loss position.Securities that could be dilutive in the future as of June 30, 2009 and 2008 are as follows: 2009 2008 Preferred stock 59,065 59,065 Common stock warrants 3,216,644 3,245,082 Common stock options 2,708,166 2,803,393 Total potential dilutive securities 5,983,875 6,107,540 F-12Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Subsequent EventsEffective APRIL 1, 2009, THE COMPANY ADOPTED SFAS NO. 165, Subsequent Events. THIS STATEMENT ESTABLISHES THE ACCOUNTING FOR, AND DISCLOSURE OF, MATERIALEVENTS THAT OCCUR AFTER THE BALANCE SHEET DATE, BUT BEFORE THE FINANCIAL STATEMENTS ARE ISSUED. IN GENERAL, THESE EVENTS WILL BE RECOGNIZED IF THE CONDITIONEXISTED AT THE DATE OF THE BALANCE SHEET, AND WILL NOT BE RECOGNIZED IF THE CONDITION DID NOT EXIST AT THE BALANCE SHEET DATE. DISCLOSURE IS REQUIRED FORNONRECOGNIZED EVENTS IF REQUIRED TO KEEP THE FINANCIAL STATEMENTS FROM BEING MISLEADING. THE GUIDANCE IN THIS STATEMENT IS VERY SIMILAR TO CURRENT GUIDANCEPROVIDED IN ACCOUNTING LITERATURE AND, THEREFORE, WILL NOT RESULT IN SIGNIFICANT CHANGES IN PRACTICE. SUBSEQUENT EVENTS HAVE BEEN EVALUATED THROUGH THE DATEour financial statements were issued—the filing time and date of our 2009 Annual Report on Form 10-K.Use of EstimatesThe PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA REQUIRES MANAGEMENT OFthe COMPANY TO MAKE ESTIMATES AND ASSUMPTIONS THAT AFFECT THE AMOUNTS REPORTED IN THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES. ACCORDINGLY, ACTUALresults could differ from those estimates and affect the amounts reported in the financial statements.Impact of Recently Issued Accounting PronouncementsIN DECEMBER 2007, THE FASB ISSUED STATEMENT NO. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51(SFAS 160). THE STATEMENT REQUIRES NONCONTROLLING INTERESTS OR MINORITY INTERESTS TO BE TREATED AS A SEPARATE COMPONENT OF EQUITY, NOT AS A LIABILITY OR otherITEM OUTSIDE OF PERMANENT EQUITY. UPON A LOSS OF CONTROL, THE INTEREST SOLD, AS WELL AS ANY INTEREST RETAINED, IS REQUIRED TO BE MEASURED AT FAIR VALUE, WITH ANYGAIN OR LOSS RECOGNIZED IN EARNINGS. BASED ON SFAS 160, ASSETS AND LIABILITIES WILL NOT CHANGE FOR SUBSEQUENT PURCHASE OR SALES TRANSACTIONS WITHNONCONTROLLING INTERESTS AS LONG AS CONTROL IS MAINTAINED. DIFFERENCES BETWEEN THE FAIR VALUE OF CONSIDERATION PAID OR RECEIVED AND THE CARRYING VALUE OFNONCONTROLLING INTERESTS ARE TO BE RECOGNIZED AS AN ADJUSTMENT TO THE PARENT INTEREST’S EQUITY. SFAS 160 IS EFFECTIVE FOR FISCAL YEARS BEGINNING ON OR AFTERDECEMBER 15, 2008 AND EARLIER ADOPTION IS PROHIBITED. THE ADOPTION OF THIS STATEMENT IS NOT EXPECTED TO HAVE A MATERIAL EFFECT ON THE COMPANY’S FINANCIALstatements.IN MAY 2008, FASB ISSUED SFAS NO. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 IDENTIFIES THE SOURCES OF accountingPRINCIPLES AND THE FRAMEWORK FOR SELECTING THE PRINCIPLES TO BE USED IN THE PREPARATION OF FINANCIAL STATEMENTS OF NONGOVERNMENTAL ENTITIES THAT ARE presentedIN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES. IT WAS EFFECTIVE NOVEMBER 15, 2008, FOLLOWING THE SEC’S APPROVAL OF THEPUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD AMENDMENTS TO AU SECTION 411, The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles. The adoption of this statement did not have a material effect on the Company’s financial statements.THE FASB ISSUED SFAS NO. 168, The FASB Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement ofFASB Statement 162, IN LATE JUNE 2009. THE FASB ACCOUNTING STANDARDS CODIFICATION WILL BECOME THE SOURCE OF AUTHORITATIVE U.S. GENERALLY ACCEPTEDACCOUNTING PRINCIPLES (GAAP) AND WILL SUPERSEDE ALL THEN-EXISTING NON-SEC ACCOUNTING AND REPORTING STANDARDS ON THE EFFECTIVE DATE, SEPTEMBER 15,2009. THE CODIFICATION WILL NOT CHANGE GAAP, BUT CONSOLIDATES IT INTO A LOGICAL AND CONSISTENT STRUCTURE. THE COMPANY WILL BE REQUIRED TO REVISE OURreferences to GAAP in our financial statements beginning with the first quarter of fiscal year 2010. F-13Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 3. Short-Term InvestmentsThe Company’s short-term investments consisted of the following at June 30, 2009 and 2008: 2009 2008 Certificates of deposit $1,679,820 $– Municipal debt securities – 3,726,000 $1,679,820 $3,726,000 BEGINNING IN FEBRUARY 2008, THE UNCERTAINTIES IN THE CREDIT MARKETS PREVENTED THE COMPANY FROM LIQUIDATING ITS ARS (CONSISTING OF VARIOUS STUDENT LOANPORTFOLIOS). THE SECURITIES CONTINUED TO PAY INTEREST ACCORDING TO THEIR STATED TERMS AND WERE ALL AAA/AAA RATED INVESTMENTS. THROUGH SEPTEMBER 2008, THECompany classified these securities as available-for-sale AND RECORDED THEM AT FAIR MARKET VALUE. THE COMPANY RECOGNIZED A DECLINE IN THE FAIR VALUE OF THESEsecurities (which was caused by the market uncertainties) as other than temporary and recorded the loss in the statement of operations.In OCTOBER 2008, THE COMPANY ACCEPTED AN OFFER FROM UBS TO PROVIDE THE COMPANY WITH CERTAIN RIGHTS PERTAINING TO OUR ARS. THE RIGHTS WERE A PUT OPTIONALLOWING THE COMPANY TO SELL ITS ARS TO UBS AT PAR VALUE AT ANY TIME FROM JANUARY 2, 2009 TO JANUARY 4, 2011. THE RIGHTS DID NOT MEET THE DEFINITION OF ADERIVATIVE UNDER SFAS NO. 133, Accounting for Derivative Instruments and Hedging Activities, AS THERE IS NO NET SETTLEMENT METHOD. THE RIGHTS ALSO DID NOTMEET THE DEFINITION OF A