IsoRay, Inc.
Annual Report 2010

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KIsoRay, Inc. - ISRFiled: September 28, 2010 (period: June 30, 2010)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, 2010 or ¨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) 375-1202 Securities 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:ClassOutstanding as of September 16, 2010Common stock, $0.001 par value23,048,754 Indicate 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 – $22,025,806 as of December 31, 2009. Documents incorporated by reference – none. Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 FACTORS25ITEM 1B – UNRESOLVED STAFF COMMENTS34ITEM 2 – PROPERTIES34ITEM 3 – LEGAL PROCEEDINGS34ITEM 4 – [REMOVED AND RESERVED]34ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES35ITEM 6 – SELECTED FINANCIAL DATA37ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS37ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK48ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA48ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE49ITEM 9A – CONTROLS AND PROCEDURES49ITEM 9B – OTHER INFORMATION51ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE51ITEM 11 – EXECUTIVE COMPENSATION55ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS57ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE58ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES59ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES59 SIGNATURES63 Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 25 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 28, 2010Powered 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, interstitialand intracavity 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. In June 2009, the Company began selling its Proxcelan Cs-131 seeds for treatment of head and neck tumors, commencingwith treatment of a tumor that could not be accessed by other treatment modalities. During the fiscal year ended June 30, 2010, the Company continued toexpand the number of areas of the body in which the Proxcelan Cs-131 seeds were being utilized by adding lung cancer in August 2009, colorectal cancer inOctober 2009, and chest wall cancer in December 2009. The Company is continuing to expand the use of the Proxcelan Cs-131 seed for other cancertreatment applications using both existing delivery systems and researching delivery systems other than 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 interstitial 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 to 80 seedsare used in the procedure. The isotope decays over time and eventually the seeds become inert. The seeds may be used as a primary treatment or inconjunction with other treatment modalities, such as chemotherapy, or as treatment for residual disease after excision of primary tumors. The number of seedsfor other treatment sites will vary from as few as 8 to16 to as many at 117 to 123 depending on the type of cancer, the location of the tumor being treated andthe type of therapy being utilized.2Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 to use seed brachytherapy as a treatment option choose Cs-131 because of its significantadvantages over Palladium-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 28, 2010Powered 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, et al. The Determination of Radiobiologically Optimized Half-lives for Radionuclides Used in Permanent Brachytherapy 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 located in front of the rectum and underneath the urinary bladder. Prostate cancer is a malignant tumor that begins mostoften in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body. According to the AmericanCancer Society, approximately one man in six will be diagnosed with prostate cancer during his lifetime and one man in thirty-six will die of prostate cancer. It is the most common form of cancer in men after skin cancer, and the second leading cause of cancer deaths in men following lung and bronchus cancersthat account for 30% of deaths from cancer in men in the United States. The American Cancer Society estimates there will be about 217,730 new cases ofprostate cancer diagnosed and an estimated 32,050 deaths associated with the disease in the United States in 2010. 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 itis still confined to the prostate; regional means it has spread from the prostate to nearby areas, but not to distant sites, such as bone).Prostate cancer accounts for about 11% of cancer related deaths in men. Prostate cancer incidence and mortality increase with age. The American CancerSociety has reported that the incidence of prostate cancer rises rapidly after age 50. Almost 2 of 3 prostate cancers are found in men over the age of 65.The American Cancer Society recommends that men be given an opportunity to make an informed decision with their health care provider about whether tobe screened for prostate cancer. The decision should be made after getting information about the uncertainties, risks, and potential benefits of prostate cancerscreening. Men should not be screened unless they receive this information. In March 2010, the American Cancer Society warned that regular testing forprostate cancer is of questionable value and can do more harm than good.This discussion about screening should take place at age 50 for men who are at average risk of prostate cancer and are expected to live at least 10 more years.4Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. This discussion should take place starting at age 45 for men at high risk of developing prostate cancer. This includes African American men and men whohave a first-degree relative (father, brother or son) diagnosed with prostate cancer at an early age (younger than age 65).This discussion should take place at age 40 for men at even higher risk (those with several first-degree relatives who had prostate cancer at an early age).After this discussion, those men who want to be screened should be tested with the prostate specific antigen (PSA) blood test. The digital rectal exam (DRE)may also be done as a part of screening but is no longer recommended.Incidence of Lung CancerAn estimated 222,520 new cases of lung cancer are expected in 2010, 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 157,300 deaths, accounting for about 28% of all cancer deaths,are expected to occur in 2010. This exceeds the combined number of deaths from the three leading causes of cancer (breast, prostate, and colon cancers). Italso accounts for 6% of all deaths from any source in the United States. (Cancer Management: A Multidisciplinary Approach, 11th ed. (2008). RichardPazdur, Lawrence R. Coia, William J. Hoskins, Lawrence D. Wagman; American Cancer Society, 2009.)Cigarette smoking is by far the most important risk factor for lung cancer. Risk increases with quantity and duration of cigarette consumption. Cigar andpipe smoking also increase risk. Other risk factors include occupational or environmental exposure to secondhand smoke, radon, asbestos (particularlyamong smokers), certain metals (chromium, cadmium, arsenic), some organic chemicals, radiation, air pollution, and a history of tuberculosis. Geneticsusceptibility plays a contributing role in the development of lung cancer, especially in those who develop the disease at a younger age. (American CancerSociety, 2010)The 1-year relative survival for lung cancer increased from 35% in 1975-1979 to 42% in 2002-2005, largely due to improvements in surgical techniques andcombined therapies. However, the 5-year survival rate for all stages combined is only 16%. The 5-year survival rate is 53% for cases detected when thedisease is still localized, but only 15% of lung cancers are diagnosed at this early stage. (American Cancer Society, 2010)Incidence of Head and Neck CancersAn estimated 49,260 new cases of head and neck cancer are expected in 2010, including 23,880 cases of oral cavity cancer, 12,720 cases of laryngeal cancer,and 12,660 cases of pharyngeal cancer diagnosed in the United States. (American Cancer Society, 2010.)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 jaw are often late symptoms. (American Cancer Society,2010)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. HumanPapilloma Virus (HPV) infection is associated with certain types of oropharyngeal cancer. (American Cancer Society, 2010)5Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 Ocular MelanomaThe American Cancer Society estimates that 2,480 new cases of cancers of the eye and orbit (primarily melanoma) will be diagnosed in 2010 and about 230deaths from cancer of the eye will occur in 2010 in the United States. Primary eye cancer can occur at any age but most occur in people over 50 years of age. (American Cancer Society, 2010)Many patients with eye melanoma (cancer) have no symptoms unless the cancer grows in certain parts of the eye or becomes more advanced. Signs andsymptoms of eye melanomas can include problems with vision including blurry vision or sudden loss of vision, floaters or flashes of light, visual field loss, agrowing dark spot on the iris, change in the size or shape of the pupil, change in position of the eyeball within its socket, bulging of the eye, and/or change inthe way the eye moves within the socket. Known risk factors for ocular melanoma include sun exposure, certain occupations (e.g. welders, farmers, fishermen,chemical workers and laundry workers), race/ethnicity/eye and skin color, and certain inherited conditions such as dysplastic nevus syndrome. (AmericanCancer Society, 2010)Incidence of Colorectal CancerAn estimated 142,570 new cases of colorectal cancer are expected in the United States in 2010, including 102,900 new cases of colon cancer and 39,670 newcases of rectal cancer. (American Cancer Society, 2010.)Symptoms may include a change in bowel habits including diarrhea, constipation, or narrowing of the stool that lasts for more than a few days, a feeling ofthe need to have a bowel movement which is not relieved by doing so, rectal bleeding, dark stools or blood in the stool, cramping or abdominal pain,weakness and fatigue, and unintended weight loss.Known risk factors include age, personal history of colorectal polyps or colorectal cancer, personal history of inflammatory bowel disease, family history ofcolorectal cancer, inherited syndromes and racial and ethnic background.The 5-year relative survival rates for colon cancer are 74% in stage I, a range of 37% to 67% in stage II, a range of 28% to 73% in stage III and 6% in stageIV. The 5-year relative survival rates for rectal cancer are 74% in stage I, a range of 32% to 65% in stage II, a range of 33% to 74% in stage III and 6% in stageIV.Prostate BrachytherapyThe industry has experienced an overall decrease in the number of cases of prostate cancer treated with brachytherapy as physicians have elected to utilizeother treatment modalities, or to defer definitive treatment to a higher degree than historically.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.6Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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).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. 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).7Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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.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.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 when compared to other treatment options. A recent study of 2,963 prostate cancer patients who underwent brachytherapy astheir sole therapeutic modality at 11 institutions across the U.S. concluded that low-risk patients (who make up the preponderance of localized cases) whounderwent adequate implants experienced rates of PSA relapse survival of greater than 90% between eight and ten years (Zelefsky MJ, et al, “Multi-institutional analysis of long-term outcome for stages T1-T2 prostate cancer treated with permanent seed implantation” International Journal of RadiationOncology Biology Physics, 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).8Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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(Buron C, et al. “Brachytherapy versus prostatectomy in localized prostate cancer: results of a French multicenter prospective medico-economic study”. International Journal of Radiation Oncology, Biology, Physics, Volume 67, 2007, 812-822). Combined with the high disease control rates described inmany 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, et al, “An assessment of quality of life following radicalprostatectomy, high dose external beam radiation therapy, and brachytherapy iodine implantation as monotherapies for localized prostate cancer” Journal ofUrology, Volume 177, 2007, 2151-2156). It has been postulated that Cs-131, with the shortest available half-life for a low-dose rate therapy isotope, willresult in a quicker resolution of these irritative symptoms based on the shorter time interval over which normal tissue receives radiation from the implantedsources.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, Volume72 (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. 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 28, 2010Powered 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.).10Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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.The Cs-131 Advisory Group’s (CAG) article entitled “Recommendations for permanent prostate brachytherapy with 131Cs: a consensus report from theCesium Advisory Group” was published in Brachytherapy in the fourth quarter of calendar year 2008. The CAG is sponsored by the Company. Theobjective of the article was to provide consensus recommendations for Cs-131 prostate brachytherapy based on experience to date for physicians stillunfamiliar with Cs-131. These recommendations are based on three clinical trials in which one of the trials has completed the patient accrual, published inthe peer reviewed literature, and the combined CAG experience of more than 1,200 Cs-131 implants. The recommendations from the group are designed toaid practitioners in the safe and effective delivery of Cs-131 prostate brachytherapy.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 during the year ended June30, 2010 enrollment to the study was closed.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 utilizing surgery, radiation therapy, other local treatments, chemotherapy and targeted therapy. Surgery generallyinvolves removing a portion of the lung (lobectomy, segmentectomy, wedge resection) or the entire lung (pneumonectomy). Chemotherapy may be usedeither as a primary treatment or a secondary treatment depending on the type and stage of the lung cancer. Standard external beam radiation therapy issometimes used as the primary treatment if the tumor cannot be removed by surgery due to the tumor’s location or the patient’s health however this is nowused less often as it is being replaced with newer EBRT techniques such as 3D-CRT, IMRT and stereotactic radiation therapy. (American Cancer Society,2010)11Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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 to apply the Proxcelan Cs-131 brachytherapy seeds generally dissolves after about 45 days. Cs-131 delivers 90% of its dose in 33 days and istherefore well-suited to use with bioabsorbable mesh. Head and Neck Cancer Treatment OptionsMost head and neck cancers have historically been treated with some combination of surgery including tumor resection, Mohs micrographic surgery, full orpartial mandible (jaw bone) resection, maxillectomy, laryngectomy, neck dissection, pedicle or free flap reconstruction, tracheostomy, gastrostomy tube ordental extraction and implants; chemotherapy and radiation therapy including external beam radiation therapy (EBRT), accelerated and hyperfractionatedradiation therapy, three-dimensional conformal radiation therapy (3D-CRT) and intensity modulated radiation therapy (IMRT), and brachytherapy (bothhigh-dose rate (HDR) and low-dose rate (LDR)).Surgery is the most common option. Chemotherapy is often used in conjunction with surgery or radiation therapy depending on the type and stage of thecancer. External beam radiation therapy and brachytherapy have been used together or in combination with surgery or chemotherapyManagement believes Proxcelan Cs-131 represents an improved approach to brachytherapy treatment of head and neck cancers.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, and is used less often than in the past as the use ofradiation therapy has grown. External beam radiation (including conformal proton beam radiation therapy and stereotactic radiosurgery) involves sendingradiation from a source outside the body that is focused on the cancer but has not been as widely used to date for ocular melanoma. Laser therapy, rarely usednow to treat ocular melanoma, burns the cancerous tissue by using a highly focused, high-energy light beam. Laser therapy can be effective for very smallmelanomas but it is more often used to treat side effects from radiation. (American Cancer Society, 2010)Brachytherapy has become the most commonly used radiation treatment for most eye melanomas. Brachytherapy using Cs-131, I-125, or Pd-103 is done byplacing the seeds in a plaque (shaped like a small cap) that is attached to the eyeball with minute stitches for 4 to 5 days. The patient generally stays in thehospital until the plaque is removed from the eye. Brachytherapy cures approximately 9 out of 10 small tumors and can preserve the vision of some patients. (American Cancer Society, 2010)Colorectal Treatment OptionsColorectal cancer has historically been treated using surgery, radiation therapy, chemotherapy and other targeted therapies. Depending on the stage of thecancer, two or more of these types of treatment may be combined at the same time or used after one another. (American Cancer Society, 2010)For the treatment of early stage colon and rectal cancers, surgery is often the main treatment. Colorectal surgeries include open colectomy, laparoscopic-assisted colectomy, and polypectomy and local excision. Rectal surgeries include polypectomy and local excision, local transanal resection, transanalendoscopic microsurgery (TEM), lower anterior resection, proctectomy with coloanal anastomosis, abdominoperineal resection and pelvic exenteration.