IsoRay, Inc.
Annual Report 2011

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KIsoRay, Inc. - ISRFiled: September 28, 2011 (period: June 30, 2011)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 Commission Washington, D.C. 20549 FORM 10-K xxAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended June 30, 2011or ¨¨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 41-1458152 (State of incorporation) (I.R.S. Employer Identification No.) 350 Hills St., Suite 106 99354Richland, Washington (Zip code) (Address of principal executive offices) 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:Class Outstanding as of September 20, 2011Common stock, $0.001 par value 26,493,118Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ 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 ¨ 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 ¨ 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 ¨ 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. ¨ 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 ¨ Accelerated filer ¨Non-accelerated filer ¨Smaller reporting company xIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ¨ 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 – $28,697,642 as of December 31, 2010. Documents incorporated by reference – none. Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 PageITEM 1 – BUSINESS1ITEM 1A – RISK FACTORS24ITEM 1B – UNRESOLVED STAFF COMMENTS32ITEM 2 – PROPERTIES32ITEM 3 – LEGAL PROCEEDINGS33ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES33ITEM 6 – SELECTED FINANCIAL DATA36ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS36ITEM 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 DISCLOSURE48ITEM 9A – CONTROLS AND PROCEDURES48ITEM 9B – OTHER INFORMATION50ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE50ITEM 11 – EXECUTIVE COMPENSATION54ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS56ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE57ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES57ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES58 SIGNATURES62 Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 24 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.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 atwww.isoray.com. Information on this website is not a part of this Report. 1Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Business OperationsOverviewIn 2003, IsoRay obtained clearance from the FDA for treatment for all solid tumor applications using Cesium-131. Such applications include prostate cancer;ocular melanoma; head, neck and lung tumors; breast cancer; liver cancer; brain cancer; colorectal cancer; gynecological cancer; esophageal cancer; andpancreatic cancer. The seed may be used in surface, interstitial and intracavity applications for tumors with known radio sensitivity. Management believesits Cs-131 technology will allow it to become a leader in the brachytherapy market. Management believes that the IsoRay Proxcelan Cesium-131brachytherapy seed represents the first major advancement in brachytherapy 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 expanded thenumber of areas of the body in which the Proxcelan Cs-131 seeds were being utilized for treatment by adding lung cancer in August 2009, colorectal cancerin October 2009, and chest wall cancer in December 2009. During the fiscal year ended June 30, 2011, the Company continued the expansion in the numberof areas of the body in which the Proxcelan Cs-131 seeds were being utilized through the addition of the treatment of brain cancer in September 2010 and thetreatment of gynecological cancer in December 2010. The Company continues to expand the application of the Proxcelan Cesium-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 Cesium-131 brachytherapy seeds themselves have been cleared for treatment in all organs since 2003, this510(k) allows Cesium-131 seeds to be delivered in a convenient and sterile format that can be implanted without additional seed loading by the facility. The510(k) also clears the application of braided strands onto a bioabsorbable mesh matrix to further facilitate the implant procedure. In March 2011, theCompany received clearance to commercially deliver Proxcelan™ Cesium-131 brachytherapy seeds that are preloaded into bioabsorbable braided strandsinto Europe. This clearance permits the product to be commercially distributed for treatment of lung, head and neck tumors as well as tumors in other organsin Europe.In August 2011, IsoRay Medical received clearance from the FDA for its premarket notification (510(k)) for the GliaSite® radiation therapy system. TheGliaSite® radiation therapy system is the only FDA-cleared balloon catheter device used in the treatment of brain cancer. The product possesses anestablished reimbursement rate for application in both in-patient and out-patient settings. In order to receive this clearance, the Company has redevelopedthis device in a configuration which is equivalent to, but possesses certain modifications to improve the performance and manufacturability of, the originaldevice which received FDA clearance when manufactured by Hologic Inc., from which the Company licenses the intellectual property underlying theGliaSite® radiation therapy system.