SECURITY UNDER SFAS NO. 115, Accounting for Certain Investments in Debt and Equity Securities. THE COMPANY ELECTED TO MEASUREthe Rights under the fair value option of SFAS 159 on the date they were received (see Note 2) and classified them as short-term investments.ALSO IN OCTOBER 2008, THE COMPANY RECLASSIFIED ITS ARS FROM AVAILABLE-FOR-SALE TO TRADING AND RECORDED ALL CHANGES IN FAIR VALUE TO THESE SECURITIES IN THESTATEMENT OF OPERATIONS. THE COMPANY FELT THIS RECLASSIFICATION WAS APPROPRIATE GIVEN THAT IT ACCEPTED THE OFFER OF THE RIGHTS, IT DID NOT INTEND TO HOLD THESEinvestments to maturity, and there was no longer an active market to permit their sale in the normal course of business.On JANUARY 2, 2009, THE COMPANY EXERCISED ITS PUT OPTION WITH UBS TO REDEEM ITS ARS AT PAR VALUE. THE ENTIRE $4 MILLION OF CASH WAS DEPOSITED INTO THECompany’s account on January 5, 2009.4. InventoryInventory consisted of the following at June 30, 2009 and 2008: 2009 2008 Raw materials $609,932 $696,958 Work in process 155,827 191,684 Finished goods 23,487 11,322 $789,246 $899,964 The cost OF MATERIALS AND PRODUCTION COSTS CONTAINED IN INVENTORY THAT ARE NOT USEABLE DUE TO THE PASSAGE OF TIME, AND RESULTING LOSS OF BIO-EFFECTIVENESS, AREwritten off to cost of product sales at the time it is determined that the product is not useable.In June 2007, THE COMPANY PURCHASED $469,758 OF ENRICHED BARIUM THAT WILL BE USED IN FUTURE PRODUCTION OF OUR ISOTOPE. THE ENRICHED BARIUM IS HELD AT ANoff-site storage location in Richland, Washington and is included in raw materials at June 30, 2009 and 2008. F-14Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 5. Prepaid ExpensesPrepaid expenses consisted of the following at June 30, 2009 and 2008: 2009 2008 Prepaid contract work $– $60,107 Prepaid insurance 30,625 38,059 Prepaid rent 24,402 24,199 Other prepaid expenses 61,900 106,960 Other current assets 34,150 37,676 $151,077 $267,001 6. Fixed AssetsFixed assets consisted of the following at June 30, 2009 and 2008: 2009 2008 Production equipment $3,089,793 $2,786,748 Office equipment 169,890 153,215 Furniture and fixtures 148,265 148,265 Leasehold improvements (a) 4,643,965 4,622,136 Capital lease assets (b) – 222,911 Construction in progress 3,359 64,219 8,055,272 7,997,494 Less accumulated depreciation (3,163,788) (1,956,853) $4,891,484 $6,040,641 (a)Balance includes asset retirement addition of $473,096 as of June 30, 2009 and 2008. (b)THE COMPANY’S CAPITAL LEASES WERE PROPERLY TERMINATED DURING FISCAL YEAR 2009. THE COMPANY NOW HAS OWNERSHIP OF THESE ASSETS ANDCONTINUES TO USE THEM IN ITS FACILITIES. THEREFORE, THE COMPANY RECLASSIFIED THESE ASSETS TO PRODUCTION EQUIPMENT DURING FISCAL YEAR2009. Accumulated amortization of capital lease assets totaled $0 and $166,328 at June 30, 2009 and 2008, respectively.Depreciation and amortization expense related to fixed assets totaled $1,206,935 and $1,103,940 for 2009 and 2008, respectively.The COMPANY RECORDED AN IMPAIRMENT CHARGE OF $85,000 IN FISCAL YEAR 2008 FOR A HOT CELL THAT IS NOT CURRENTLY IN USE. THIS IMPAIRMENT CHARGE IS INCLUDED incost of product sales on the Consolidated Statement of Operations. The Company estimated its fair market value based on values for similar assets.7. Impairment of IBt LicenseIN DECEMBER 2008, THE COMPANY REEVALUATED ITS LICENSE AGREEMENT WITH INTERNATIONAL BRACHYTHERAPY SA (IBT) IN CONNECTION WITH AN OVERALL REVIEW OF ITSPRESENT COST STRUCTURE AND PROJECTED MARKET AND MANUFACTURING STRATEGIES (SEE NOTE 18 FOR FURTHER DETAILS ON THE IBT LICENSE AGREEMENT). MANAGEMENTDETERMINED THROUGH THIS REVIEW THAT IT DOES NOT CURRENTLY INTEND TO UTILIZE THE IBT LICENSE AS PART OF ITS MARKET STRATEGY DUE TO THE COST OF REVAMPING ITSmanufacturing PROCESS TO INCORPORATE THE TECHNOLOGY AND AS THERE CAN BE NO ASSURANCE THAT PHYSICIANS WOULD ACCEPT THIS NEW TECHNOLOGY WITHOUT EXTENSIVEEDUCATION AND MARKETING COSTS. HOWEVER, THE COMPANY DOES NOT INTEND TO CANCEL THE LICENSE AGREEMENT AT THIS TIME; THEREFORE, THE LICENSE WAS REVIEWED INTERMS OF AN “ABANDONED ASSET” FOR PURPOSES OF SFAS NO. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. AS THERE ARE NO anticipatedFUTURE REVENUES FROM THE LICENSE AND THE COMPANY CANNOT SELL OR TRANSFER THE LICENSE, IT WAS DETERMINED THAT THE ENTIRE VALUE WAS IMPAIRED. THEREFORE, THECompany recorded an impairment charge of $425,434 in December 2008 that is included in cost of product sales for the year ended June 30, 2009. F-15Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 8. Restricted Cash The Washington Department of Health, effective October 2007, has required the Company to provide collateral for the decommissioning of its facility. Tosatisfy this requirement, the Company funded two certificates of deposits (CDs) totaling $172,500 in separate banks. The CDs both have original maturitiesof three months but are classified as long-term as the Company does not anticipate decommissioning the facility until the end of the current lease plus thelease option periods. Interest earned on the CDs is rolled-over at the maturity of each CD and becomes part of the restricted cash balance. Interest earned andadded to restricted cash during the fiscal year ended June 30, 2009 and 2008 was $2,763 and $3,352, respectively. These funds will be used to settle aportion of