(American Cancer Society, 2010)12Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. For the treatment of colorectal cancers beyond early stage, other surgery treatments (radiofrequency ablation, ethanol ablation, cryosurgery and hepatic arteryembolization), radiation therapy (external beam radiation, endocavitary radiation, brachytherapy, yttrium-90 microsphere radioembolization), chemotherapy,and targeted therapies (Avastin, Erbitux, Vectibix) can be used. (American Cancer Society, 2010)Low-dose rate (LDR) brachytherapy including Proxcelan Cesium-131 is typically utilized in treating individuals with rectal cancer who are not healthyenough to tolerate curative surgery. This is generally a one-time only procedure and does not require ongoing visits for several weeks as is common withother types of radiation therapy such as external-beam radiation therapy and endocavitary radiation therapy. Management believes that the advantagesprovided by Cesium-131 shown through the treatment of other cancers will benefit patients utilizing Proxcelan Cesium -131 brachytherapy seeds in thetreatment of their colorectal cancers with low-dose rate brachytherapy.Our StrategyThe key elements of IsoRay’s strategy for fiscal year 2011 include: §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.Management plans to continue to build on an increasing number of studies related to Cs-131 therapy in the management of cancer that werepublished in the medical literature and presented at relevant oncology society meetings in 2010. The publication and presentation of speculativeand real-world data contribute to the acceptability of Cs-131 in the oncologic marketplace, and discussion in the medico-scientific community ofestablished and novel Cs-131 applications is considered a prerequisite to expansion into untapped markets.In calendar year 2010, eight presentations were made at the American Brachytherapy Society describing Cs-131 treatment of prostate, lung, andbreast cancer. Five publications were abstracted to the MEDLINE database of citations of the medical literature that reported patients treated withCs-131 for prostate cancer. Five additional publications mentioned Cs-131 as an accepted treatment for prostate cancer, and two publicationsspecifically discussed the physics and dosimetric profile of Cs-131 for the treatment of prostate and eye cancers. §Continue to introduce the Proxcelan Cs-131 brachytherapy seed into the U.S. market for prostate cancer. Utilizing our direct sales organization,IsoRay intends to continue to seek to increase the number of centers making the use of Proxcelan Cs-131 seeds available to their patients inbrachytherapy procedures for prostate cancer and by increasing the number of patients being treated at current centers using the Proxcelan Cs-131seeds. IsoRay hopes to capture much of the incremental market growth if and when seed implant brachytherapy recovers market share from othertreatments and to take market share from existing competitors. §Increase utilization of Cs-131 in treatment of other solid tumor applications such as head and neck, lung, chest wall, and colorectal cancers. IsoRay Medical has clearance from the FDA for its premarket notification, (510(k)) for Proxcelan™ brachytherapy seeds that are preloaded intobioabsorbable braided strands. This order cleared the product for commercial distribution for treatment of lung and head and neck tumors as well astumors in other organs. IsoRay will continue to explore licenses or joint ventures with other companies to develop the appropriate technologies andtherapeutic delivery systems for treatment of other solid tumors such as breast, liver, pancreas, and brain cancers. 13Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. §Return GliaSite® radiation therapy system to market in the United States and European Union (EU). In June of 2010, the Company acquiredexclusive worldwide distribution rights to the GliaSite® radiation therapy system, the only FDA-cleared balloon catheter device used in thetreatment of brain cancer from Hologic, Inc. The product possesses an established reimbursement rate for both in-patient and out-patient settings. The Company intends to return the product to market in a configuration equivalent to the original FDA-cleared device. The Company is working toobtain the rights to license or acquire the Iotrex solution (Iodine -125) manufactured for use in the GliaSite® radiation therapy system. TheCompany has developed a liquid Cesium-131 solution for use in the GliaSite® radiation therapy system as either a substitute for the Iotrex or as analternative treatment option for physicians to utilize in the system. §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 datawill be presented at the November 2010 annual meeting of the American Society for Therapeutic Radiology and Oncology (ASTRO). Although theocular melanoma market is not a large one, this application of Cs-131 continues to demonstrate the potential viability for other solid tumors. ·Introduce Proxcelan Cesium-131 brachytherapy seeds to the Canadian and European Union (EU) markets. Health Canada’s Therapeutic ProductsDirectorate has approved IsoRay’s Class 3 Medical Device License Applications for Model CS-1 Proxcelan ™ (Cesium-131) brachytherapy seedsand the Proxcelan™ Sterile Implant Devices containing Model CS-1 Seeds. This allows IsoRay to market its brachytherapy seeds and relatedpreloaded brachytherapy seeds throughout Canada. In November 2009, the Company entered into a distribution agreement with Inter V Medical ofMontreal, Quebec, Canada for exclusive rights to sell the Proxcelan Cs-131 brachytherapy seed in Canada. Approval to market Cesium-131 seeds inRussia was also obtained in 2009; and the Company has an exclusive distribution agreement in place with a Russian distributor, UralDial LLC, todistribute Proxcelan Cs-131 brachytherapy seeds in Russia, however, the economic downturn in Russia has slowed the Company’s marketpenetration efforts. The Company is focusing on the Canadian and European Union (EU) markets until the Russian market recovers. §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, the European Union (EU) and Russia. The Companycompleted its registrations of 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, lung cancer, ocular melanomas, head and neck cancers, andcolorectal cancer. The Company intends to market Cs-131 for the treatment of other malignant disease, such as brain and gynecological cancers, in the nearfuture through the use of existing proven technologies that have received FDA-clearance. The strategy of utilizing existing FDA-cleared technologiesintends to reduce the time and cost required to develop new applications of Cs-131 and deliver them to market.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. 14Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Isotope Delivery Over TimeIsotopeHalf-LifeEnergy90% DoseTotal DoseCs-1319.7 days30.4 KeV33 days115 GyPd-10317 days20.8 KeV58 days125 GyI-12560 days28.5 KeV204 days145 Gy Cs-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).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.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 Russia that are capable of meeting these requirements. In order to managethe Russian supply more effectively IsoRay entered into a second agreement with UralDial, LLC (a Russian LLC) on November 30, 2009 to provide Cs-131isotope from Russia to the Company’s facility in Richland, WA through December 31, 2010. UralDial obtains Cs-131 from two suppliers. The Company alsocontinues to receive irradiated barium from the MURR reactor located in the United States. For the fiscal year ended June 30, 2010, approximately sixty-eight percent (68%) of our Cs-131 was supplied by one of two Russian supply sources and thirty-two percent (32%) 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, however, 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.15Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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.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 the domestic supplier’s reactor) or unpurified Cs-131 (from the international supplier’s reactor), separation and purification of Cs-131, isotope labelingof the core, 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 in either loose or preloaded form or sends the order to an independent preloading service that delivers theseeds preloaded into needles or cartridges just prior to implant. If the implant is postponed or rescheduled, the short half-life of the seeds makes themunsuitable for use and therefore they must 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 2010, IsoRay pursued further automation identified by management to reduce cost and increase radiation safety while allowing an expansion ofproduct loading configurations. The Company will continue to evaluate and implement automation in the future that supports process improvement,employee safety and resource management. The Company continues to contract with a third party to outsource certain sub-processes where cost effective.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 has exercised the first of two three-year renewal options to extend the APELfacility lease through April 2013 and it believes that the Company will exercise the second three-year renewal option 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.16Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 fiscal year 2010, the Company delivered approximately 67% of its Proxcelan seeds to customers configured in Mick cartridges, approximately 31% of theProxcelan seed configured in stranded forms and the remaining 2% in a loose form.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 96% of Mick cartridges in our own facility which in fiscal year 2010 accounted for approximately 67% of seeds sold. Theremaining approximately 33% of seeds sold are strand configurations including preloaded strands. Although the Company performs in-house analyticalservices to eliminate loss in isotope activity due to radioactive decay, the Company utilizes independent radiopharmacies to back up its own preloadingoperation, handle periodic increases in demand and cater to certain doctors’ preferences.Independent radiopharmacies traditionally provide the final packaging of the product delivered to the end user thereby eliminating the opportunity forreinforcing the "branding" of our seed product. By providing our own repackaging service, we are able to preserve the product branding opportunity andeliminate any concerns related to the handling of our product by a third party prior to receipt by 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 requirements on-site, eliminating the need for additional staffing to sterilize seeds andneedles, and eliminating the expense of additional assaying of the seeds.With clearance from the FDA for preloading flexible braided strands and bioabsorbable mesh, IsoRay became the second company in the industry that has510(k) clearance to preload both the strands and the mesh. This allows IsoRay to reduce loading costs by providing them directly to our customers. 17Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 Sales Marketing 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 2010, the Company’s website www.isoray.comwas again substantially updated to deliver the message that Cs-131 is for the treatment of cancers throughout the body and includes sections that providebackground information on the Company, cancer treatment utilizing brachytherapy in prostate, lung, ocular and brain, information for physicians/clinicianresources, investor information, current events that representatives will attend, and contact information. IsoRay also maintains print and visual medias(including physician brochures discussing the clinical advantages of Cs-131, clinical information binders, informational DVDs, single sheet glossies withtargeted clinical data, etc.), and advertisements in 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 expects articles for professional journals such asMedical Physics, the Brachytherapy Journal, and the International Journal of Radiation Oncology, Biology, and Physics regarding the benefits of andclinical trials involving Cs-131 will continue to be submitted.IsoRay has conducted physician training programs in the past but is no longer doing so as it no longer believes the costs of these training programs are offsetby improved sales.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.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.18Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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 five 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. With the assistance of an executive search firm, the Company is currently actively recruiting one to two additionalsales persons with previous experience in radiation oncology and specifically with brachytherapy sales.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 its results to date have been disappointing.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.ReimbursementReimbursement by third party payers is the primary means of payment for all IsoRay products. The Centers for Medicare and Medicaid Services (CMS) is theprimary payer, providing coverage for approximately 65% of all prostate brachytherapy cases. Well established brachytherapy coverage and paymentpolicies are currently in place by CMS and other non-governmental payers. In 2003, CMS established a unique HCPCS code for Cs-131 brachytherapyseeds that permitted providers to report the use of Cs-131 directly to payers. In July 2007, CMS established two separate Cs-131 codes for providers to reportloose seeds and stranded seeds due to the cost differential of these two products. Reimbursement for prostate brachytherapy services and sources is wellestablished in the US and most providers (hospitals and physicians) are not faced with reimbursement challenges when providing this treatment option topatients. 19Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. ThroughDecember 31, 2009, when charges for the seeds were correctly submitted by the provider to CMS, CMS reimbursed the hospital or clinic for the cost of theseeds. On January 1, 2010, CMS changed the hospital outpatient system by implementing a fixed reimbursement per seed for stranded and loose seeds. Iodine, palladium and cesium each have their own reimbursement values for stranded and loose seeds. If reported correctly when seeds are submitted forpayment to CMS, providers are reimbursed at a flat rate that is equivalent to the cost of the seeds. It is expected that this reimbursement system established inJanuary 2010 will continue as it is currently scheduled through calendar 2011 but there is no assurance that this will occur. Private insurance companieshave historically followed the CMS reimbursement policies.Other InformationCustomersCustomers representing ten percent or more of total Company sales for the twelve months ended June 30, 2010 include: Various Northern California facilities (1)11.6% of revenueEl Camino Hospital (Los Gatos, CA) (1)11.0% of revenueUniversity of Pittsburgh Medical Center (Pittsburgh, PA)10.7% of revenue (1)The following facilities located in northern California are used by one doctor (the Company’s Medical Director): Fremont Surgery Center(6.1%), Mills Peninsula Health Services (2.6%), San Mateo Surgery Center (1.4%) and all others used by this doctor combined (1.5%). ElCamino Hospital is a facility used by two doctors, 6.4% of the 11% (58% of the facility sales) are attributable to the Company’s MedicalDirector for a total of approximately 18% of sales.The loss of any of these significant customers would have a material adverse effect on the Company’s revenues, which would continue until the Companylocated new 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.20Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 2010 and 2009, the Company recordedroyalty expense of $23,041 and $20,063, 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, 2010, IsoRay and its predecessor companies incurred more than $2.7 million in costs related to research anddevelopment activities. The Company expects to continue ongoing research and development activities for the foreseeable future.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.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.21Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 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 device manufacturing facility in the State of Washington and is subject to periodic state regulatory inspections. Our customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us.In support of IsoRay’s global strategy to expand marketing to Canada, the European Union (EU) and Russia, we initiated the process in fiscal year 2008 toobtain the European CE Mark, Canadian registration, and certification to ISO 13485, an internationally recognized quality system. European law requiresthat medical devices sold in any EU Member State comply with the requirements of the European Medical Device Directive (MDD) or the Active ImplantableMedical Device Directive (AIMDD). IsoRay’s products are classified in Europe as an active implantable and are subject to the AIMDD. Compliance withAIMDD and obtaining a CE Mark involves being certified to ISO 13485 and obtaining approval of the product technical file by a notified body that isrecognized by competent authorities of a Member State. Compliance with ISO 13485 is also required for registration of a company for sale of its products inCanada. Many of the recognized EU Notified Bodies are also recognized by Health Canada to conduct the ISO 13485 inspections for Canadian registration. During fiscal year 2009, the Company received its certification to ISO 13485 and obtained approval from Health Canada for its Canadian registration. TheCompany continues to focus on the Canadian and Russian markets while renewing its efforts to penetrate the European Union market.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.22Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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-four percent (34%) of the Company's business is dependant on threephysicians, simultaneous vacations by these three physicians could cause significant drops in the Company's productivity during those reporting periods.EmployeesAs of September 3, 2010, IsoRay employed thirty-six full-time individuals and one part-time individual. The Company's future success will depend, in part,on its ability 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 2011.In fiscal year 2010, the Company employed five direct sales persons and a VP of Business Development. The Company experienced some growth in the salesgroup as there were three sales persons added and one sales person lost through attrition.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 use of radicalprostatectomy has 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.