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 thephysician. When brachytherapy is combined with external beam radiation or intensity modulated radiation therapy (dual therapy), then approximately 40 to80 seeds are 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 as 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, 2011Powered 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 EnergyCesium-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 Cesium-131 implants are able to deliver the required dose while maintaining homogeneity across the gland itself and potentiallyreducing unnecessary dose to critical structures such as the urethra and rectum. (Prestidge B.R., Bice W.S., Jurkovic I., et al. Cesium-131 PermanentProstate Brachytherapy: An Initial Report. Int. J. Radiation Oncology Biol. Phys. 2005: 63 (1) 5336-5337.)Shorter Half-LifeCesium-131 has the shortest half-life of any commonly used prostate brachytherapy isotope at 9.7 days. Cesium-131 delivers 90% of the prescribeddose in just 33 days compared to 58 days for Pd-103 and 204 days for I-125. By far the most commonly reported side effects of prostatebrachytherapy are irritative and obstructive symptoms in the acute phase post-implant (Neill B, et al. The Nature and Extent of Urinary Morbidity inRelation to Prostate Brachytherapy Urethral Dosimetry. Brachytherapy 2007:6(3)173-9.). The short half-life of Cesium-131 reduces the duration oftime during which the patient experiences the irritating effects of the radiation.Improved Coverage of the ProstatePermanent prostate brachytherapy utilizing Cesium-131 seeds allows for better dose homogeneity and sparing of the urethra and rectum whileproviding comparable prostate coverage compared to I-125 or Pd-103 seeds with comparable or fewer seeds and needles. Several studies havedemonstrated dosimetric advantages of Cesium-131 over the other commonly used prostate brachytherapy isotopes. (Musmacher JS, et al.Dosimetric Comparison of Cesium-131 and Palladium-103 for Permanent Prostate Brachytherapy. Int. J. Radiation Oncology Biol. Phys.2007:69(3)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. 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.) (Yang R, et al. Dosimetric Comparison of Permanent Prostate Brachytherapy Plans Utilizing Cs-131, I-125 andPd-103 Seeds. Medical Physics 2008:35(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 EarlyExperience. 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 131Radioisotope? Int. J. Radiation Oncology Biol. Phys. 2008:72(S1)S317.) Recent studies with longer follow-up periods continue to support theresolution of urinary and rectal side effects in a rapid fashion following treatment with Cesium-131. (Jacobs B, et al. Acute lower urinary tractsymptoms after prostate brachytherapy with Cesium-131. Urology. 2010:76(5)1143.) 3Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Cesium-131 is what is known as the "biological effective dose" or BED. BED is a way for health careproviders to predict how an isotope will perform against cancers exhibiting different characteristics – for instance, slow versus fast growing tumors. Studies have shown Cesium-131 is able to deliver a higher BED across a wide range of tumor types than either I-125 or Pd-103. Although prostatecancer is typically viewed as a slow growing cancer it can present with aggressive features. Cesium-131's higher BED may be particularly beneficialin such situations. (Armpilia CI, et al. The Determination of Radiobiologically Optimized Half-lives for Radionuclides Used in PermanentBrachytherapy Implants. Int. J. Radiation Oncology Biol. Phys. 2003; 55 (2): 378-385.)PSA ControlInvestigators tracking PSA in both single arm and randomized trials have concluded Cesium-131's PSA response rates show similar early tumorcontrol to I-125, long considered the gold standard in permanent seed brachytherapy. Longitudinal PSA measurements from ongoing Cs-131clinical series demonstrate trends very similar to those seen with other isotopes. (Moran B, et. al. Cesium-131 Prostate Brachytherapy" An EarlyExperience. Brachytherapy. 2007:6(2)80.) (Bice W, et. al. Recommendations for permanent prostate brachytherapy with 131Cs: a consensus reportfrom the Cesium Advisory Group. Brachytherapy 2008:7(4)290-296.) (Platta CS, et al. Early Outcomes of Prostate Seed Implants with 131Cs:Toxicity and Initial PSA Dynamics from a Single Institution. Int. J. Radiation Oncology Biol. Phys. 2008:72(S1)S323-4.)Studies with longer follow-up periods published in the previous fiscal year report very high rates of PSA control post-treatment with Cesium-131 forprostate cancer: 95% at four years (Moran B, et al. Cesium-131 Prostate Brachytherapy: PSA Outcome. Int. J. Radiation Oncology Biol Phys.2010:78(3S1) S375.) and 98% at five years. (Prestidge B. et al. Five-year biochemical control following Cesium-131 Permanent ProstateBrachytherapy in a Multi-Institutional Trial. Brachytherapy 10(3S1)S27.)