the Company’s remaining asset retirement obligations (Note 2).9. Other AssetsOther assets, net of accumulated amortization, consisted of the following at June 30, 2009 and 2008: 2009 2008 Deferred charges $40,496 $322,319 Patents and trademarks, net of accumulated amortization of $25,244 and $19,094 233,463 22,721 $273,959 $345,040 DEFERRED CHARGES CONSIST OF PREPAID LEGAL FEES FOR PATENTS WHICH HAVE NOT YET BEEN OBTAINED, AND PREPAYMENTS AND DEPOSITS ON FIXED ASSETS ANDcontracts. Amortization of patents and trademarks was $6,150 and $2,631 for the years ended June 30, 2009 and 2008, respectively.During FISCAL YEAR 2009, THE COMPANY PERFORMED A REVIEW OF ITS PREPAID LEGAL FEES FOR PATENTS AND TRADEMARKS THAT HAVE NOT BEEN OBTAINED AND ARE CLASSIFIEDwithin OTHER ASSETS ON THE CONSOLIDATED BALANCE SHEET. THE FOCUS OF THE REVIEW WAS PATENT AND TRADEMARK APPLICATIONS THAT THE COMPANY HAD BEEN PURSUING inFOREIGN COUNTRIES. THE COMPANY DECIDED TO LIMIT ITS FOREIGN APPLICATIONS TO CANADA, EUROPE, AND RUSSIA, AS WELL AS THE CONTINUED PROTECTION OF THE USPATENTS AND TRADEMARKS. THIS RESULTED IN THE WRITE-OFF OF $85,818 OF OTHER PATENT AND TRADEMARK APPLICATION FEES RELATING TO OTHER COUNTRIES DURING FISCAL YEAR2009 that is included in research and development expenses. F-16Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10. Notes PayableNotes payable consisted of the following at June 30, 2009 and 2008: 2009 2008 Benton-Franklin Economic Development District (BFEDD) note payable (a) $115,898 $145,745 Hanford Area Economic Investment Fund Committee (HAEIFC) note payable (b) 221,562 263,639 337,460 409,384 Less amounts due within one year (161,437) (64,486) Amounts due after one year $176,023 $344,898 (a)The NOTE PAYABLE TO BFEDD, WHICH IS COLLATERALIZED BY SUBSTANTIALLY ALL OF THE COMPANY’S ASSETS, AND GUARANTEED BY CERTAIN SHAREHOLDERS, WASEXECUTED PURSUANT TO A DEVELOPMENT LOAN AGREEMENT. THE NOTE CONTAINS CERTAIN RESTRICTIVE COVENANTS RELATING TO: WORKING CAPITAL; LEVELS OFLONG-TERM DEBT TO EQUITY; INCURRENCE OF ADDITIONAL INDEBTEDNESS; PAYMENT OF COMPENSATION TO OFFICERS AND DIRECTORS; AND PAYMENT OFDIVIDENDS. THE NOTE IS PAYABLE IN MONTHLY INSTALLMENTS INCLUDING INTEREST AT 8.0% PER ANNUM WITH A FINAL BALLOON PAYMENT DUE IN October2009. AT JUNE 30, 2009, THE COMPANY WAS NOT IN COMPLIANCE WITH CERTAIN OF THE COVENANTS AND THE ENTIRE BALANCE HAS BEEN CLASSIFIED AS Acurrent liability. (b)In JUNE 2006, THE COMPANY ENTERED INTO A NOTE PAYABLE WITH HAEIFC, WHICH IS COLLATERALIZED BY RECEIVABLES, INVENTORY, EQUIPMENT, AND CERTAINLIFE INSURANCE POLICIES. THE LOAN ORIGINALLY HAD A TOTAL FACILITY OF $1,400,000 WHICH WAS REDUCED IN SEPTEMBER 2007 TO THE AMOUNT OF THECOMPANY’S INITIAL DRAW OF $418,670. THE NOTE CONTAINS CERTAIN RESTRICTIVE COVENANTS RELATING TO: FINANCIAL RATIOS; PAYMENT OF COMPENSATION TOOFFICERS AND DIRECTORS; AND PAYMENT OF DIVIDENDS. THE NOTE ACCRUES INTEREST AT 9% AND IS PAYABLE IN MONTHLY INSTALLMENTS WITH THE FINALINSTALLMENT DUE IN JULY 2016. AT JUNE 30, 2009, THE COMPANY WAS NOT IN COMPLIANCE WITH CERTAIN OF THE COVENANTS. THE COMPANY HAS OBTAINEDa waiver from HAEIFC, relating to these covenants, through June 30, 2010.Principal maturities on notes payable as of June 30, 2009 are as follows:Year ending June 30, 2010 $161,437 2011 49,445 2012 54,059 2013 59,154 2014 13,365 Thereafter – $337,460 F-17Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 11. Share-Based CompensationTHE FOLLOWING TABLE PRESENTS THE SHARE-BASED COMPENSATION EXPENSE RECOGNIZED IN ACCORDANCE WITH SFAS 123R DURING THE YEARS ENDED JUNE 30, 2009 AND2008: Year ended June 30, 2009 2008 Cost of product sales $17,619 $109,578 Research and development 23,450 43,885 Sales and marketing expenses 148,407 238,230 General and administrative expenses 164,220 205,361 Total share-based compensation $353,696 $597,054 THE TOTAL VALUE OF THE STOCK OPTIONS AWARDS IS EXPENSED RATABLY OVER THE SERVICE PERIOD OF THE EMPLOYEES RECEIVING THE AWARDS. AS OF JUNE 30, 2009, TOTALUNRECOGNIZED COMPENSATION COST RELATED TO STOCK-BASED OPTIONS AND AWARDS WAS $223,295 AND THE RELATED WEIGHTED-AVERAGE PERIOD OVER WHICH IT IS EXPECTEDto be recognized is approximately 0.96 years.THE COMPANY CURRENTLY PROVIDES SHARE-BASED COMPENSATION UNDER THREE EQUITY INCENTIVE PLANS APPROVED BY THE BOARD OF DIRECTORS: THE AMENDED ANDRESTATED 2005 STOCK OPTION PLAN (THE OPTION PLAN), THE AMENDED AND RESTATED 2005 EMPLOYEE STOCK OPTION PLAN (THE EMPLOYEE PLAN), AND THE 2006Director Stock Option Plan (the Director Plan). The Option Plan allows the Board of Directors to GRANT OPTIONS TO PURCHASE UP TO 1,800,000 SHARES OF COMMONSTOCK TO DIRECTORS, OFFICERS, KEY EMPLOYEES AND SERVICE PROVIDERS OF THE COMPANY. THE EMPLOYEE PLAN ALLOWS THE BOARD OF DIRECTORS TO GRANT OPTIONS TOPURCHASE UP TO 2,000,000 SHARES OF COMMON STOCK TO OFFICERS AND KEY EMPLOYEES OF THE COMPANY. THE DIRECTOR PLAN ALLOWS THE BOARD OF DIRECTORS TO GRANTOPTIONS TO PURCHASE UP TO 1,000,000 SHARES OF COMMON STOCK TO DIRECTORS OF THE COMPANY. OPTIONS GRANTED UNDER ALL OF THE PLANS HAVE A TEN YEAR maximumTERM, AN EXERCISE PRICE EQUAL TO AT LEAST THE FAIR MARKET VALUE OF THE COMPANY’S COMMON STOCK ON THE DATE OF THE GRANT, AND VARYING VESTING PERIODS ASDETERMINED BY THE BOARD. FOR STOCK OPTIONS WITH GRADED VESTING TERMS, THE COMPANY RECOGNIZES