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, claimed over 59% of the Pd-103 market share (through CR Bard, other distributors, and direct distribution) in 2008. (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.23Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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. However, asthe Company expands the application of its Proxcelan Cesium-131 seed to other cancers (other than prostate), management believes it may improve itscompetitive advantages over Pd-103 and I-125 which do not have as wide of an application to other certain locations or have the potential for greater sideeffects. It is possible that three or four of the current I-125 or Pd-103 seed manufacturers (e.g., CR Bard, Oncura, Theragenics, etc.) are capable of producingand 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, for use 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 producedany 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 AmericanAssociation of Physicists in Medicine to determine the seed’s characteristics such as anisotropy, dose rate constant, etc. To date there has been no submissionto the TG-43 task group for a competing Cs-131 seed.Additional Growth OpportunitiesManagement of the Company sees growth opportunities through sales for homeland security applications, expansion into international markets andadditional treatment applicability to cancers other than prostate. The Company plans to introduce Cs-131 for prostate brachytherapy initially into Canada,the European Union (EU) and Russia and later into other international markets through partnerships and strategic alliances with channel partners formanufacturing and distribution but other than with respect to Canada has only one distribution agreement outside the United States as of the date of thisReport.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, lung and head and neck tumors, and colorectal tumors as of the date of this Report. The Company continues to have discussionswith prominent physicians and to evaluate 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 throughoutthe body. Our new liquid form of Cs-131 may be advantageous to use in other FDA cleared devices as an alternative to our titanium-encapsulated seed todeliver radiation to these other body sites.Consistent with the strategy of identifying alternative methods of delivering our isotopes to new locations, the Company has obtained exclusive worldwidedistribution rights to the GliaSite® radiation therapy system, the world’s only FDA-cleared balloon catheter device used in the treatment of brain cancer. This technology was previously used to treat approximately 500 cases annually in some 40 hospitals worldwide however this technology has not beenavailable for sale since 2007. This exclusive worldwide distribution agreement with Hologic, Inc aligns with the Company strategy to locate existing FDA-cleared technologies to provide new ways to treat other organs with Cesium-131. The Company is in negotiations with a previous distributor of theGliaSite® radiation therapy system in the European Union for distribution rights to the system in Germany, Austria, Switzerland and Italy but there is noassurance an agreement will be reached. The Company intends to return the product to market in a configuration equivalent to the original FDA-cleareddevice. The Company is working to obtain the rights to license or acquire the Iotrex solution (Iodine-125) manufactured for use in the GliaSite® radiationtherapy system. The Company has developed a liquid Cesium-131 solution for use in the GliaSite® radiation therapy system as either a substitute for theIotrex solution if an intellectual property agreement can not be reached or as a future alternative treatment option for physicians to utilize in the system. Useof liquid Cesium-131 will require clearance of a 510(k) application with the FDA.24Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 1A – RISK FACTORSRisks Related to Our Industry and OperationsOur 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, the European Union (EU) andRussia; any unfavorable publicity concerning our product or similar products; our product’s price relative to other products or competing treatments; anydecrease in current reimbursement rates from the Centers for Medicare and Medicaid Services or third-party payers; regulatory developments related to themanufacture or continued use of the product; availability of sufficient supplies of enriched barium (now coming from Russia) for Cs-131 seed production;ability to produce sufficient quantities of this product; the ability of physicians to properly utilize the device and avoid excessive levels of radiation topatients, and the ability to use this product to treat multiple types of cancers in various organs. Because of our reliance on this product as the sole source ofour revenue, any material adverse developments with respect to the commercialization of this product may cause us to continue to incur losses rather thanprofits in the future.Although Cleared To Treat Any Malignant Tissue, Our Sole Product Is Currently Used To Treat Primarily One Type Of Cancer. Currently, the Proxcelan Cs-131 seed is used almost exclusively for the treatment of prostate cancer (over ninety-six percent of our sales). We are just beginning to treat other types ofcancer including lung cancer (approximately 3% of our sales) and ocular melanoma, head and neck, colorectal and chest wall that together constitute lessthan one percent of our sales. Management believes the Proxcelan Cs-131 seed will continue to be used to treat other types of cancers as the Companyidentifies existing delivery systems that it can be utilized or develops new delivery methods for the product, however these delivery systems may not proveas effective as anticipated Management believes that clinical data gathered by select groups of physicians under treatment protocols specific to other organswill be needed prior to widespread acceptance of our product for treating other cancer sites. If our current and future products do not become accepted intreating cancers of other sites, our sales will depend solely on treatment of prostate cancer, a market with increasing competition and ongoing loss of marketshare by all brachytherapy products.We Have Ongoing 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 30,2010 will be sufficient to meet our anticipated cash requirements for operations, debt service, and capital expenditure requirements through at least the nextseven months or until approximately January 31, 2011. The Company has an active S-3 filing to issue additional shares of up to $4.0 million in at the markettransactions and has a sales agreement with C. K. Cooper & Company, Inc (CKCC) through December 31, 2010 to sell common stock to investors. Management now estimates that operational cashflow breakeven will be achieved at approximately $700,000 in monthly revenue. However, there is noassurance as to when break-even will occur. If we are unable to generate profits and unable to obtain additional financing to meet our working capitalrequirements, we may 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 2010, approximately sixty-eight percent (68%) 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 on December 31, 2010 and will have to be renegotiated. Management will seek tonegotiate favorable pricing but there is no assurance as to the outcome of these negotiations.25Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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.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.Unfavorable Industry Trends in the Prostate Market. Several factors occurred in fiscal 2009 that caused our revenues to significantly decline and thesefactors continued into fiscal 2010 contributing to our failure to improve sales in the prostate market. Beginning in the fall of 2008, U.S. consumerssignificantly curtailed all spending (even for life saving medical procedures) which impacted the brachytherapy industry as a whole. In February of 2009noted urologists announced at a medical conference that prostate specific antigen (PSA) testing was not as necessary as previously believed. Their statementswere widely publicized. Management continues to believe that many people have been influenced by these statements to cut back on PSA testing therebydecreasing in the short term the number of prostate procedures performed.In 2010, the American Cancer Society revised their advice regarding PSA testing. In March 2010, the American Cancer Society warned that regular testingfor prostate cancer is of questionable value and can do men more harm than good. The ACS suggested that an initial discussion about screening should takeplace at age 50 for men who are at average risk of prostate cancer and are expected to live at least 10 more years. For men at high risk of developing prostatecancer, the discussion should take place starting at age 45 for men at high risk of developing prostate cancer, this includes African American men and menwho have a first-degree relative (father, brother or son) diagnosed with prostate cancer at an early age (younger than age 65). For men at even higher risk suchas those with several first-degree relatives who had prostate cancer at an early age, this discussion should take place at age 40. After this discussion, thosemen who want to be screened should be tested with the prostate specific antigen (PSA) blood test. The digital rectal exam (DRE) may also be done as a partof screening but is no longer recommended.Also the emergence of IMRT as the preferred treatment alternative as a result of a much higher reimbursement rate to physicians compared to brachytherapytreatments has resulted in declining market share for brachytherapy treatment. In fiscal 2010, each of these factors continues to impact the performance of theCompany in the prostate market and the industry as a whole and there is no assurance that they will not continue to impact sales of the Company in theprostate market through fiscal 2011.26Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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 barium targets. 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 for irradiatingtargets. This limitation can be overcome by utilizing barium feedstock that is enriched in the stable isotope Ba-130. However, the number of suppliers ofenriched barium is limited and they may be unable to produce this material in sufficient quantities and at a reasonable price.IsoRay entered into an exclusive agreement (through December 31, 2010) with UralDial in Russia to provide Cs-131 in quantities sufficient to supply asignificant percentage of future demand for this isotope. Due to the purchase of enriched barium in June 2007, IsoRay has access to sufficient quantities ofenriched barium that may be recycled to increase the production of Cs-131. Although the UralDial agreement provides for supplying Cs-131 in significantquantities, there is no assurance that this will result in IsoRay gaining access to a continuing sufficient supply of enriched barium feedstock. If we wereunable to obtain supplies of isotopes from Russia in the future, our overall supply of Cs-131 would be reduced significantly unless the Company has a sourceof enriched barium for utilization in domestic reactors.We Have Entered Into An Agreement With A Single Distributor For Our Cesium-131 From Russia. In December 2009, the Company entered into a newagreement with UralDial to purchase Cs-131 directly from UralDial through December 31, 2010 instead of directly from Institute of Nuclear Materials (INM)and Research Institute of Atomic Reactors (RIAR) as the Company had done prior to the original agreement with UralDial in December 2008. As a result, theCompany continues to rely on UralDial to obtain Cs-131 from Russian sources. UralDial has agreed to maintain at least two Russian sources of its Cs-131 and through the UralDial agreement we have obtained set pricing for our Russian Cs-131 through the end of 2010. There can be no guarantee thatUralDial will always be able to supply us with sufficient Cs-131 or will renew our existing contract on favorable terms in December 2010, which could be duein part to risks associated with foreign operations and beyond our and UralDial's control. If we were unable to obtain supplies of isotopes from Russia in thefuture, our overall supply of Cs-131 would be reduced significantly unless we have a source of enriched barium for utilization in domestic reactors.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 at fixed rates that cover the cost of stranded and loose seeds. Clinics and physiciansperforming procedures in a free standing center are reimbursed at the actual cost of the seeds. It is expected that CMS will continue to reimburse providersusing this same methodology in 2011. In 2003, IsoRay applied to the CMS and received a reimbursement code for our Cs-131 seed. On July 1, 2007, CMS revised the coding system forbrachytherapy seeds and separated the single code into two codes – one code for loose seeds and a second code for stranded seeds. This methodology wasapplied to all companies manufacturing brachytherapy seeds. Reimbursement amounts are reviewed and revised annually based upon information submittedto CMS on claims by providers. Although no changes are anticipated for 2011, adjustments can be made to reimbursement amounts or coverage policies,which could result in changes to reimbursement for brachytherapy services. These changes can positively or negatively affect market demand for ourproducts. We monitor these changes and provide comments, as permitted, when changes are proposed, prior to implementation.In July 2010, CMS published proposed changes for both reimbursement programs for government fiscal year 2011. No changes in reimbursement have beenproposed by CMS for 2011. If the proposed changes are finalized, as expected in November 2010, there will be no changes in CMS reimbursement for2011 but there is no assurance this will occur and is subject to revision annually. 27Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Historically, private insurers have followed Medicare guidelines in establishing reimbursement rates. However, third-party payers are increasinglychallenging the pricing of certain medical services or devices, and we cannot be sure that they will reimburse our customers at levels sufficient for us tomaintain favorable sales and price levels for our products. There is no uniform policy on reimbursement among third-party payers, and we can provide noassurance that our products will continue to qualify for reimbursement from all third-party payers or that reimbursement rates will not be reduced. Areduction in or elimination of third-party reimbursement for treatments using our products would likely have a material adverse effect on our revenues.Furthermore, any federal and state efforts to reform government and private healthcare insurance programs, such as those passed by the federal government in2010, could significantly affect the purchase of healthcare services and products in general and demand for our products in particular. Medicare is the payerin approximately 70% of all U.S. prostate brachytherapy cases and management anticipates this percentage to increase annually. We are unable to predictwhether potential healthcare reforms will be enacted, whether other healthcare legislation or regulations affecting the business may be proposed or enacted inthe future or what effect any such legislation 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 purchasing decisions; §research and development and manufacturing expenses; §patient outcomes from our therapy; §physician acceptance of our products; §government or private healthcare reimbursement policies; §healthcare reform: §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 June 30, 2010, the Proxcelan Cs-131 seed has been implanted in over 5,000 patientsand research papers are being published on the use of the Proxcelan seed. While there is less historical statistical data for the Proxcelan seed than is availablefor I-125 and Pd-103 seeds during the fiscal year ended June 30, 2010, the Company reached a key milestone by collecting the first 5 year outcome data forpatients that received treatment with the Proxcelan seed. In addition, during 2010 there were nine reports of the Proxcelan seed being used in the treatment ofprostate and ocular melanoma published in peer-reviewed literature. There were eight presentations made at the 2010 meeting of the AmericanBrachytherapy Society covering the application of the Proxcelan seed in prostate, lung and breast cancers. While this limited data may prevent us fromdrawing statistically significant conclusions, the side effects experienced by these patients were less severe than side effects observed in seed brachytherapywith I-125 and Pd-103 and in other forms of treatment such as radical prostatectomy. These early results indicate that the onset of side effects generallyoccurs between one and three weeks post-implant, and the side effects are resolved between five and eight weeks post-implant, more quickly than theresolution of side effects that occur with competing seeds or with other forms of treatment. These limited findings 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 on outcomes from additional patients before we canestablish statistically valid conclusions regarding the incidence of side effects from our seeds. 28Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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.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. 29Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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. 30Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, the European Union (EU) and Russia. However, we have limited experience in marketing and distributing productsin other countries. Any foreign operations would subject us to additional risks and uncertainties, including our customers’ ability to obtain reimbursementfor procedures using our products in foreign markets; the burden of complying with complex and changing foreign regulatory requirements; time-sensitivedelivery requirements due to the short half-life of our product; language barriers and other difficulties in providing long-distance customer service;potentially increase time to collect accounts receivable; significant currency fluctuations, which could cause third-party distributors to reduce the number ofproducts they purchase from us because the cost of our products to them could fluctuate relative to the price they can charge their customers; reducedprotection of intellectual property rights in some foreign countries; and the possibility that contractual provisions governed by foreign laws would beinterpreted differently than intended in the event of a contract dispute. Any future foreign sales of our products could also be adversely affected by exportlicense requirements, the imposition of governmental controls, political and economic instability, trade restrictions, changes in tariffs, and difficulties instaffing and managing foreign operations. 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. 31Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Risks Related to Our Stock and Reporting RequirementsIf We Are Unable To Successfully Address The Material Weakness In Our Internal Controls, Our Ability To Report Our Financial Results On A Timely AndAccurate Basis May Be Adversely Affected. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be harmed. We have in the past discovered, andmay in the future discover, areas of our internal controls that need improvement. In its assessment of the effectiveness in internal control over financialreporting as of June 30, 2010, the Company determined that there were deficiencies that constituted a material weakness. Specifically, the Company did notmaintain a sufficient complement of personnel with the appropriate level of knowledge, experience and training to analyze, review and monitor theaccounting of complex financial transactions. As a result, the Company did not prepare adequate contemporaneous documentation that would provide asufficient basis for an effective evaluation and review of the accounting for complex transactions that are significant or non-routine. This material weaknessresulted in errors in the preliminary June 30, 2010 consolidated financial statements and more than a remote likelihood that a material misstatement of theCompany’s annual or interim financial statements would not be prevented or detected. The Company is in the process of developing and implementing aremediation plan to address the material weakness described above, along with the deficiencies also identified in the assessment, which are described underItem 9A below. Specifically, in April 2010, an additional accounting position at the Company's operating subsidiary was filled with a Certified PublicAccountant to address issues with segregation of duties, and the Company is assessing additional steps that may be taken in fiscal year 2011 to improveinternal controls. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes andreporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm ouroperating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reportedfinancial information, which could have a negative effect on the trading price of our stock.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 have continued to increase as provisions of the Sarbanes Oxley Act of 2002 have been implemented. As a smaller reportingcompany, the Company incurred costs to implement additional provisions of the Sarbanes Oxley Act during fiscal year 2010 in particular related to theimplementation of Section 404(b). These Section 404(b) reporting obligations were permanently exempted through legislation passed in July 2010 and thisexemption retrospectively applied to the year ended June 30, 2010 for companies classified as smaller reporting companies.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. 32Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 Price Of Our Common Stock May Be Adversely Affected By The Future Issuance And Sale Of Shares Of Our Common Stock Or Other Equity Securities,Including Pursuant To The Sales Agreement, Or By Our Announcement That Such Issuances And Sales May Occur. We cannot predict the size of futureissuances or sales of our common stock or other equity securities, including those made pursuant to the Company's sales agreement with CKCC, futureacquisitions or capital raising activities, or the effect, if any, that such issuances or sales may have on the market price of our common stock. In addition,CKCC, as agent for sales under the sales agreement, will not engage in any transactions that stabilize the price of our common stock. The issuance and sale ofsubstantial amounts of common stock or other equity securities, including the issuances and sales pursuant to the sales agreement, or announcement that suchissuances and sales may occur, could adversely affect the market price of our common stock. Our Reduced Stock Price May Adversely Affect Our Liquidity. Our common stock has been trading at less than $1.00 per share periodically in the lastyear. 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 fewer marketmakers 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, 2010, we had 23,048,754 outstanding shares of common stock, and thefollowing additional shares were reserved for issuance: 2,274,706 shares upon exercise of outstanding options, 3,165,768 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 5,500,000 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.Failure to Comply with NYSE Amex Listing Standards And Any Resulting Delisting Could Adversely Affect The Market For Our Common Stock. Ourcommon stock is presently listed on the NYSE Amex. The NYSE Amex will consider delisting a company's securities if, among other things, the companyfails to maintain minimum stockholder's equity or the company has sustained losses which are so substantial in relation to its overall operations or itsexisting financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the NYSE Amex, as to whethersuch issuer will be able to continue operations and/or meet its obligations as they mature. There can be no assurance that we will be able to maintain ourlisting on the NYSE Amex indefinitely. In the event that our common stock is delisted from the NYSE Amex, trading, if any, in the common stock would beconducted in the over-the-counter market. As a result, our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as tothe market value 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 except for dividends on the Series B Preferred Stock which we intend to pay on or before December 31, 2010 if required to comply with the Form S-3eligibility requirements. 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. 33Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 15,900 square feet of office and laboratory space for approximately $23,100 per month plus monthly janitorial expenses of approximately$430 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 2010, expires on April30, 2013, and has one additional three-year renewal option remaining.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 – [REMOVED AND RESERVED] 34Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 7, 2010, we had 23,048,754 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, 2010 High Low First quarter $1.65 $0.23 Second quarter 1.21 0.72 Third quarter 1.58 0.82 Fourth quarter 1.58 1.02 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 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 December11, 2009, the Board of Directors declared a dividend on the Series B Preferred Stock of all outstanding and cumulative dividends through December 31,2009. There is no Series A Preferred Stock outstanding. The total Series B accrued dividends of $36,679 were paid as of December 31, 2009. At June 30,2010, there were 59,065 Series B preferred shares outstanding and cumulative dividends in arrears were $5,316. There is no Series A Preferred Stockoutstanding.As of September 3, 2010, we had approximately 259 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. 35Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 2010, 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 2,274,706 $1.96 1,551,845 Total 2,274,706 $1.96 1,551,845 Sales of Unregistered SecuritiesAll sales of unregistered securities were previously reported.Use of Proceeds from Registered SecuritiesOn October 27, 2010, we filed a registration statement on Form S-3 to register securities up to $15 million in value for future issuance in our capital raisingactivities. The registration statement became effective on November 13, 2010, and we filed a prospectus supplement relating to the Sales Agreementdescribed below on April 23, 2010. The Commission file number assigned to the registration statement is 333-162694.On April 22, 2010, we entered into a Sales Agreement (the "Agreement") with C. K. Cooper & Company, Inc. ("CKCC"). Pursuant to the terms of theAgreement, the Company may offer and sell (the "Offering") from time to time through CKCC, as the Company's sales agent, up to $4 million of shares of theCompany's common stock, par value $0.001 per share (the "Shares"). CKCC is not required to sell any specific number or dollar amount of Shares but willuse its commercially reasonable efforts, as the Company's agent and subject to the terms of the Agreement, to sell the Shares offered, as instructed by theCompany. Sales of the Shares, if any, may be made by means of ordinary brokers' transactions on the NYSE AMEX at market prices and such other sales asagreed to by the Company and CKCC. CKCC will receive from us a commission of 2.0% based on the gross sales price per share for any Shares sold throughit as agent under the Agreement. Net proceeds from the sale of the Shares will be used for general corporate purposes. The Company has also agreed toreimburse CKCC for certain expenses incurred in connection with entering into the Agreement and has provided CKCC with customary indemnificationrights.On July 29, 2010, we entered into an amendment (the "Amendment") to the Agreement. The purpose of the Amendment is to extend the term of the offeringof Shares by CKCC as the Company's sales agent pursuant to the Agreement. The offering of Shares pursuant to the Agreement, as amended by theAmendment, will terminate upon the earliest of (i) December 31, 2010, (ii) the sale of all Shares subject to the Agreement or (iii) the termination of theAgreement by the Company or CKCC. The other terms of the Agreement remain in effect and have not been changed by the Amendment. CKCC has not yet commenced the Offering as it has not yet been instructed to do so by the Company. 36Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 6 – SELECTED FINANCIAL DATAAs a smaller reporting company, the Company is not required to provide Item 6 disclosure in this Annual Report.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. Any declines in fair value that areconsidered other than temporary are recorded in the Consolidated Statements of Operations.Fair Value of Financial Instruments The Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, of the Financial Accounting Standards Board (FASB),permits, but does not require, entities to measure many financial instruments and certain other items not specifically identified in other topics of the ASC,such as available-for-sale investments, at fair value. We have not elected to measure additional assets and liabilities at fair value. Fair value is defined as the price that would be received in the sale of an asset, or paid to transfer a liability, in an orderly transaction between marketparticipants at the measurement date. A three-level valuation hierarchy is used to qualify fair value measurements based upon the transparency of inputs tothe valuation of an asset or liability as of the measurement date: Level 1. Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets andliabilities include debt and equity securities and derivative financial instruments actively traded on exchanges, as well as U.S. Treasury securitiesand U.S. Government and agency mortgage-backed securities that are actively traded in highly liquid over-the-counter markets. 37Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Level 2. Model inputs are observable inputs, other than Level 1 prices, such as quoted prices for similar assets and liabilities in active markets,quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, eitherdirectly or indirectly, for substantially the full term of the financial instrument. Level 2 assets and liabilities include debt instruments that aretraded less frequently than exchange traded securities and derivative instruments, for which the model inputs are observable in the market or canbe corroborated by market observable data. Examples in this category are less frequently traded mortgage-backed securities, corporate debtsecurities and derivative contracts.Level 3. Inputs to the valuation methodology are unobservable but significant to the fair value measurement. Examples in this category includeinterests in loans held for sale, certain securitized financial assets or certain private equity investments. Fair value is applied to eligible assets based on quoted market prices, where available. For financial instruments for which quotes from recent exchangetransactions are not available, fair value is based on discounted cash flow analysis and comparisons to similar instruments. Discounted cash flow analysis isdependent upon estimated future cash flows and the level of interest rates. The methods used for current fair value calculations of Level 2 and Level 3 assets and liabilities may not be indicative of net realizable value or reflective offuture fair values. If readily determined market values became available, or if actual performance were to vary appreciably from assumptions used,assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. We believe our methods of determiningfair value are appropriate and consistent with other market participants. However, the use of different methodologies or application of different assumptionsto value certain financial instruments could result in a different estimate of fair value.Effective July 1, 2008, the Company implemented ASC 820, Fair Value Measurements and Disclosures, of the Financial Accounting Standards Board(FASB), ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in theUnited States, and expands disclosures about fair value measurements. The Company elected to implement this Standard with the one-year deferral permittedfor nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis. This deferralapplied to fixed assets and intangible asset impairment testing and initial recognition of asset retirement obligations for which fair value is used. TheCompany does not expect any significant impact to our consolidated financial statements when we implement ASC 820 for these assets and liabilities.ASC 820 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, 2010, 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 ASC Topic 825, Financial Instruments. The statement allows entities to value many financial instrumentsand certain other items at fair value. ASC 825 provides guidance over the election of the fair value option, including the timing of the election and specificitems eligible for the fair value accounting. If the fair value option is elected then unrealized gains and losses are reported in earnings at each subsequentreporting date. The Company elected not to measure any additional financial instruments or other items at fair value as of July 1, 2008 in accordance withASC 825. Accordingly, the adoption of ASC 825 did not impact our consolidated financial statements. The Company did elect to fair value its ARS rightsthat were received in October 2008 and exercised in January 2009 in accordance with ASC 825. 38Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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 equipment 3 to 7 yearsOffice equipment 2 to 5 yearsFurniture and fixtures 2 to 5 years Leasehold 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 of value has occurred, and if there is a 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 with (ASC)820 Capitalization of Interest and (ASC) 230 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 $14,909 and $37,035 for the years ended June 30, 2010 and 2009, respectively, isincluded in financing expense on the statements of operations. 39Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. During fiscal year 2009, theCompany determined that the entire remaining value of the IBt license was impaired and recorded an impairment charge of $425,434 that is included in costof product sales for the year ended June 30, 2009. (see Footnote 7 to the audited consolidated financial statements)Amortization of licenses was $11,867 and $30,067 for the years ended June 30, 2010 and 2009, respectively. Based on the licenses recorded at June 30,2010, 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: $11,721 for 2011, $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 otherassets. Impairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.Amortization of other assets was $16,861 and $11,315 for the years ended June 30, 2010 and 2009 respectively. Based on the patents and other intangibleassets recorded in other assets at June 30, 2010, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for eachfiscal year ending June 30 is expected to be as follows: $15,139 for each year 2011 through 2015 and $142,629 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 September 2007, an asset retirement obligation of $473,096 was established representing the discounted cost of the Company’s estimate of the obligationsto remove any residual radioactive materials and all leasehold improvements at the end of the lease term at its new production facility. The estimate wasdeveloped by qualified production personnel and the general contractor of the new facility. The Company has reviewed the estimate again based on itsexperience with decommissioning its old facility and believes that the original estimate continues to be applicable.During the years ended June 30, 2010 and 2009, the asset retirement obligations changed as follows: 2010 2009 Beginning balance $553,471 $506,005 Accretion of discount 51,920 47,466 Ending balance $605,391 $553,471 Because the Company does not expect to incur any expenses related to its asset retirement obligations in fiscal year 2011, the entire balance as of June 30,2010 is classified as a noncurrent liability. 40Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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, 2010 and 2009.Revenue RecognitionThe Company applies the provisions of ASC Topic 605, Revenue Recognition. ASC 605 provides guidance on the recognition, presentation and disclosureof revenue in financial statements. ASC 605 outlines the basic criteria that must be met to recognize revenue and provides guidance for the disclosure ofrevenue recognition policies. The Company recognizes revenue related to product sales when (i) persuasive evidence of an arrangement exists, (ii) shipmenthas occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. Revenue for the fiscal years ended June 30, 2010 and 2009 was derived primarily 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.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. 41Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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. Management has determined that the Company, its subsidiary, and itspredecessors are subject to examination of their income tax filings in the United States and state jurisdictions for the 2005 through 2008 tax years. In theevent that the Company is assessed penalties and or interest, penalties will be charged to other operating expense and interest will be charged to interestexpense.