COMPENSATION COST ON A STRAIGHT-LINE BASIS OVER THE requisiteservice period for the entire award.On June 1, 2007, THE COMPANY ISSUED AN OPTION GRANT TO EMPLOYEES AND DIRECTORS. THE OPTIONS HAD AN EXERCISE PRICE OF $4.14 WHICH WAS THE CLOSING MARKETPRICE OF THE COMPANY’S STOCK ON THE GRANT DATE. THE OPTIONS ISSUED TO THE EMPLOYEES VEST OVER THREE YEARS WHILE THE OPTIONS GRANTED TO THE NON-EMPLOYEEdirectors were immediately vested.The COMPANY’S FORMER CEO, WHO ALSO SERVED AS CHAIRMAN OF THE BOARD, WAS GRANTED 150,000 OPTIONS, AND THE FORMER EXECUTIVE VICE PRESIDENT OPERATIONS(EVP–Operations), who also served as a director, was granted 100,000 options, and all non-employee directors were granted 50,000 options each. On July 25,2007, THE BOARD DISCUSSED THE ISSUE OF DIRECTOR COMPENSATION AND EACH DIRECTOR (INCLUDING THE EMPLOYEE DIRECTORS) ELECTED TO CANCEL 50,000 OF THEIR optionsFROM THE JUNE 1, 2007 GRANT. AFTER THE CANCELLATION, THE FORMER CEO AND FORMER EVP–OPERATIONS HAD 100,000 AND 50,000 OPTIONS, RESPECTIVELY, AND THE NON-EMPLOYEE DIRECTORS HAD NO OPTIONS FROM THE JUNE 1, 2007 GRANT. THE TERMS OF THESE REMAINING OPTIONS FOR THE FORMER CEO AND FORMER EVP–OPERATIONS WEREnot changed as part of the cancellation.IN ACCORDANCE WITH SFAS 123R, ALL OF THE OPTIONS THAT WERE CANCELLED HAVE BEEN ACCOUNTED FOR AS CANCELLATION OF OPTIONS WITH NO CONSIDERATION. NOADDITIONAL COMPENSATION COST ASSOCIATED WITH THE FORMER CEO’S AND EVP–OPERATIONS’ OPTIONS WILL BE RECOGNIZED AFTER THE CANCELLATION DATE OF JULY 25,2007. CANCELLED OPTIONS THAT HAD BEEN GRANTED TO NON-EMPLOYEE DIRECTORS WERE IMMEDIATELY VESTED ON THE DATE OF GRANT; THEREFORE ALL RELATED compensationcost was recognized in fiscal year 2007.All of these subsequently cancelled options are included in the options outstanding as OF JULY 1, 2007 AND ARE INCLUDED IN THE OPTIONS CANCELLED IN FISCAL YEAR2008 (see Note 12). F-18Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A summary of stock option activity within the Company’s share-based compensation plans for the year ended June 30, 2009 is as follows: Shares Price (a) Life (b) Value (c) Outstanding at June 30, 2009 2,708,166 $2.08 7.92 $– Vested and expected to vest at June 30, 2009 2,615,395 $2.14 7.85 $– Vested and exercisable at June 30, 2009 1,837,018 $2.74 7.12 $– (a)Weighted average exercise price per share.(b)Weighted average remaining contractual life.(c)Aggregate intrinsic value. As of June 30, 2009, all options outstanding have an exercise price greater than the closing market price of $0.25.The AGGREGATE INTRINSIC VALUE OF OPTIONS EXERCISED DURING THE YEARS ENDED JUNE 30, 2009 AND 2008 WAS $0 AND $25,300, RESPECTIVELY. THE COMPANY’S CURRENTpolicy is to issue new shares to satisfy option exercises.THE WEIGHTED AVERAGE FAIR VALUE OF STOCK OPTION AWARDS GRANTED AND THE KEY ASSUMPTIONS USED IN THE BLACK-SCHOLES VALUATION MODEL TO CALCULATE THE FAIRvalue are as follows for the year ended June 30, 2009 and 2008: Years ended June 30, 2009 2008 Weighted average fair value of options granted $0.21 $0.70 Key assumptions used in determining fair value: Weighted average risk-free interest rate 2.55% 3.17%Weighted average life of the option (in years) 4.66 6.00 Weighted average historical stock price volatility 128.23% 141.67%Expected dividend yield 0.00% 0.00%The BLACK-SCHOLES OPTION VALUATION MODEL WAS DEVELOPED FOR USE IN ESTIMATING THE FAIR VALUE OF TRADED OPTIONS WHICH HAVE NO VESTING RESTRICTIONS AND AREFULLY TRANSFERABLE. IN ADDITION, OPTION VALUATION MODELS REQUIRE THE INPUT OF HIGHLY SUBJECTIVE ASSUMPTIONS, INCLUDING THE EXPECTED STOCK PRICEVOLATILITY. ALTHOUGH THE COMPANY IS USING THE BLACK-SCHOLES OPTION VALUATION MODEL, MANAGEMENT BELIEVES THAT BECAUSE CHANGES IN THE SUBJECTIVE inputASSUMPTIONS CAN MATERIALLY AFFECT THE FAIR VALUE ESTIMATE, THIS VALUATION MODEL DOES NOT NECESSARILY PROVIDE A RELIABLE SINGLE MEASURE OF THE FAIR VALUE OF ITSSTOCK OPTIONS. THE RISK-FREE INTEREST RATE IS BASED ON THE U.S. TREASURY SECURITY RATE WITH AN EQUIVALENT TERM IN EFFECT AS OF THE DATE OF GRANT. THE EXPECTEDoption lives, volatility, and forfeiture assumptions are based on historical data of the Company.12. Shareholders’ EquityThe authorized capital structure of the Company consists of $.001 par value preferred stock and $.001 par value common stock.Preferred StockTHE COMPANY'S ARTICLES OF INCORPORATION AUTHORIZE 6,000,000 SHARES OF $0.001 PAR VALUE PREFERRED STOCK AVAILABLE FOR ISSUANCE WITH SUCH RIGHTS ANDpreferences, including liquidation, dividend, conversion, and voting rights, as described below. F-19Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Series ASeries A PREFERRED SHARES ARE ENTITLED TO A 10% DIVIDEND ANNUALLY ON THE STATED PAR VALUE PER SHARE. THESE SHARES ARE CONVERTIBLE INTO SHARES OF COMMONstock AT THE RATE OF ONE SHARE OF COMMON STOCK FOR EACH SHARE OF SERIES A PREFERRED STOCK, AND ARE SUBJECT TO AUTOMATIC CONVERSION INTO COMMON STOCKUPON THE CLOSING OF AN UNDERWRITTEN PUBLIC OFFERING PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COVERING THE OFFERand sale of common STOCK IN WHICH THE GROSS PROCEEDS TO THE COMPANY ARE AT LEAST $4 MILLION. SERIES A PREFERRED SHAREHOLDERS HAVE VOTING RIGHTS EQUALTO THE VOTING RIGHTS OF COMMON STOCK, EXCEPT THAT THE VOTE OR WRITTEN CONSENT OF A MAJORITY OF THE OUTSTANDING PREFERRED SHARES IS REQUIRED FOR ANYCHANGES TO THE COMPANY’S ARTICLES OF INCORPORATION, BYLAWS OR CERTIFICATE OF DESIGNATION, OR FOR ANY BANKRUPTCY, INSOLVENCY, DISSOLUTION ORLIQUIDATION OF THE COMPANY. UPON LIQUIDATION OF THE COMPANY, THE COMPANY’S ASSETS ARE FIRST DISTRIBUTED RATABLY TO THE SERIES A PREFERREDshareholders. At June 30, 2009, there were no Series A preferred shares outstanding.Series BSeries B PREFERRED SHARES ARE ENTITLED TO A CUMULATIVE 15% DIVIDEND ANNUALLY ON THE STATED PAR VALUE PER SHARE. THESE SHARES ARE CONVERTIBLE INTO SHARESOF COMMON STOCK AT THE RATE OF ONE SHARE OF COMMON STOCK FOR EACH SHARE OF SERIES B PREFERRED STOCK, AND ARE SUBJECT TO AUTOMATIC CONVERSION INTOCOMMON STOCK UPON THE CLOSING OF AN UNDERWRITTEN PUBLIC OFFERING PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933covering the OFFER AND SALE OF COMMON STOCK IN WHICH THE GROSS PROCEEDS TO THE COMPANY ARE AT LEAST $4 MILLION. SERIES B PREFERRED SHAREHOLDERS HAVEVOTING RIGHTS EQUAL TO THE VOTING RIGHTS OF COMMON STOCK, EXCEPT THAT THE VOTE OR WRITTEN CONSENT OF A MAJORITY OF THE OUTSTANDING PREFERRED SHARES ISREQUIRED FOR ANY CHANGES TO THE COMPANY’S ARTICLES OF INCORPORATION, BYLAWS OR CERTIFICATE OF DESIGNATION, OR FOR ANY BANKRUPTCY, INSOLVENCY,DISSOLUTION OR LIQUIDATION OF THE COMPANY. UPON LIQUIDATION OF THE COMPANY, THE COMPANY’S ASSETS ARE FIRST DISTRIBUTED RATABLY TO THE SERIES Apreferred shareholders, then to the Series B preferred shareholders.On FEBRUARY 1, 2007, THE BOARD OF DIRECTORS DECLARED A DIVIDEND ON THE SERIES B PREFERRED STOCK OF ALL OUTSTANDING AND CUMULATIVE DIVIDENDS THROUGHDecember 31, 2006. The total dividends of $38,458 were paid on February 15, 2007. THE COMPANY DOES NOT ANTICIPATE PAYING ANY CASH DIVIDENDS ONTHE SERIES B PREFERRED STOCK IN THE FORESEEABLE FUTURE. AT JUNE 30, 2009, THERE WERE 59,065 SERIES B PREFERRED SHARES OUTSTANDING AND CUMULATIVEdividends in arrears were $26,565.IN ADDITION TO THE PREVIOUSLY OUTSTANDING SHARES OF COMMON STOCK AND SERIES B PREFERRED STOCK, THE COMPANY HAD THE FOLLOWING TRANSACTIONS THAT AFFECTEDshareholders’ equity during the years ended June 30, 2009 and 2008.Cancellation of Common SharesIn March 2008, THE COMPANY CANCELLED 148,112 SHARES OF COMMON STOCK HELD BY ROGER GIRARD, THE COMPANY’S FORMER CEO, DUE TO THE RELEASE OF MR. GIRARDfrom certain personal GUARANTEES OF COMPANY DEBT AND DUE TO MR. GIRARD’S RESIGNATION AS CHAIRMAN, PRESIDENT, AND CEO. THE SHARES WERE ORIGINALLY ISSUED INconnection with Mr. Girard’s personal guarantee of Company debt or were contingent on his employment through August 2008. F-20Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Warrants to Purchase Common StockIn CONNECTION WITH THE VARIOUS COMMON STOCK OFFERINGS AND AT OTHER TIMES THE COMPANY HAS ISSUED WARRANTS FOR THE PURCHASE OF COMMON STOCK. THE warrantsactivity is summarized as follows: 2009 2008 Warrants Price (a) Warrants Price (a) Beginning balance outstanding 3,245,082 $5.50 3,627,764 $5.31 Cancelled/expired (28,438) 0.70 (91,806) 4.18 Exercised – – (290,876) 3.48 Ending balance outstanding 3,216,644 $5.55 3,245,082 $5.50 (a)Weighted average exercise price per share.ON AUGUST 20, 2008, THE BOARD OF DIRECTORS EXTENDED THE EXPIRATION DATES OF WARRANTS ISSUED PURSUANT TO THE COMPANY’S PRIVATE PLACEMENT MEMORANDUMSdated October 17, 2005 AND FEBRUARY 1, 2006 FOR AN ADDITIONAL ONE-YEAR PERIOD. THE BOARD OF DIRECTORS HAD PREVIOUSLY RETROACTIVELY EXTENDED THESE WARRANTSon January 8, 2008 for a one-year period beyond their initial expiration dates of October 2007 to February 2008. Based on these extensions, the WARRANTS WILLNOW EXPIRE BETWEEN OCTOBER 2009 AND FEBRUARY 2010. NO OTHER TERMS OR CONDITIONS OF THE WARRANTS WERE CHANGED. THE CHANGE IN EXPIRATION DATES AFFECTEDOUTSTANDING WARRANTS TO PURCHASE 2,102,142 SHARES OF COMMON STOCK. OF THESE OUTSTANDING WARRANTS, THERE WERE WARRANTS TO PURCHASE 12,500 COMMON SHARESHELD BY THE CHAIRMAN AND CEO OF THE COMPANY. PRIOR TO THE ORIGINAL EXTENSION, WARRANTS TO PURCHASE 1,186,219 SHARES OF COMMON STOCK HAD PASSED THEIRoriginal expiration dates.The CHANGE IN EXPIRATION DATE WAS A MODIFICATION OF THE ORIGINAL WARRANT BASED ON MARKET CONDITIONS AND WAS ACCOUNTED FOR AS A FINANCING TRANSACTION SIMILARto an EXTENSION OF TIME IN THE OFFERING OF SHARES IN A STOCK SALE. THEREFORE THERE WAS NO EFFECT ON THE STATEMENT OF OPERATIONS AS THE COMPANY HAD PREVIOUSLYdetermined that under SFAS 133 and EITF 00-19 these warrants were equity instruments rather than derivatives.The following table summarizes additional information about the Company’s common warrants outstanding as of June 30, 2009:Number of Warrants Range of Exercise Prices Expiration Date 53,000 $6.00 October 2009 162,500 $6.00 November 2009 909,469 $6.00 December 2009 700,250 $6.00 January 2010 276,923 $6.00 to $6.50 February 2010 56,876 $0.70 March 2010 826,100 $5.00 March 2011 206,526 $4.40 March 2012 25,000 $2.00 July 2015 3,216,644 F-21Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Common Stock OptionsA summary of the Company’s stock option activity and related information for the years ended June 30, 2009 and 2008 is as follows: 2009 2008 Shares Price (a) Shares Price (a) Beginning balance outstanding 2,803,393 $2.62 3,683,439 $2.86 Granted (b) 993,900 0.31 100,000 0.75 Cancelled (1,089,127) 1.86 (970,046) 3.35 Exercised – – (10,000) 1.19 Ending balance outstanding 2,708,166 $2.08 2,803,393 $2.62 Exercisable at end of year 1,837,018 $2.74 2,442,001 $2.42 (a)Weighted average exercise price per share.