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, including preferred stock, common stock warrants oroptions that are potentially convertible into common 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, 2010 and 2009 are as follows: 2010 2009 Preferred stock 59,065 59,065 Common stock warrants 3,165,768 3,216,644 Common stock options 2,274,706 2,708,166 Total potential dilutive securities 5,499,539 5,983,875 Subsequent EventsEffective April 1, 2009, the Company adopted ASC 855 Subsequent Events. This Statement establishes the accounting for, and disclosure of, material eventsthat occur after the balance sheet date, but before the financial statements are issued. In general, these events will be recognized if the condition existed atthe date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognizedevents if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided inaccounting literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our financialstatements were issued—the filing time and date of our 2010 Annual Report on Form 10-K. 42Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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, 2010 and2009. 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 25 of this Annual Report on Form 10-K.Year ended June 30, 2010 compared to year ended June 30, 2009Product sales. The Company generated revenue of $5,286,084 for the year ended June 30, 2010 compared to revenue of $5,417,815 for the yearended June 30, 2009, a decrease of $131,731 or 2.4%. The total number of cases for the year ended June 30, 2010 as compared to the year endedJune 30, 2009 declined 5.7%. Revenue generated from prostate cancer related therapy amounted to approximately 97% of revenue in the yearended June 30, 2010 while the remaining approximately 3% is from new treatment modalities including lung, colorectal, head and neck and chestwall cancers. In the year ended June 30, 2009 nearly 100% of revenue was generated by prostate cancer therapy. Management believes that theoverall market for prostate brachytherapy has received increased pressure from other treatment options with higher reimbursement rates such asintensity-modulated radiation therapy (IMRT) and management is focused on new treatment modalities to become a larger portion of the totalrevenue in the future.Cost of product sales. Cost of product sales was $4,560,287 for the year ended June 30, 2010 compared to cost of product sales of $5,771,147 forthe year ended June 30, 2009. While the Company continues to streamline manufacturing processes, the reduction of cost of product sales of$1,210,860 or 21% for the year ended June 30, 2010 as compared to the year ended June 30, 2009, was substantially impacted by a one-timeimpairment charge of $425,434. The remaining year to year cost reduction of $785,426 was composed of decreases in depreciation and amortizationexpense of $219,000, occupancy expense of $66,000, payroll and benefits expense of $172,000 and pre-loading expense of 207,000. The Companyachieved a $785,000 reduction in production costs as a result of a continued focus on analyzing and improving all aspects of productionoperations. These continued efforts during fiscal year 2010 have resulted in improved production processes, better utilization of labor, ability toutilize Company personnel in lieu of consultants and the continued increased use of internal seed loading capabilities by customers instead ofexternal third-party seed loading services.Gross margin (loss). Gross margin was $725,797 for the year ended June 30, 2010 compared to a gross loss of $353,332 for the year ended June 30,2009. The improvement of $1,079,129 or 305% was due to the one-time impairment charge in the year ended June 30, 2009 as well as continuedreductions in production costs and more efficient use of manufacturing resources in the year ended June 30, 2010. 43Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 2010 were $340,959 which represents adecrease of $617,706 or approximately 64% less than the research and development expenses of $958,665 for the year ended June 30, 2009.The cost savings of approximately $618,000 were primarily due to a $305,000 reduction in protocol expense as the major cost for the monotherapyprotocol has been completed, consulting costs of $74,000 as several production projects were completed, legal costs were reduced by $127,000 andsavings of $60,000 in payroll and benefits, related taxes and share-based compensation.Sales and marketing expenses. Sales and marketing expenses were $1,953,598 for the year ended June 30, 2010 compared to sales and marketingexpenses of $2,365,973 for the year ended June 30, 2009, which represents a decrease of $412,375 or 17%.The decrease of approximately $412,000 is primarily the net result of a reduction in wages, benefits, related taxes and share-based compensation of$242,000 that is related to both temporary and permanent attrition as well as forfeiture of related equity stock options; a decrease of $88,000 intravel that is a result of both the temporary attrition and improved trip planning; and a reduction of $76,000 in marketing and advertising expensethrough reducing the number of trade journals that were used for advertising.General and administrative expenses. General and administrative expenses for the year ended June 30, 2010 were $2,440,140 compared to generaland administrative expenses of $2,792,611 for the year ended June 30, 2009. The decrease of approximately $352,000 is primarily the net result ofreductions in wages, benefits, related taxes and share-based compensation of $137,000; reduction in legal expense of $157,000; and a decrease inconsulting expenses of $92,000 that was partially offset by an increase in audit, Sarbanes-Oxley Act related compliance and tax expense of $50,000.Operating loss. In the year ended June 30, 2010, the Company had an operating loss of $4,008,900 compared to $6,470,581 for the year ended June30, 2009, a decrease of $2,461,681 or 38%. The Company’s operating loss reduction of approximately $2.5 million was achieved through savingsin cost of product sales of $1.2 million (including a one-time impairment charge of $425,000), research and development of $618,000, sales andmarketing of $412,000, and general and administrative of $352,000.Interest income. Interest income was $11,433 for the year ended June 30, 2010 compared to interest income of $111,047 for the year ended June 30,2009. The decrease of $99,614 or 90% is the result of lower average cash and short-term investment balances during the year ended June 30, 2010and decreased interest rates.Gain on the fair value of short-term investments. There was no gain on short-term investments for the year ended June 30, 2010 as compared to again of $274,000 for the year ended June 30, 2009. The gain of $274,000 for the year ended June 30, 2009 was due to the receipt of the Company’srights related to its auction rate securities (ARS) issued by its broker in October 2008. The gain was calculated as the fair value amount of the putrights 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, 2010 was $36,389 compared to $75,307 for the yearended June 30, 2009, a decrease of $39,000 or 52%. Financing expense included interest expense of approximately $19,000 and $38,000 for theyears ended June 30, 2010 and 2009, respectively. The decrease is due to the lower than average debt balances in the year ended June 30,2010. The remaining balance of financing expense represents the amortization of deferred financing costs. 44Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Liquidity and capital resources. We have historically financed our operations through the sale of common stock and related warrants. During fiscal year2010, 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 $2.7 million in fiscal year 2010 compared to approximately $3.9 million in fiscal year 2009, a decreaseof approximately $1.3 million. Cash used by operating activities is net loss adjusted for non-cash items and changes in operating assets and liabilities.The reduction of net cash used by operating activities of $1.3 million is attributable to the reduction of the Company’s net loss of $2.1 million with anoffsetting reduction in non cash charges of $600,000 in fiscal year 2010 compared to fiscal year 2009 and a reduction of $260,000 in operating assets andliabilities in the fiscal year 2010 compared to the fiscal year 2009.Cash flows from investing activitiesCash provided by investing activities was approximately $1.6 million for the year ended June 30, 2010 and $2.2 million for the year ended June 30,2009. Cash expenditures for fixed assets were approximately $22,000 in fiscal year 2010 and approximately $58,000 in fiscal year 2009. The short-terminvestments of the Company matured in the year ended June 30, 2010 and provided $1.7 million of cash proceeds. The Company sold its remaining auctionrate securities in January 2009 which generated $4.0 million of cash proceeds.Cash flows from financing activitiesCash used in financing activities was approximately $270,000 for the year ended June 30, 2010 and $102,000 for the year ended June 30, 2009 and was usedmainly for payments of debt, capital leases and the cash payment of stock offering costs.Projected 2011 Liquidity and Capital ResourcesAt June 30, 2010, cash and cash equivalents amounted to $1,678,869 with no short-term investments compared to $2,990,744 of cash and cash equivalentsand $1,679,820 of short-term investments at June 30, 2009.The Company had approximately $1.2 million of cash as of September 21, 2010. As of that date management believed that the Company’s monthly requiredcash operating expenditures were approximately $223,000 which represents a significant decrease of approximately $100,000 from average monthly cashoperating expenditures in fiscal year 2009. Management believes that less than $100,000 will be spent on capital expenditures for the entire fiscal year2011, but there is no assurance that unanticipated needs for capital equipment may not arise.The Company’s loan with the Benton-Franklin Economic Development District matured and was paid during the fiscal year ended June 30, 2010. TheCompany has only one remaining loan facility outstanding with the Hanford Area Economic Investment Fund Committee (HAEIFC), with a principal balanceof approximately $179,995 as of June 30, 2010.During fiscal year 2011, 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 $100,000 in fiscal year 2011 for protocol expenses relating to lung cancer as well as continuedwork on the dual therapy and mono therapy prostate protocols. 45Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Based on the foregoing assumptions, management believes cash and cash equivalents on hand at June 30, 2010 should be sufficient to meet our anticipatedcash requirements for operations, debt service, and capital expenditure requirements through January 31, 2011.Management plans to attain breakeven and generate additional cash flows by increasing revenues from both new and existing customers (through our directsales channels and through our distributors), expanding into other market applications which initially will include head and neck implants, colorectal andlung implants while maintaining the Company's focus on cost control. Management believes the Company will reach breakeven with revenues ofapproximately $750,000 per month with cashflow breakeven from operations being reached at approximately $700,000. However, there can be no assurancethat the Company will attain profitability or that the Company will be able to attain its revenue targets. Sales in the prostate market have not shown theincreases necessary to breakeven during the past two fiscal years and did not improve during the year ended June 30, 2010. As management is now focusedon expanding into head and neck, colorectal, lung and brain applications, management believes the Company will need to raise additional capital forprotocols, marketing staff, production staff and production equipment as it attempts to gain market share. Initially, management plans to seek to sell commonstock pursuant to either an “at the market” offering or through a direct registered offering at a discount to the market price of not more than 15% and has aneffective Form S-3 shelf offering registration statement available for this purpose.Management executed a sales agreement with C.K. Cooper & Company, Inc. (CKCC) on April 22, 2010 to sell shares as the Company’s sales agent at marketprices, which was amended on July 29, 2010. As amended, the sales agreement expires on December 31, 2010. If the shares are sold, the shares will be issuedpursuant to the Form S-3 (File No. 333-162694) which became effective on November 13, 2009 and the prospectus supplement dated April 23, 2010. Salescannot exceed $4 million under the prospectus supplement and must be sold “at the market” price of the common stock as of the day the sales are made.The Company may also finance its future cash needs through solicitation of warrant holders to exercise their warrants at potentially reduced exercise prices,possible strategic collaborations, debt financing or through other sources that may be dilutive to existing shareholders but as the Company now hasinsufficient capital to fund operations through the end of the current fiscal year, it may need to offer more substantial discounts. Management anticipates thatif it raises financing that it will be at a discount to the market price of common stock of not more than 15% and dilutive to shareholders. Of course, fundingmay not be available to it on acceptable terms, or at all. If the Company is unable to raise additional funds, it will have to discontinue or significantly curtailoperations.Long-Term DebtThe Company has a single loan facility in place as of June 30, 2010. The loan facility is from HAEIFC and was originated in June 2006. The loan originallyhad 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 principal balanceowed on the loan as of June 30, 2010 was $179,995. This loan is secured by receivables, equipment, materials and inventory, and certain life insurancepolicies and also required personal guarantees. The final payment on the HAEIFC loan will be due in September 2013.HAEIFC has granted the Company a waiver from enforcing several loan covenants in the loan agreement. The waiver is effective through June 30, 2011.Other Commitments and ContingenciesIn May 2010, Medical exercised the first of two options to renew the original lease that was entered into on May 2, 2007 with Energy Northwest, the owner ofthe Applied Process Engineering Laboratory (the APEL lease), for an additional 3 years with a new lease expiration date of April 30, 2013. Due to areduction in some lab and office space at APEL, the rent has been reduced to approximately $23,100 per month. 46Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Future minimum lease payments under operating leases, including the one remaining three-year renewal of the APEL lease, are as follows:Year ending June 30, 2011 $296,157 2012 284,915 2013 282,390 2014 282,390 2015 282,390 Thereafter 235,324 $1,663,566 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.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 eliminated 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 was postponed due to an electrical problem that damaged equipment and due to economicdifficulties in the Ukraine that have protracted the contractor’s efforts with a planned demonstration originally expected in Fall 2009. The contractor has notdelivered a successful demonstration as required by the contract despite on-going commitments to the Company to do so. There is no assurance thisdemonstration will occur or whether it will be successful. If a successful demonstration occurs, the Company will then need decide if the prototype modelwill produce sufficient quantities of enriched barium or if a larger production model will need to be built for an additional cost estimated to be $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. 47Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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 StandardsOn July 1, 2009, the Company adopted ASC 105, Generally Accepted Accounting Principles, new accounting provisions which establishes the FASBAccounting Standards Codification™ (the Codification) as the single official source of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) otherthan rules and interpretive releases issued by the Securities and Exchange Commission. The Codification reorganized the literature and changed the namingmechanism by which topics are referenced. The Codification became effective for interim and annual periods ending after September 15, 2009. TheCompany’s accounting policies and amounts presented in the financial statements were not impacted by this change.On July 1, 2009, the Company adopted new accounting provisions which were delayed from the effective date of fair value accounting for one year forcertain nonfinancial assets and nonfinancial liabilities, excluding those that are recognized or disclosed in financial statements at fair value on a recurringbasis (that is, at least annually). For purposes of applying the new provisions, nonfinancial assets and nonfinancial liabilities include all assets and liabilitiesother than those meeting the definition of a financial asset or a financial liability. The Company had previously adopted new standards for fair valueaccounting on July 1, 2008. The adoption of these new provisions did not have a material effect on the Company but will affect future calculations of assetretirement obligations and long-lived asset impairment.On July 1, 2009, the Company adopted ASC 805, Business Combinations, this new accounting standard applies to business combinations and for non-controlling interests. The new business combination provisions require an acquirer to measure the identifiable assets acquired, the liabilities assumed and anynon-controlling interest in the aquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assetsacquired. In addition, the new provisions require that a non-controlling interest in a subsidiary be reported as equity in the consolidated financial statements.The calculation of earnings per share will continue to be based on income amounts attributable to the parent. The adoption of these statements did not have amaterial effect on the Company’s financial statements. 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. 48Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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, 2010. 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. 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.