(b)All options granted had exercise prices equal to or greater than the ending market price of the Company’s common stock on the grant date.The following table summarizes additional information about the Company’s stock options outstanding as of June 30, 2009: Options Outstanding Options Exercisable Range of Exercise Prices Shares Price (a) Life (b) Shares Price (a) $0.26 898,900 $0.26 9.93 200,000 $0.26 $0.65 to $0.75 130,000 0.73 8.90 yrs 100,000 0.75 $1.00 to $1.19 272,802 1.05 6.57 yrs 222,802 1.06 $1.96 to $2.00 342,118 2.00 5.35 yrs 342,118 2.00 $3.10 to $3.11 440,400 3.11 6.86 yrs 407,066 3.11 $3.50 to $3.85 150,000 3.70 7.00 yrs 133,333 3.73 $4.14 to $4.15 189,431 4.14 6.82 yrs 165,187 4.15 $4.40 63,265 4.40 7.37 yrs 45,262 4.40 $5.50 to $6.50 221,250 6.06 5.48 yrs 221,250 6.06 Total options 2,708,166 1,837,018 (a)Weighted average exercise price. (b)Weighted average remaining contractual life.13. Treasury StockIN JUNE 2008, THE BOARD OF DIRECTORS OF ISORAY AUTHORIZED THE REPURCHASE OF UP TO 1,000,000 SHARES OF THE COMPANY’S COMMON STOCK. THE COMPANYREPURCHASED 8,200 SHARES OF ITS COMMON STOCK FOR $4,735 DURING THE YEAR ENDED JUNE 30, 2009 AND 5,000 SHARES OF ITS COMMON STOCK FOR $3,655 DURING THEyear ended June 30, 2008.14. Income TaxesThe Company recorded no income tax provision or benefit for the years ended June 30, 2009 and 2008.1. The COMPANY HAD A NET DEFERRED TAX ASSET OF APPROXIMATELY $11.3 AND $9.3 MILLION AS OF JUNE 30, 2009 AND 2008, RESPECTIVELY. THE DEFERRED TAX ASSET HASARISEN PRINCIPALLY FROM NET OPERATING LOSS CARRYFORWARDS, SHARE-BASED COMPENSATION, DEPRECIATION AND AMORTIZATION, AND ACCRUED COMPENSATION. THE DEFERREDTAX ASSET WAS CALCULATED BASED ON THE CURRENTLY ENACTED 34% STATUTORY INCOME TAX RATE. SINCE MANAGEMENT OF THE COMPANY CANNOT DETERMINE IF IT IS MORELIKELY THAN NOT THAT THE COMPANY WILL REALIZE THE BENEFIT OF ITS NET DEFERRED TAX ASSET, A VALUATION ALLOWANCE EQUAL TO THE FULL AMOUNT OF THE NET DEFERRED TAXasset at June 30, 2009 and 2008 has been established. F-22Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. AT JUNE 30, 2009, THE COMPANY HAD TAX BASIS NET OPERATING LOSS CARRYFORWARDS OF APPROXIMATELY $26.9 MILLION AVAILABLE TO OFFSET FUTURE REGULAR TAXABLEincome. These net operating loss carryforwards expire through 2029.15. 401(k) and Profit Sharing PlanTHE COMPANY HAS A 401(K) PLAN, WHICH COMMENCED IN FISCAL YEAR 2007, COVERING ALL ELIGIBLE FULL-TIME EMPLOYEES OF THE COMPANY. CONTRIBUTIONS TO THE401(K) PLAN ARE MADE BY THE PARTICIPANTS TO THEIR INDIVIDUAL ACCOUNTS THROUGH PAYROLL WITHHOLDING. THE 401(K) PLAN ALSO ALLOWS THE COMPANY TO MAKEcontributions at the discretion of management. To date, the Company has not made any contributions to the 401(k) plan.16. UralDial, LLCON JANUARY 23, 2008, THE COMPANY, THROUGH ITS SUBSIDIARY ISORAY INTERNATIONAL LLC, BECAME A THIRTY PERCENT (30%) OWNER IN A RUSSIAN LIMITED LIABILITYcompany, URALDIAL, LLC (URALDIAL), A NEW COMPANY BASED IN YEKATERINBURG, RUSSIA. IN DECEMBER 2008, THE COMPANY ENTERED INTO AN AGREEMENT TO SELL ITSTHIRTY PERCENT (30%) INTEREST IN URALDIAL FOR A NOMINAL AMOUNT. URALDIAL DID NOT HAVE ANY MATERIAL ASSETS OR LIABILITIES AT THE TIME OF THE COMPANY’Sdisposition of its ownership interest.ALSO IN DECEMBER 2008, THE COMPANY FINALIZED A CONTRACT TO PURCHASE CS-131 FROM URALDIAL. UNDER THE CONTRACT, THE COMPANY WILL PURCHASE CS-131 FROMURALDIAL RATHER THAN PURCHASING CS-131 DIRECTLY FROM ITS TWO EXISTING SUPPLIERS IN RUSSIA. URALDIAL WILL PROVIDE CS-131 FROM AT LEAST TWO RUSSIAN facilitiesSUBJECT TO SCHEDULED MAINTENANCE SHUTDOWNS OF THE FACILITIES FROM TIME TO TIME. THE CONTRACT STABILIZES SUPPLY ARRANGEMENTS FOR THE 12 MONTHS BEGINNING ONDecember 15, 2008 and ending on December 31, 2009.The COMPANY HAS AN EXISTING DISTRIBUTION AGREEMENT WITH URALDIAL THAT ALLOWS URALDIAL TO DISTRIBUTE PROXCELAN CS-131 BRACHYTHERAPY SEEDS IN RUSSIA. THECOMPANY, THROUGH URALDIAL, HAS REGULATORY APPROVAL TO SELL CS-131 SEEDS IN RUSSIA. HOWEVER, THE ECONOMIC DOWNTURN IN RUSSIA HAS SLOWED THE COMPANY’Smarket penetration efforts.17. Distribution AgreementON FEBRUARY 18, 2009, THE COMPANY ENTERED INTO AN EXCLUSIVE DISTRIBUTION AGREEMENT WITH BRACHYSCIENCES, A DIVISION OF BIOCOMPATIBLES INTERNATIONALPLC. THE AGREEMENT ALLOWS BRACHYSCIENCES TO SELL THE COMPANY’S PROXCELAN CS-131 BRACHYTHERAPY SEEDS THROUGHOUT THE UNITED STATES. THE COMPANY DIDnot have any sales under this agreement in fiscal year 2009.18. Commitments and ContingenciesRoyalty Agreement for Invention and Patent ApplicationA SHAREHOLDER OF THE COMPANY PREVIOUSLY ASSIGNED HIS RIGHTS, TITLE AND INTEREST IN AN INVENTION TO ISORAY PRODUCTS LLC (A PREDECESSOR COMPANY) IN EXCHANGEfor a ROYALTY EQUAL TO 1% OF THE GROSS PROFIT, AS DEFINED, FROM THE SALE OF “SEEDS” INCORPORATING THE TECHNOLOGY. THE PATENT AND ASSOCIATED ROYALTY obligationswere transferred to the Company in connection with the merger transaction.The COMPANY MUST ALSO PAY A ROYALTY OF 2% OF GROSS SALES, AS DEFINED, FOR ANY SUB-ASSIGNMENTS OF THE AFORESAID PATENTED PROCESS TO ANY THIRD PARTIES. THEROYALTY AGREEMENT WILL REMAIN IN FORCE UNTIL THE