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.A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will occur and not be detected by management before the financial statements are published. In itsassessment of the effectiveness in internal control over financial reporting as of June 30, 2010, the Company determined that there was a material weaknessand a significant deficiency, as described below. ·Material weakness - The Company did not maintain a sufficient complement of personnel with the appropriate level of knowledge, experience andtraining to analyze, review and monitor the accounting of complex financial transactions. As a result, the Company did not prepare adequatecontemporaneous documentation that would provide a sufficient basis for an effective evaluation and review of the accounting for complextransactions that are significant or non-routine. This material weakness resulted in errors in the preliminary June 30, 2010 consolidated financialstatements and more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements would not beprevented or detected. ·Significant deficiency - There is a lack of segregation of duties in preparation of the financial statements and other key financial transactions. TheController is responsible for almost every key financial duty and has access to all of the Company’s financial information. Such a lack ofsegregation of duties is typical in a company with limited resources. Although the Company’s CEO and Board of Directors review the financialstatements and would most likely discover any misappropriation of funds, this cannot be assured by the existing system.Due to the above significant deficiency and the resulting material weakness, management concluded that our internal control over financial reporting was noteffective as of June 30, 2010. 49Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 is in the process of developing and implementing a remediation plan to address the material weakness and significant deficiency as describedabove.The Company has taken the following actions to improve internal control over financial reporting: ·In April 2010, the Company filled an additional accounting position with an individual who is a Certified Public Accountant to addressissues with segregation of duties. ·The Company plans to continue to enhance staff knowledge through continued training and periodic reviews.In light of the aforementioned material weakness, management conducted a thorough review of all significant or non-routine transactions and adjustments forthe year ended June 30, 2010. As a result of this review, management believes that there are no material inaccuracies or omissions of material fact and to thebest of its knowledge, believes that the consolidated financial statements for the year ended June 30, 2010 fairly present in all material respects the financialcondition and results of operations for the Company in conformity with U.S. generally accepted accounting principles.This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control overfinancial reporting due to a permanent exemption for smaller reporting companies from the internal control audit requirements of Section 404(b)of theSarbanes-Oxley Act of 2002.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. 50Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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, 2010 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.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 under applicable NYSE Amexstandards. The Board’s conclusions regarding the qualifications of Mr. LaVoy as an audit committee financial expert were based on his service as a chieffinancial officer of a public company, his experience as a certified public accountant and his degree in accounting. The Board’s conclusions regarding thequalifications of Mr. Kauffman as an audit committee financial expert were based on his service as a chief executive officer of multiple public companies, hisactive supervision of the principal financial and accounting officers of the public companies for which he served as chief executive officer, and his M.B.A. inFinance.Executive Officers and DirectorsThe executive officers and directors serving the Company as of June 30, 2010 were as follows:Name Age Position Held Term*Dwight Babcock 62 Chairman, Chief Executive Officer AnnualBrien Ragle 41 Controller, Principal Financial and Accounting Officer Robert Kauffman 70 Vice-Chairman AnnualThomas LaVoy 50 Director AnnualAlbert Smith 66 Director Annual* For directors only 51Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Dwight 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. Mr. Babcock brings over 35years of CEO-level experience to his service on the Company's Board.Brien Ragle – Mr. Ragle has over 14 years of finance and accounting experience, including financial reporting, and cost, project, and managementaccounting in addition to performing operational analysis. Mr. Ragle became IsoRay's Controller in October 2009. Before joining IsoRay in January 2007as Cost Accounting Manager, Mr. Ragle was employed by BNG America, LLC, a wholly-owned subsidiary of Energy Solutions, LLC (ES) from 2005 to 2006as a Project Accounting Manager and from 2000 to 2004 as a Business Unit Controller by SCM Consultants, Inc, a wholly-owned subsidiary of Tetra Tech,Inc (TTEK). Mr. Ragle holds Bachelor of Arts degrees in Business Administration, accounting emphasis, and Hospitality Management from WashingtonState University and is a Certified Public Accountant in the State of Washington.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. Mr. Kauffman has substantial experience in serving as CEO for publiccompanies, and brings these skills to his service on the Company's Board.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 and presently serveson its audit committee. From September 1987 to February 1997, Mr. LaVoy served as Chief Financial Officer of NASDAQ-listed Photocomm, Inc. Mr.LaVoy was a Certified Public Accountant with the firm of KPMG Peat Marwick from 1980 to 1983. Mr. LaVoy has a Bachelor of Science degree inAccounting from St. Cloud University, Minnesota, and is a Certified Public Accountant. Mr. LaVoy brings over 25 years of CFO experience for progressivelygrowing companies in multiple industries to his service on the Company's Board.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 privately held video conferencing companywith headquarters in Scottsdale, Arizona in December 2005. In January 2008, he formed Face to Face Live, Inc. (successor to Extreme Video Solutions) wherehe presently serves as CEO. Mr. Smith presently serves as Chairman of the Board for Doulos Ministries, Inc. Mr. Smith has extensive experience inmarketing and sales having managed a national sales force of over fifty people while at CSI Leasing, Inc. Mr. Smith holds a BS in Business Administrationfrom Ferris State College. Mr. Smith brings his entrepreneurial skills in founding and growing multiple private companies, together with a strong sales andmarketing background, to his service on the Company's Board. 52Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 & TenureLane Bray 82 Chief ChemistFredric Swindler 62 Vice-President, Regulatory Affairs and Quality AssuranceAnthony Pasqualone 55 Vice-President, Business DevelopmentWilliam Cavanagh, III 44 Vice-President, Research and DevelopmentLane 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 28 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.Fredric Swindler – Mr. Swindler joined IsoRay Medical in October 2006 and has over 40 years experience in manufacturing and regulatory compliance. Mr.Swindler also serves as Secretary for IsoRay, Inc., a position he has held since June 11, 2008. Mr. Swindler served as VP, Quality Assurance and RegulatoryAffairs for Medisystems Corporation, a manufacturer and distributor of medical devices, from 1994 until joining the Company. During his tenure atMedisystems Corporation, Mr. Swindler developed a quality system to accommodate vertically integrated manufacturing, 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 MarquestMedical Products from 1989 to 1994, Sherwood Medical Products from 1978 to 1989, Oak Park Pharmaceuticals in 1978, and Mead Johnson & Companyfrom 1969 to 1978. Mr. Swindler holds a Bachelor of Science degree in Biomedical Engineering from Rose-Hulman Institute of Technology and a Masters ofBusiness Administration from the University of Evansville. 53Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 IsoRay Medical 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 introducedSeedLink to the brachytherapy market in 2003. He started his career managing brachytherapy sales as the National Sales Manager at TheragenicsCorporation, where he helped develop market acceptance of Pd-103. In 1995 he brought the first stranded product to market while working with the team atOncura (Amersham Corporation). Mr. Pasqualone is an alumnus of Fordham University with a BS in Science.William Cavanagh III – Mr. Cavanagh joined IsoRay Medical in January 2010. Mr. Cavanagh has most recently been engaged in the research anddevelopment of dendritic cell therapies for cancer and infectious diseases. He served as Chief Scientific Officer for Sangretech Biomedical, LLC for the sixyears prior to joining IsoRay Medical. At Sangretech, he oversaw the design and implementation of a novel cancer therapy. Mr. Cavanagh began hisextensive career in cancer treatment technologies in the early 1990s, when he helped lead research and development of a therapy involving the insertion ofradioactive sources directly into the prostate for the treatment of prostate cancer (prostate brachytherapy). He has designed several cancer treatment-relatedstudies, is listed as an author on 34 peer-reviewed publications, and is the listed inventor on a U.S. patent application detailing a novel treatment for cancer. Mr. Cavanagh has also served as Director of the Haakon Ragde Foundation for Advanced Cancer Studies in Seattle, Washington, where he led the researchfoundation in the selection of viable research projects directed at treating advanced cancers. Mr. Cavanagh holds a B.S. in Biology from the University ofPortland (Oregon) and completed two years of medical school before beginning his career in research management.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 30,2010 except for a single Form 3, which was filed late by Brien Ragle.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/corporate_governance.. Each of these policies comprises written standards that are reasonably designed to deterwrongdoing and to promote the behavior described in Item 406 of Regulation S-K promulgated by the Securities and Exchange Commission. 54Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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. Summary Compensation Table Nonqualified Nonequity deferred Stock Option incentive plan compensation All other Salary Bonus awards awards compensation earnings compensation Total Name and principal position Year ($) ($) ($) ($) (1) ($) ($) ($) ($) Dwight Babcock 2010 237,539 25,000 - 136,000 - - 398,539 Chairman and CEO (2) 2009 140,308 - - 50,000 - - - 190,308 Brien Ragle 2010 92,771 - - 24,480 - - - 117,251 Controller, PFO / PAO 2009 83,109 - - 5,202 - - - 88,311 Robert Bilella 2010 97,200 100,650 - 5,610 - - - 203,460 Territory Sales Manager 2009 86,722 106,550 - 2,448 - - - 195,720 Frederic Swindler 2010 160,000 - - 24,480 - - - 184,480 VP – QA / RA 2009 160,000 - - 9,450 - - - 169,450 (1)Amounts represent the ASC 718, Compensation – Stock Compensation valuation for the fiscal years ended June 30, 2010 and 2009, respectively. Allsuch options were awarded under one of the Company’s stock option plans. All options awarded (with the exception of Mr. Babcock’s stock optiongrants that were immediately vested on the grant date) vest in three equal annual installments beginning with the first anniversary from the date ofgrant and expire ten years after the date of grant. All options were granted at the fair market value of the Company’s stock on the date of grant and theCompany used a Black-Scholes methodology as discussed in the footnotes to the financial statements to value the options.(2)Mr. Babcock became the Chairman and Interim CEO on February 26, 2008 and was appointed CEO on February 18, 2009. He was serving as InterimCEO on a contract basis. Mr. Babcock also received compensation as a Director of the Company until his appointment as CEO on February 18, 2009which is disclosed in the table above.Outstanding Equity Awards at Fiscal Year-End Option awards Equity Incentive plan awards: Number of Number of Number of securities securities securities underlying underlying underlying unexercised unexercised unexercised Option options options unearned exercise Option (#) (#) options price expirationName exercisable unexercisable (#) ($) dateDwight Babcock, 50,000 - - 6.30 03/31/2016Chairman and CEO 50,000 - - 3.80 06/23/2016 50,000 - - 3.11 08/15/2016 50,000 - - 4.14 06/01/2007 100,000 - - 0.75 05/13/2018 200,000 - - 0.26 06/01/2019 100,000 - - 1.43 06/30/2020 Brien Ragle 5,000(2) - - 4.40 03/02/2017Controller, Principal Finance and Accounting Officer 2,000(3) - - 4.14 06/01/2017 34,000(5) - - 0.26 06/01/2019 20,000(6) - - 1.43 06/30/2020 Fred Swindler 10,000(2) - - 4.40 03/02/2017Vice-President, Quality Assurance and Regulatory Affairs 10,000(3) - - 4.14 06/01/2017 10,000(4) - - 0.65 07/01/2018 50,000(5) - - 0.26 06/01/2019 20,000(6) - - 1.43 06/30/2020 Robert Bilella 84,236(1) - - 4.15 06/23/2015Territory Sales Manager 18,000(5) - - 0.26 06/01/2019 5,000(6) - - 1.43 06/30/2020 55Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 28, 2010Powered 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. (1)Represents the June 23, 2005 grant, all of which were exercisable as of June 23, 2008.(2)Represents the March 2, 2007 grant, all of which were exercisable as of March 2, 2010.(3)Represents the June 1, 2007 grant, all of which were exercisable as of June 1, 2010.(4)Represents a July 1, 2008 grant, one-third of which became exercisable on July 1, 2009, one-third of which will became exercisable on July 1, 2010,and the final third will become exercisable on July 1, 2011.(5)Represents a June 1, 2009 grant, one-third of which became 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.(6)Represents a June 30, 2010 grant, one-third of which will become exercisable on June 30, 2011, one-third of which will become exercisable on June30, 2012, and the final third will become exercisable on June 30, 2013.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.Non-Employee Director Compensation Fees Non-qualified earned or Non-equity deferred paid in Stock Option incentive plan compensation All other cash awards awards compensation earnings compensation Total Name ($) ($) ($) ($) ($) ($) ($) Robert Kauffman 61,500 - - - - - 61,500 Thomas LaVoy 49,500 - - - - - 49,500 Albert Smith 37,500 - - - - - 37,500 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. Kauffman began receiving an additional $2,000 per month for serving as Vice-Chairman, and Mr. LaVoy beganreceiving an additional $1,000 per month for serving as Audit Committee Chairman. Each non-employee director had stock options to purchase 150,000shares of the Company’s common stock outstanding as of June 30, 2010. 56Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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 September21, 2010 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 21, 2010, the Company had 23,048,754 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.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) 130,856 550,000 12,500 2.94%Brien Ragle - 18,333 - —%Robert Kauffman 63,802 150,000 - —%Thomas LaVoy 40,423 150,000 - —%Albert Smith 198,101 150,000 - 1.50%Directors and Executive Officers as a group 433,182 1,018,333 12,500 6.08%(1)Percentage ownership is based on 23,048,754 shares of Common Stock outstanding on September 21, 2010. Shares of Common Stock subject to stockoptions or warrants which are currently exercisable or will become exercisable within 60 days after September 21, 2010 are deemed outstanding forcomputing the percentage ownership of the person or group holding such options or warrants, but are not deemed outstanding for computing thepercentage 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 21, 2010.(2)The address of Ms. Sidibe is 229 Lasiandra Ct, Richland, WA 99352. 57Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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)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 in the royalty agreement, for any sub-assignments of the aforesaid patented process to any third parties. The royalty agreement will remain in forceuntil the expiration of the patents on the assigned technology, unless earlier terminated in accordance with the terms of the underlying agreement. TheCompany recorded royalty expense of $23,041 and $20,063 for the years ended June 30, 2010 and 2009, respectively, related to these payments.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. 58Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICESThe 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, 2010 2009 1.Audit fees $65,861 $31,047 2.Audit-related fees – – 3.Tax fees 10,350 7,900 4.All other fees 22,750 – Totals $98,961 $39,947 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. All other fees are related to deferred offering costs for theactive S-3 filing. 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. 59Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 4.6 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. 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 Intentionally Omitted.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. 60Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 10.20 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 for redacted portions).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 for redacted portions).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). 61Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 10.51 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 Intentionally Omitted.10.53 Intentionally Omitted.10.54 Distributor Agreement, dated effective November 10, 2009, by and between IsoRay Medical, Inc. and Inter V Medical, Inc., incorporatedby reference to the Form 8-K filed on November 18, 2009 (confidential treatment requested for redacted portions).10.55 Distribution Agreement, dated effective November 15, 2009, by and between IsoRay Medical, Inc. and Oncura, Inc., incorporated byreference to the Form 8-K filed on December 3, 2009 (confidential treatment requested for redacted portions).10.56 Contract, dated December 1, 2009, by and between IsoRay Medical, Inc. and UralDial LLC, incorporated by reference to the Form 8-Kfiled on December 7, 2009 (confidential treatment requested for redacted portions).10.57 Sales Agreement between IsoRay, Inc. and C. K. Cooper & Company, Inc., dated April 22, 2010, incorporated by reference to the Form 8-K filed on April 23, 2010.10.58 Consulting and Severance Agreement dated January 12, 2010 between IsoRay, Inc. and Lori Woods, incorporated by reference to theForm 10-Q filed on May 12, 2010.10.59 License Agreement, dated effective June 14, 2010, by and between IsoRay Medical, Inc. and Hologic Inc., incorporated by reference tothe Form 8-K filed on June 23, 2010 (confidential treatment requested for redacted portions).10.60 Amendment, dated July 29, 2010, of the Sales Agreement between IsoRay, Inc. and C. K. Cooper & Company, Inc., dated April 22, 2010,incorporated by reference to the Form 8-K filed on July 30, 2010.10.61 Loan Covenant Waiver Letter dated September 23, 2010 from the Hanford Area Economic Investment Fund Committee, filed herewith.