EXPIRATION OF THE PATENTS ON THE ASSIGNED TECHNOLOGY, UNLESS EARLIER TERMINATED IN ACCORDANCE WITH THE TERMSof the underlying agreement. F-23Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During fiscal years 2009 and 2008, the Company recorded royalty expenses of $20,063 and $21,219, respectively.Patent and Know-How Royalty License AgreementTHE COMPANY IS THE HOLDER OF AN EXCLUSIVE LICENSE TO USE CERTAIN “KNOW-HOW” DEVELOPED BY ONE OF THE FOUNDERS OF A PREDECESSOR TO THE COMPANY ANDlicensed to THE COMPANY BY THE LAWRENCE FAMILY TRUST, A COMPANY SHAREHOLDER. THE TERMS OF THIS LICENSE AGREEMENT REQUIRE THE PAYMENT OF A ROYALTY BASEDON THE NET FACTORY SALES PRICE, AS DEFINED IN THE AGREEMENT, OF LICENSED PRODUCT SALES. BECAUSE THE LICENSOR’S PATENT APPLICATION WAS ULTIMATELY abandoned,ONLY A 1% “KNOW-HOW” ROYALTY BASED ON NET FACTORY SALES PRICE, AS DEFINED IN THE AGREEMENT, REMAINS APPLICABLE. TO DATE, MANAGEMENT BELIEVES THAT THEREHAVE BEEN NO PRODUCT SALES INCORPORATING THE “KNOW-HOW” AND THEREFORE NO ROYALTY IS DUE PURSUANT TO THE TERMS OF THE AGREEMENT. MANAGEMENT BELIEVES THATultimately no royalties should be paid under this agreement as there is no intent to use this “know-how” in the future.The LICENSOR OF THE “KNOW-HOW” HAS DISPUTED MANAGEMENT’S CONTENTION THAT IT IS NOT USING THIS “KNOW-HOW”. ON SEPTEMBER 25, 2007 AND AGAIN ON OCTOBER31, 2007, THE COMPANY PARTICIPATED IN NONBINDING MEDIATION REGARDING THIS MATTER; HOWEVER, NO SETTLEMENT WAS REACHED WITH THE LAWRENCE FAMILYTRUST. AFTER ADDITIONAL SETTLEMENT DISCUSSIONS, WHICH ENDED IN APRIL 2008, THE PARTIES FAILED TO REACH A SETTLEMENT. THE PARTIES MAY DEMAND BINDINGarbitration at any time.Operating Lease AgreementsThe COMPANY LEASES OFFICE AND LABORATORY SPACE AND PRODUCTION AND OFFICE EQUIPMENT UNDER NONCANCELABLE OPERATING LEASES. THE LEASE AGREEMENTS REQUIREmonthly lease payments and expire on various dates through April 2016 (including renewal dates). The Company’s significant lease is described below.ON MAY 2, 2007, MEDICAL ENTERED INTO A LEASE FOR ITS NEW PRODUCTION FACILITY WITH ENERGY NORTHWEST, THE OWNER OF THE APPLIED PROCESS ENGINEERINGLABORATORY (THE APEL LEASE). THE NEW LEASE ORIGINALLY PROVIDED THE COMPANY WITH 19,328 SQUARE FEET OF MANUFACTURING AND OFFICE SPACE AND THE COMPANYHAS MOVED ALL MANUFACTURING OPERATIONS TO THIS NEW LEASED SPACE AS OF SEPTEMBER 2007 AND VACATED ITS LEASED SPACE AT THE PECOS-ISORAY RADIOISOTOPELaboratory (PIRL). THE APEL LEASE HAS A THREE YEAR TERM EXPIRING ON APRIL 30, 2010, PLUS OPTIONS TO RENEW FOR TWO ADDITIONAL THREE-YEAR TERMS, AND MONTHLYrent of approximately $26,700, subject to annual increases based on the Consumer Price Index, plus monthly janitorial expenses of approximately $700. Dueto the severe economic penalty associated with not exercising the two lease renewal options, the Company currently intends to exercise both of the three-yearRENEWAL OPTIONS AT THE APPROPRIATE TIME IN THE LEASE. SUBSEQUENT TO THE INITIAL SIGNING OF THIS LEASE, THE COMPANY RECONFIGURED ITS SPACE REQUIREMENTS ANDRETURNED SOME LAB SPACE TO ENERGY NORTHWEST. THIS HAS REDUCED THE COMPANY’S RENT TO APPROXIMATELY $23,500 PER MONTH PLUS JANITORIAL EXPENSES OFapproximately $460 per month.Future MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES INCLUDING THE TWO THREE-YEAR RENEWALS OF THE APEL LEASE, WHICH THE COMPANY INTENDS TO EXERCISE, AREas follows:Year ending June 30, 2010 $305,908 2011 302,235 2012 290,993 2013 288,467 2014 288,467 Thereafter 528,857 $2,004,927 F-24Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Rental expense amounted to $325,496 and $354,202 for the years ended June 30, 2009 and 2008, respectively.License Agreement with IBtIN FEBRUARY 2006, THE COMPANY SIGNED A LICENSE AGREEMENT WITH INTERNATIONAL BRACHYTHERAPY SA (IBT), A BELGIAN COMPANY, COVERING NORTH AMERICA ANDPROVIDING THE COMPANY WITH ACCESS TO IBT’S INK JET PRODUCTION PROCESS AND ITS PROPRIETARY POLYMER SEED TECHNOLOGY FOR USE IN BRACHYTHERAPY PROCEDURESusing Cs-131. Under the original agreement royalty payments were to be paid on net sales revenue incorporating the technology.ON OCTOBER 12, 2007, THE COMPANY ENTERED INTO AMENDMENT NO. 1 (THE AMENDMENT) TO ITS LICENSE AGREEMENT DATED FEBRUARY 2, 2006 WITH IBT. THECOMPANY PAID LICENSE FEES OF $275,000 (UNDER THE ORIGINAL AGREEMENT) AND $225,000 (UNDER THE AMENDMENT) DURING FISCAL YEARS 2006 AND 2008,RESPECTIVELY. THE AMENDMENT ELIMINATES THE PREVIOUSLY REQUIRED ROYALTY PAYMENTS BASED ON NET SALES REVENUE, AND THE PARTIES INTEND TO NEGOTIATE TERMS FORFUTURE PAYMENTS BY THE COMPANY FOR POLYMER SEED COMPONENTS TO BE PURCHASED AT IBT'S COST PLUS A TO-BE-DETERMINED PROFIT PERCENTAGE. NO AGREEMENT HASBEEN REACHED ON THESE TERMS AND THERE IS NO ASSURANCE THAT THE PARTIES WILL CONSUMMATE AN AGREEMENT PURSUANT TO SUCH TERMS. THE COMPANY DOES NOTcurrently intend to use this technology and recorded an impairment charge on the remaining book value of the license in fiscal year 2009.19. Concentrations of Credit and Other RisksFinancial InstrumentsThe COMPANY’S FINANCIAL INSTRUMENTS THAT ARE EXPOSED TO CONCENTRATIONS OF CREDIT RISK CONSIST PRIMARILY OF CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS,and accounts receivable.THE COMPANY’S CASH AND CASH EQUIVALENTS ARE MAINTAINED WITH HIGH-QUALITY FINANCIAL INSTITUTIONS. THE