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 April 23, 2010, the Company filed a Current Report on Form 8-K announcing its entry into a Sales Agreement with C.K Cooper and Company, Inc to offerand sell from time to time as the Company’s agent, up to $4 million of shares of the Company’s common stock, par value $0.001 per share.On May 12, 2010, the Company filed a Current Report on Form 8-K announcing its financial results for the quarter ended March 31, 2010.On June 23, 2010, the Company filed a Current Report on Form 8-K announcing that its wholly owned subsidiary IsoRay Medical, Inc. entered into a LicenseAgreement with Hologic Inc.On July 30, 2010, the Company filed a Current Report on Form 8-K announcing that the Company entered into an amendment to the Sales Agreementbetween the Company and C.K. Cooper & Company, Inc. dated April 22, 2010. The purpose of the Amendment is to extend the term of the offering of sharespursuant to the Sales Agreement until December 31, 2010. 62Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 Firm F-2 Financial Statements: Consolidated Balance Sheets as of June 30, 2010 and 2009 F-3Consolidated Statements of Operations for the years ended June 30, 2010 and 2009 F-4Consolidated Statement of Changes in Shareholders’ Equity for the years ended June 30, 2010 and 2009 F-5Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009 F-6Notes to Consolidated Financial Statements F-7 F-1Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 2010 and 2009,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, 2010 and 2009, 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 23, 2010 F-2Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, June 30, 2010 2009 Assets Current assets: Cash and cash equivalents $1,678,869 $2,990,744 Short-term investments - 1,679,820 Accounts receivable, net of allowance for doubtful accounts of $36,390 and $86,931, respectively 896,266 746,568 Inventory 681,677 789,246 Prepaid expenses and other current assets 259,975 151,077 Total current assets 3,516,787 6,357,455 Fixed assets, net of depreciation and amortization 3,959,983 4,891,484 Deferred financing costs, net of accumulated amortization 13,277 28,186 Restricted cash 180,154 178,615 Other assets, net of accumulated amortization 272,594 285,826 Total assets $7,942,795 $11,741,566 Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued expenses $404,401 $416,993 Accrued protocol expense 242,029 221,888 Accrued radioactive waste disposal 60,060 60,000 Accrued payroll and related taxes 186,513 103,887 Accrued vacation 68,525 84,817 Notes payable, due within one year 49,445 161,437 Total current liabilities 1,010,973 1,049,022 Notes payable, due after one year 130,550 176,023 Asset retirement obligation, non-current 605,391 553,471 Total liabilities 1,746,914 1,778,516 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; 23,048,754 and 22,942,088 shares issued andoutstanding 23,049 22,942 Treasury stock, at cost 13,200 shares (8,390) (8,390)Additional paid-in capital 48,084,783 47,818,203 Accumulated deficit (41,903,620) (37,869,764) Total shareholders’ equity 6,195,881 9,963,050 Total liabilities and shareholders’ equity $7,942,795 $11,741,566 The accompanying notes are an integral part of these consolidated financial statements.F-3Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, June 30, 2010 2009 Product sales $5,286,084 $5,417,815 Cost of product sales 4,560,287 5,771,147 Gross income / (loss) 725,797 (353,332) Operating expenses: Research and development 340,959 958,665 Sales and marketing 1,953,598 2,365,973 General and administrative 2,440,140 2,792,611 Total operating expenses 4,734,697 6,117,249 Operating loss (4,008,900) (6,470,581) Non-operating income (expense): Interest income 11,433 111,047 Gain on fair value of short-term investments - 274,000 Financing and interest expense (36,389) (75,307) Non-operating income / (expense), net (24,956) 309,740 Net loss (4,033,856) (6,160,841)Preferred stock dividends (10,632) (10,632) Net loss applicable to common shareholders $(4,044,488) $(6,171,473) Basic and diluted loss per share $(0.18) $(0.27) Weighted average shares used in computing net loss per share: Basic and diluted 22,960,421 22,942,088 The accompanying notes are an integral part of these consolidated financial statements. F-4Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 Preferred Stock Common Stock Treasury Stock Additional Accumulated Shares Amount Shares Amount Shares Amount Paid-in Capital Deficit Total 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(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 Issuance of common stock pursuant toexercise of options 106,666 107 30,226 30,333 Payment of dividend to Preferredshareholders (36,679) (36,679)Share-based compensation 273,033 273,033 Net loss (4,033,856 ) (4,033,856) Balances at June 30, 2010 59,065 $59 23,048,754 $23,049 13,200 $(8,390) $48,084,783 $(41,903,620) $6,195,881 The accompanying notes are an integral part of these consolidated financial statements. F-5Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 June 30, June 30, 2010 2009 Cash flows from operating activities: Net loss $(4,033,856) $(6,160,841)Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization of fixed assets 953,243 1,206,935 Impairment of IBt license - 425,434 Write-off of certain foreign patents and trademarks - 85,818 Amortization of deferred financing and other assets 43,637 79,563 (Gain) loss on fair value of short-term investments - (274,000)Accretion of asset retirement obligation 51,920 47,466 Share-based compensation 273,033 353,696 Changes in operating assets and liabilities: Accounts receivable, net (149,698) 269,927 Inventory 107,569 110,718 Prepaid expenses, other current assets and other assets (6,194) 114,777 Accounts payable and accrued expenses (12,593) (258,408)Accrued protocol expense 20,141 161,888 Accrued radioactive waste disposal 60 44,000 Accrued payroll and related taxes 82,627 (118,145)Accrued vacation (16,292) (37,764) Net cash used by operating activities (2,686,403) (3,948,936) Cash flows from investing activities: Purchases of fixed assets (21,742) (57,778)Additions to licenses and other assets (11,721) (37,773)Change in restricted cash (1,539) (2,763)Purchase of short-term investments - (1,679,820)Proceeds from the sale or maturity of short-term investments 1,679,820 4,000,000 Net cash provided by investing activities 1,644,818 2,221,866 Cash flows from financing activities: Principal payments on notes payable (157,465) (71,924)Principal payments on capital lease obligations - (25,560)Preferred dividends paid (36,679) - Proceeds from cash sales of common stock, pursuant to exercise of options 30,333 - Cash payment on stock offering costs (106,479) - Repurchase of Company common stock - (4,735) Net cash used by financing activities (270,290) (102,219) Net decrease in cash and cash equivalents (1,311,875) (1,829,289)Cash and cash equivalents, beginning of year 2,990,744 4,820,033 Cash and cash equivalents, end of year $1,678,869 $2,990,744 Supplemental disclosures of cash flow information: Cash paid for interest $18,698 $38,752 The accompanying notes are an integral part of these consolidated financial statements. F-6Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 2010 and 20091.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 planned todistribute 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 to be other than temporary are recorded in the Consolidated Statements of Operations.Fair Value of Financial InstrumentsEffective July 1, 2008, the Company implemented ASC Topic 820, Fair Value Measurements and Disclosures. ASC Topic 820 defines fair value, establishesa framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fairvalue measurements. The Company elected to implement this Statement with the permitted one-year deferral permitted for nonfinancial assets andnonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis. This deferral applies to fixed assets,intangible asset impairment testing and initial recognition of asset retirement obligations for which fair value is used. The Company did not experience anysignificant impact to our consolidated financial statements when we implemented ASC Topic 820 for these assets and liabilities. F-7Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. ASC Topic 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on theobservability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputsare observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroboratedinputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant modifications to observable related market data or ourassumptions about pricing by market participants.There were no financial assets or liabilities at June 30, 2010.Also effective July 1, 2008, the Company utilized the guidance contained in ASC Topic 820 regarding the election of the fair value option, including thetiming of the election and specific items eligible for the fair value accounting. If the fair value option is elected then unrealized gains and losses are reportedin earnings at each subsequent reporting date. The Company elected not to measure any additional financial instruments or other items at fair value as ofJuly 1, 2008. Accordingly, the adoption of this did not impact our consolidated financial statements. The Company did elect to fair value its ARS rights thatwere received in October 2008 and exercised in January 2009.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 experience write-offs, collections and current credit conditions. Balances which remain outstanding after management hasused reasonable 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 treated as 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 there is an impairment in value which has occurred, and there is a need for any asset impairment write-down. F-8Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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). The valueof the shares issued was the estimated market price of the shares as of the date of issuance. Amortization of deferred financing costs, totaling $14,909 and$37,035 for the years ended June 30, 2010 and 2009, respectively, is included in financing and interest expense on the consolidated statements of operations.LicensesAmortization of licenses is computed using the straight-line method over the estimated economic useful lives of the assets. Amortization of licenses was$11,867 and $30,067 for the years ended June 30, 2010 and 2009, respectively. Based on the licenses recorded at June 30, 2010, and assuming nosubsequent impairment of the underlying assets, the annual amortization expense for each fiscal year ending June 30 is expected to be as follows: $11,721for 2011, $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 any relatedimpairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.Amortization of other assets was $16,861 and $11,315 for the years ended June 30, 2010 and 2009, respectively. Based on the patents and other intangibleassets recorded in other assets at June 30, 2010, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for eachfiscal year ending June 30 is expected to be as follows: $15,139 for 2011through 2015, and $142,629 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 September 2007, an asset retirement obligation of $473,096 was established representing the discounted cost of the Company’s estimate of the obligationsto remove any residual radioactive materials and all leasehold improvements at the end of the lease term at its new production facility. The estimate wasdeveloped by qualified production personnel and the general contractor of the new facility. The Company has reviewed the estimate and believes that theoriginal estimate continues to be applicable. F-9Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 the years ended June 30, 2010 and 2009, the asset retirement obligations changed as follows: 2010 2009 Beginning balance $553,471 $506,005 Accretion of discount 51,920 47,466 Ending balance $605,391 $553,471 Because the Company does not expect to incur any expenses related to its asset retirement obligations in fiscal year 2011, the entire balance as of June 30,2010 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.At June 30, 2009, the Company’s financial assets, composed of short-term investments, were reported at fair value using Level 1 inputs. There were nofinancial assets or liabilities at June 30, 2010.Revenue RecognitionThe Company recognizes revenue related to product sales when (i) persuasive evidence of an arrangement exists, (ii) shipment has occurred, (iii) the fee isfixed or determinable, and (iv) collectability is reasonably assured. Revenue for the fiscal years ended June 30, 2010 and 2009 was derived primarily 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. F-10Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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 $292,727 and $376,319 for the years ended June 30, 2010 and 2009,respectively. Marketing costs of $8,900 and $5,800 were included in prepaid expenses at June 30, 2010 and 2009 respectively.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 carry-forwards, 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. Management has determined that the Company, its subsidiary, and itspredecessors are subject to examination of their income tax filings in the United States and state jurisdictions for the 2005 through 2008 tax years. In theevent that the Company is assessed penalties and or interest, penalties will be charged to other operating expense and interest will be charged to interestexpense.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, including preferred stock, common stock warrants oroptions that are potentially convertible into common 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, 2010 and 2009 are as follows: 2010 2009 Preferred stock 59,065 59,065 Common stock warrants 3,165,768 3,216,644 Common stock options 2,274,706 2,708,166 Total potential dilutive securities 5,499,539 5,983,875 F-11Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 ASC 855, Subsequent Events. This Statement establishes the accounting for, and disclosure of, material eventsthat occur after the balance sheet date, but before the financial statements are issued. In general, these events will be recognized if the condition existed atthe date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognizedevents if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided inaccounting literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our financialstatements were issued—the filing time and date of our 2010 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 including theallowance for doubtful accounts receivable; net realizable value of the enriched barium inventory; the estimated useful lives used in calculating depreciationand amortization on the Company’s fixed assets, patents, trademarks and other assets; estimated amount and fair value of the asset retirement obligationrelated to the Company’s production facilities; and inputs used in the calculation of expense related to share-based compensation including volatility,estimated lives and forfeiture rates of options granted.. Accordingly, actual results could differ from those estimates and affect the amounts reported in thefinancial statements.Impact of Recently Issued Accounting PronouncementsOn July 1, 2009, the Company adopted new accounting provisions which establishes the FASB Accounting Standards Codification™ (ASC or theCodification) as the single official source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in thepreparation of financial statements in conformity with generally accepted accounting principles (GAAP) other than rules and interpretive releases issued bythe Securities and Exchange Commission. The Codification reorganized the literature and changed the naming mechanism by which topics arereferenced. The Codification became effective for interim and annual periods ending after September 15, 2009. The Company’s accounting policies andamounts presented in the financial statements were not impacted by this change.On July 1, 2009, the Company adopted new accounting provisions which were delayed from the effective date of fair value accounting for one year forcertain nonfinancial assets and nonfinancial liabilities, excluding those that are recognized or disclosed in financial statements at fair value on a recurringbasis (that is, at least annually). For purposes of applying the new provisions, nonfinancial assets and nonfinancial liabilities include all assets and liabilitiesother than those meeting the definition of a financial asset or a financial liability. The Company had previously adopted new standards for fair valueaccounting on July 1, 2008. The adoption of these new provisions did not have a material effect on the Company but will affect future calculations of assetretirement obligations and long-lived asset impairment. On July 1, 2009, the Company adopted new accounting provisions for business combinations and for non-controlling interests. The new businesscombination provisions require an acquirer to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in theacquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. In addition, the newprovisions require that a non-controlling interest in a subsidiary be reported as equity in the consolidated financial statements. The calculation of earningsper share will continue to be based on income amounts attributable to the parent. The adoption of these statements did not have a material effect on theCompany’s financial statements. F-12Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 January 2010, the Company adopted ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair ValueMeasurements,” which amends ASC 820. This new accounting guidance requires expanded fair value measurement disclosures in quarterly and annualfinancial statements. The new guidance clarifies existing disclosure requirements for the Level 2 and Level 3 fair value measurement. Additionally, the newguidance also requires details of significant transfers of assets between Level 1 and Level 2 fair value measurement categories, including the reasons for suchtransfers, as well as gross presentation of activity within the Level 3 fair value measurement category. ASU No. 2010-06 is effective for the Company onJanuary 1, 2010, except for the gross presentation of Level 3 activity, which is effective January 1, 2011. Adoption of ASU No. 2010-06 did not impact theresults of operations, financial position or cash flows of the Company.On February 24, 2010, the Company adopted ASU No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and DisclosureRequirements” which amends FASB ASC 855, “Subsequent Events.” According to this standard, SEC filers are no longer required to disclose the datethrough which subsequent events have been evaluated in originally issued and revised financial statements. ASU No. 2010-09 was effective immediately andthe Company adopted these new requirements on February 24, 2010.In April 2010, the Company adopted ASU 2010-12, “Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts.”After consultation with the FASB, the SEC stated that it “would not object to a registrant incorporating the effects of the Health Care and EducationReconciliation Act of 2010 when accounting for the Patient Protection and Affordable Care Act.” The Company does not expect the provisions of ASU 2010-12 to have a material impact on the financial position, results of operations or cash flows of the Company.3. Short-Term InvestmentsThe Company’s short-term investments consisted of the following at June 30, 2010 and 2009: 2010 2009 Certificates of deposit $– $1,679,820 Municipal debt securities – – $– $1,679,820 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, 2010 and 2009: 2010 2009 Raw materials $546,080 $609,932 Work in process 130,840 155,827 Finished goods 4,757 23,487 $681,677 $789,246 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, 2010 and 2009. F-13Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 2010 and 2009: 2010 2009 Prepaid insurance 6,757 30,625 Prepaid rent – 24,402 Other prepaid expenses 222,527 61,900 Other current assets 30,691 34,150 $259,975 $151,077 6. Fixed Assets Fixed assets consisted of the following at June 30, 2010 and 2009: 2010 2009 Production equipment $3,114,894 $3,089,793 Office equipment 169,890 169,890 Furniture and fixtures 148,265 148,265 Leasehold improvements (a) 4,643,965 4,643,965 Construction in progress – 3,359 8,077,014 8,055,272 Less accumulated depreciation (4,117,031) (3,163,788) $3,959,983 $4,891,484 (a)Balance includes asset retirement addition of $473,096 as of June 30, 2010 and 2009.Depreciation and amortization expense related to fixed assets totaled $953,243 and $1,206,935 for 2010 and 2009, respectively.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 ASC Topic 360, Property, Plant and Equipment. As there are no anticipated future revenues from the licenseand the Company cannot sell or transfer the license, it was determined that the entire value was impaired. Therefore, the Company recorded an impairmentcharge of $425,434 in December 2008 that is included in cost of product sales for the year ended June 30, 2009.8. Restricted CashThe 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 theone remaining three-year lease option period. The end date of the current lease including the one three-year renewal option is April 2016. Interest earned onthe CDs is rolled-over at the maturity of each CD and becomes part of the restricted cash balance. Interest earned and added to restricted cash during thefiscal year ended June 30, 2010 and 2009 was $1,539 and $2,763, respectively. These funds will be used to settle a portion of the Company’s remaining assetretirement obligations (Note 2). F-14Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 9. Other AssetsOther assets, net of accumulated amortization, consisted of the following at June 30, 2010 and 2009: 2010 2009 Deferred charges $54,270 $52,363 Patents and trademarks, net of accumulated amortization of $40,383 and $25,244 218,324 233,463 $272,594 $285,826 Deferred charges consist of prepaid legal fees for patents and trademarks which have not yet been obtained, and prepayments and deposits on fixed assets andcontracts. Amortization of patents and trademarks was $15,139 and $6,150 for the years ended June 30, 2010 and 2009, respectively.During fiscal year 2009, the Company performed a review of its prepaid legal fees for patents and trademarks that had not been obtained and were classifiedwithin other assets on the consolidated balance sheet. The focus of the review was on patent and trademark applications that the Company had beenpursuing in foreign countries. The Company decided to limit its foreign applications to Canada, Europe, and Russia, as well as the continued protection ofthe US patents and trademarks. This decision resulted in the write-off of $85,818 of other patent and trademark application fees relating to other countriesduring fiscal year 2009 that was included in research and development expenses.10. Notes PayableNotes payable consisted of the following at June 30, 2010 and 2009: 2010 2009 Benton-Franklin Economic Development District (BFEDD) note payable (a) $– $115,898 Hanford Area Economic Investment Fund Committee (HAEIFC) note payable (b) 179,995 221,562 179,995 337,460 Less amounts due within one year (49,445) (161,437) Amounts due after one year $130,550 $176,023 (a)The note payable to BFEDD, which was collateralized by substantially all of the Company’s assets, and guaranteed by certain shareholders, wasexecuted pursuant to a Development Loan Agreement. The note contained 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 was payable in monthly installments including interest at 8.0% per annum with a final balloon payment made inNovember 2009. (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 and employee bonuses. The note accrues interest at 9% and is payable in monthly installmentswith the final installment due in September 2013. At June 30, 2010, the Company was not in compliance with certain of the covenants. TheCompany has obtained a waiver from HAEIFC, relating to these covenants, through June 30, 2011. F-15Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. Principal maturities on notes payable as of June 30, 2010 are as follows:Year ending June 30, 2011 $49,445 2012 54,059 2013 54,154 2014 17,337 2015 – Thereafter – $179,995 11. Share-Based CompensationThe following table presents the share-based compensation expense recognized in accordance with ASC Topic 718, Stock Compensation, during the yearsended June 30, 2010 and 2009: Year ended June 30, 2010 2009 Cost of product sales $22,615 $17,619 Research and development 5,206 23,450 Sales and marketing expenses 74,745 148,407 General and administrative expenses 170,467 164,220 Total share-based compensation $273,033 $353,696 The total value of the stock options awards is expensed ratably over the vesting period of the employees receiving the awards. As of June 30, 2010, totalunrecognized compensation cost related to stock-based options and awards was $248,492 and the related weighted-average period over which it is expectedto be recognized is approximately 1.36 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.A summary of stock option information within the Company’s share-based compensation plans for the year ended June 30, 2010 is as follows: Shares Price (a) Life (b) Value (c) Outstanding at June 30, 2010 2,274,706 $1.96 7.21 $924,174 Vested and expected to vest at June 30, 2010 2,180,616 $2.02 7.14 $843,714 Vested and exercisable at June 30, 2010 1,730,961 $2.36 6.75 $512,760 F-16Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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)Weighted average exercise price per share.(b)Weighted average remaining contractual life.(c)Aggregate intrinsic value.The aggregate intrinsic value of options exercised during the years ended June 30, 2010 and 2009 was $109,700 and $0, respectively. The Company’scurrent policy 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, 2010 and 2009: Years ended June 30, 2010 2009 Weighted average fair value of options granted $1.26 $0.21 Key assumptions used in determining fair value: Weighted average risk-free interest rate 1.90% 2.55%Weighted average life of the option (in years) 4.78 4.66 Weighted average historical stock price volatility 168.79% 128.23%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.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, 2010 and 2009, there were no Series A preferred shares outstanding. F-17Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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 December 11, 2009, the Board of Directors declared a dividend on the Series B Preferred Stock of all outstanding and cumulative dividendsthrough December 31, 2009. The total dividends of $36,679 were paid as of December 31, 2009. The Company anticipates paying any cashdividends on the Series B Preferred Stock on or before December 31, 2010 if required to comply with the Form S-3 eligibility requirements. At June30, 2010, there were 59,065 Series B preferred shares outstanding and cumulative dividends in arrears were $5,316.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, 2010 and 2009.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: 2010 2009 Warrants Price (a) Warrants Price (a) Beginning balance outstanding 3,216,644 $5.55 3,245,082 $5.50 Cancelled/expired (56,876) 0.70 (28,438) 0.70 Granted 6,000 1.18 – – Ending balance outstanding 3,165,768 $5.62 3,216,644 $5.55 (a)Weighted average exercise price per share.On January 13, 2010, 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 and again extended the these warrants onJanuary 13, 2010 for an additional one-year period beyond their extended expiration dates of October 2009 to February 2010. Based on these extensions, thewarrants will now expire between October 2010 and February 2011. No other terms or conditions of the warrants were changed. The change in expirationdates affected outstanding warrants to purchase 2,102,142 shares of common stock. Of these outstanding warrants, there were warrants to purchase 12,500common shares held by the Chairman and CEO of the Company. Prior to the original extension, warrants to purchase 1,286,219 shares of common stock hadpassed their original expiration dates. F-18Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 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 ASC Topic 815, Derivatives and Hedging, these warrants were equity instruments rather than derivatives.On June 8, 2010, the Board of Directors issued 6,000 warrants to Schultz Public Relations at an exercise price of $1.18 and a five year term. These warrantswere issued for services rendered by Schultz Public Relations at an exercise price equal to the closing price of the Company's common stock on the grantdate.The following table summarizes additional information about the Company’s common warrants outstanding as of June 30, 2010:Number of Warrants Range of Exercise Prices Expiration Date53,000 $6.00 October 2010162,500 $6.00 November 2010909,469 $6.00 December 2010700,250 $6.00 January 2011276,923 $6.00 to $6.50 February 2011826,100 $5.00 March 2011206,526 $4.40 March 20126,000 $1.18 June 201525,000 $2.00 July 2015 3,165,768 Common Stock OptionsA summary of the Company’s stock option activity and related information for the years ended June 30, 2010 and 2009 is as follows: 2010 2009 Shares Price (a) Shares Price (a) Beginning balance outstanding 2,708,166 $2.08 2,803,393 $2.62 Granted (b) 290,000 1.34 993,900 0.31 Cancelled (616,794) 2.48 (1,089,127) 1.86 Exercised 106,666 0.28 – .– Ending balance outstanding 2,274,706 $1.96 2,708,166 $2.08 Exercisable at end of year 1,730,961 $2.36 1,837,018 $2.74 (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. F-19Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 following table summarizes additional information about the Company’s stock options outstanding as of June 30, 2010: Options Outstanding Options Exercisable Range of Exercise Prices Shares Price (a) Life (b) Shares Price (a) $0.26 670,600 $0.26 8.91 yrs 356,856 $0.26 $0.65 to $0.84 150,000 0.76 7.87 yrs 103,333 0.75 $1.00 to $1.43 372,802 1.33 7.76 yrs 189,486 1.30 $1.96 to $2.00 300,000 2.00 5.08 yrs 300,000 2.00 $3.10 to $3.11 349,534 3.11 6.16 yrs 349,534 3.11 $3.50 to $3.85 150,000 3.70 6.00 yrs 150,000 3.70 $4.14 to $4.15 128,270 4.15 5.65 yrs 128,270 4.15 $4.40 33,500 4.40 6.68 yrs 33,500 4.40 $5.50 to $6.50 120,000 6.29 5.71 yrs 120,000 6.29 Total options 2,274,706 1,730,961 (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 no shares of its common stock during the year ended June 30, 2010 and 8,200 shares of its common stock for $4,735 during the year ended June30, 2009.14. Income TaxesThe Company recorded no income tax provision or benefit for the years ended June 30, 2010 and 2009.The Company had a net deferred tax asset of approximately $12.6 and $11.3 million as of June 30, 2010 and 2009, respectively. The deferred tax asset hasarisen principally from net operating loss carry-forwards, 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, 2010 and 2009 has been established.At June 30, 2010, the Company had tax basis net operating loss carry-forwards of approximately $32.4 million available to offset future regular taxableincome. These net operating loss carry-forwards expire through 2030.15. 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. F-20Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 December 2008 and December 2009, the Company negotiated contracts to purchase Cs-131 from UralDial. Under the contracts, the Company willpurchase Cs-131 from UralDial rather than purchasing Cs-131 directly from the two suppliers in Russia that the Company had purchased frompreviously. UralDial will provide Cs-131 from at least two Russian facilities subject to scheduled maintenance shutdowns of the facilities from time totime. The recent contract entered into in December 2009 continues to stabilize the supply arrangements for the 12 months beginning in December 2009 andending in December 2010.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. There was no revenue from this agreement in the years ended June 30, 2009 or June 30, 2010.17. 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. In fiscal year 2010,this agreement generated approximately $22,000 in sales.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.During fiscal years 2010 and 2009, the Company recorded royalty expenses of $23,041 and $20,063, 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. F-21Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 Lease AgreementsThe Company leases office and laboratory space and production and office equipment under non-cancelable 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 was renewed in May 2010 for occupancy of 15,932 square feet of manufacturing and office space with a three year termexpiring on April 30, 2013, plus an option to renew for one additional three-year term, and monthly rent of approximately $23,100, subject to annualincreases based on the Consumer Price Index, plus monthly janitorial expenses of approximately $400. Due to the severe economic penalty associated withnot exercising the one lease renewal option remaining, the Company currently intends to exercise the one remaining three-year renewal option at theappropriate time in the lease. The amount of space returned to the landlord during the lease renewal process in fiscal year 2010 was sufficient to offset theannual cost of living increase prescribed in the lease agreement.Future minimum lease payments under operating leases including the one three-year renewal of the APEL lease, which the Company intends to exercise, areas follows:Year ending June 30, 2011 $296,157 2012 284,915 2013 282,390 2014 282,390 2015 282,390 Thereafter 235,324 $1,663,566 Rental expense amounted to $306,212 and $325,496 for the years ended June 30, 2010 and 2009, 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 eliminated 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 profit percentage. Noagreement has been reached on these terms and there is no assurance that the parties will consummate an agreement pursuant to such terms. The Companydoes not currently intend to use this technology and recorded an impairment charge on the remaining book value of the license in fiscal year 2009. F-22Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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. 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, 2010, cash balances uninsured by the FDIC totaled approximately $1.4 million.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 three customers whose sales were greater than 10% for the yearended June 30, 2010 and two customers whose sales were greater than 10% for the year ended 2009. These customers represented a combined 33.1% and35.0% of the Company’s total revenues for the years ended June 30, 2010 and 2009, respectively. These same customers accounted for a combined 42.3%and 39.6% of the Company’s net accounts receivable balance at June 30, 2010 and 2009, 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.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-23Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 28, 2010ISORAY, INC., a Minnesota corporation By/s/ Dwight BabcockDwight Babcock, Chief Executive Officer and Chairman By/s/ Brien L. RagleBrien L. Ragle, Controller, Principal Financial andAccounting 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 28, 2010/s/ Dwight BabcockDwight Babcock, Chief Executive Officer and Chairman /s/ Brien L. RagleBrien L. Ragle, Controller, Principal Financial and Accounting Officer /s/ Robert KauffmanRobert Kauffman, Director and Vice-Chairman /s/ Thomas LaVoyThomas LaVoy, Director /s/ Albert SmithAlbert Smith, Director 63 Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 28, 2010Powered 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 REGISTRANT IsoRay Medical, Inc., a Delaware corporation IsoRay International LLC, a Washington limited liability company Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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 28, 2010Powered 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, certify that: 1. I have reviewed this annual report on Form 10-K of IsoRay, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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 28, 2010 /s/ Dwight BabcockDwight BabcockChief Executive Officer Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, Brien L Ragle, certify that: 1. I have reviewed this annual report on Form 10-K of IsoRay, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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 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 28, 2010/s/ Brien L. RagleBrien L. RaglePrincipal Financial and Accounting Officer Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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, 2010 (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 28, 2010 /s/ Dwight BabcockDwight BabcockChief Executive Officer(Principal Executive Officer)Dated: September 28, 2010/s/ Brien L. RagleBrien l. ragleController(Principal Financial and Accounting Officer) Source: IsoRay, Inc., 10-K, September 28, 2010Powered 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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