ACCOUNTS ARE GUARANTEED BY THE FEDERAL DEPOSITINSURANCE CORPORATION (FDIC) UP TO $250,000. AT JUNE 30, 2009, CASH BALANCES UNINSURED BY THE FDIC TOTALED APPROXIMATELY $2.5 MILLION. A PORTION OFTHIS AMOUNT (APPROXIMATELY $2.3 MILLION) IS HELD IN A MONEY MARKET ACCOUNT THAT IS PROTECTED BY THE US TREASURY DEPARTMENT’S TEMPORARY GUARANTEEProgram for Money Market Funds.SHORT-TERM INVESTMENTS ARE HELD BY A MAJOR, HIGH-QUALITY FINANCIAL INSTITUTION. GENERALLY, THESE SECURITIES ARE TRADED IN A HIGHLY LIQUID MARKET AND MAY BEREDEEMED UPON DEMAND AND BEAR MINIMAL RISK. MANAGEMENT REGULARLY MONITORS THE COMPOSITION AND MATURITIES OF THESE INVESTMENTS AND THE COMPANY HASnot experienced any material realized losses on its investments.The Company’s accounts receivable result from credit sales to customers. The Company had two customers whose sales were greater THAN 10% FOR EACH OF THEYEARS ENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. THESE CUSTOMERS REPRESENTED A COMBINED 35.0% AND 34.3% OF THE COMPANY’S TOTAL REVENUES FOR THE YEARSENDED JUNE 30, 2009 AND 2008, RESPECTIVELY. THESE SAME CUSTOMERS ACCOUNTED FOR A COMBINED 39.6% AND 38.4% OF THE COMPANY’S NET ACCOUNTS RECEIVABLEbalance at June 30, 2009 and 2008, respectively.The loss OF ANY OF THESE SIGNIFICANT CUSTOMERS WOULD HAVE A TEMPORARY ADVERSE EFFECT ON THE COMPANY’S REVENUES, WHICH WOULD CONTINUE UNTIL THE COMPANYlocated new customers to replace them.The Company routinely assesses the financial strength of its customers and provides an allowance for doubtful accounts as necessary. F-25Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. InventoriesMost COMPONENTS USED IN THE COMPANY’S PRODUCT ARE PURCHASED FROM OUTSIDE SOURCES. CERTAIN COMPONENTS ARE PURCHASED FROM SINGLE SUPPLIERS. THE FAILUREOF ANY SUCH SUPPLIER TO MEET ITS COMMITMENT ON SCHEDULE COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS, OPERATING RESULTS AND FINANCIALCONDITION. IF A SOLE-SOURCE SUPPLIER OR A SUPPLIER OF CS-131 OR IRRADIATED BARIUM WERE TO GO OUT OF BUSINESS OR OTHERWISE BECOME UNABLE TO MEET ITS SUPPLYCOMMITMENTS, THE PROCESS OF LOCATING AND QUALIFYING ALTERNATE SOURCES COULD REQUIRE UP TO SEVERAL MONTHS, DURING WHICH TIME THE COMPANY’S PRODUCTIONcould be delayed. Such delays could have a material adverse effect on the Company’s business, operating results and financial condition. F-26Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.Dated: September 23, 2009 ISORAY, INC., a Minnesota corporation By/s/ Dwight Babcock Dwight Babcock, Chief Executive Officer and Chairman By/s/ Jonathan R. Hunt Jonathan R. Hunt, Chief Financial Officer and Principal Accounting OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Dated: September 23, 2009 /s/ Dwight Babcock Dwight Babcock, Chief Executive Officer and Chairman /s/ Jonathan R. Hunt Jonathan R. Hunt, Chief Financial Officer and Principal Accounting Officer /s/ Robert Kauffman Robert Kauffman, Director and Vice-Chairman /s/ Thomas LaVoy Thomas LaVoy, Director /s/ Albert Smith Albert Smith, Director61Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.EXHIBIT 21SUBSIDIARIES OF THE REGISTRANTIsoRay Medical, Inc., a Delaware corporationIsoRay International LLC, a Washington limited liability company Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the registration statements Nos. 333-127717 and 333-136728 on Form S-8 and Nos. 333-140246 and333-141934 on Form S-3 of our report dated September 22, 2009, with respect to the consolidated balance sheets of IsoRay, Inc. and Subsidiaries as of June30, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended, whichreport appears in the Form 10-K filing for IsoRay, Inc. to be filed on or about September 25, 2009./s/ DeCoria, Maichel & Teague, P.S.DeCoria, Maichel & Teague, P.S.Spokane, WashingtonSeptember 22, 2009 Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31.1CERTIFICATION I, Dwight Babcock, Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of IsoRay, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisannual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting Date: September 23, 2009 /s/ Dwight BabcockDwight BabcockChief Executive Officer Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31.2 CERTIFICATION I, Jonathan R. Hunt, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of IsoRay, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisannual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting. Date: September 23, 2009/s/ Jonathan R. HuntJonathan R. HuntChief Financial Officer Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32Section 1350 Certifications Pursuant to 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of IsoRay, Inc.,a Minnesota corporation (the Company), hereby certify that: To my knowledge, the Annual Report on Form 10-K of the Company for the annual period ended June 30, 2009 (the Report) fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all materialrespects, the financial condition and results of operations of the Company. Dated: September 23, 2009 /s/ Dwight Babcock Dwight Babcock Chief Executive Officer Dated: September 23, 2009 /s/ Jonathan R. Hunt Jonathan R. Hunt Chief Financial Officer Source: IsoRay, Inc., 10-K, September 23, 2009Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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