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 prostatecancer. It is the most common form of cancer in men after skin cancer, and the second leading cause of cancer deaths in men following the lung and bronchuscancers that together account for 30% of deaths from cancer in men in the United States. The American Cancer Society estimates there will be about 248,890new cases of prostate cancer diagnosed and an estimated 33,720 deaths associated with the disease in the United States in 2011. Because of early detectiontechniques (e.g., screening for prostate specific antigen, or PSA), approximately nine out of ten prostate cancers are found in the local and regional stages(local means it is still confined to the prostate; regional means it has spread from the prostate to nearby areas, but not 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 what is known and what is not known about the risks andpossible benefits of prostate cancer screening. Men should not be screened unless they receive this information. 4Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 talk about screening should take place at age 50 for men who are at average risk of prostate cancer. The talk should take place starting at age 45 for menat high risk of developing prostate cancer. This includes African American men and men who have a first-degree relative (father, brother or son) diagnosedwith prostate cancer at an early age (younger than age 65). The talk should take place at age 40 for men at even higher risk (those with several first-degreerelatives who had prostate cancer at an early age). If, after this talk, a man is not able to decide whether testing is right for him, the screening decision can bemade by the health provider, who should take into account the patient's overall health and values. Because prostate cancer grows slowly, those men withoutsymptoms of prostate cancer who are unlikely to live 10 more years should not be offered testing since they are not likely to benefit.Incidence of Lung CancerAn estimated 221,130 new cases of lung cancer are expected in 2011, accounting for 14% 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 156,940 deaths, accounting for about 27% of all cancer deaths,are expected to occur in 2011. (American Cancer Society 2011) This exceeds the combined number of deaths from the next three leading causes of cancer(breast, prostate, and colon cancers). It also accounts for 6% of all deaths from any source in the United States. (Cancer Management: A MultidisciplinaryApproach, 11th ed. (2008). Richard Pazdur, 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. Tobacco smoke causes nearly 9 out of 10 cases of lung cancer. The longer a personhas been smoking and the more packs a day smoked, the greater the risk. Other risk factors include occupational or environmental exposure to secondhandsmoke, radon, asbestos (particularly among smokers), certain metals (chromium, cadmium, arsenic), some organic chemicals, radiation, air pollution, and ahistory of tuberculosis. Genetic susceptibility plays a contributing role in the development of lung cancer, especially in those who develop the disease at ayounger age. (American Cancer Society, 2011)The 5-year survival rate is 49% for cases detected when the disease is still localized. (American Cancer Society, 2011)Incidence of Head and Neck CancersAn estimated 52,140 new cases of head and neck cancer are expected in 2011 including 25,820 cases of oral cavity cancer, 12,740 cases of laryngeal cancer,and 13,580 cases of pharyngeal cancer diagnosed in the United States. (American Cancer Society, 2011)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,2011)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, 2011)Incidence of Ocular MelanomaThe American Cancer Society estimates that 2,570 new cases of cancers of the eye and orbit (primarily melanoma) will be diagnosed in 2011 and about 240deaths from cancer of the eye will occur in 2011 in the United States. Primary eye cancer can occur at any age but most occur in people over 50 years ofage. (American Cancer Society, 2011)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, 2011) 5Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Colorectal Cancer An estimated 141,210 new cases of colorectal cancer are expected in the United States in 2011 including 101,340 new cases of colon cancer and 39,870 newcases of rectal cancer. (American Cancer Society, 2011)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.Risk factors related to colorectal cancers are classified in two groups, those that patients cannot control and those that patients can control.Known risk factors that patients cannot control include age (9 out of 10 people with colorectal cancer are older than 50), personal history of colorectal polypsor colorectal cancer, personal history of inflammatory bowel disease, family history of colorectal cancer, certain family syndromes and racial or ethnicbackground. (American Cancer Society, 2011)Known risk factors that are linked to things patients can control include certain types of diets (those high in red and processed meats can increase risk while adiet high in fruits and vegetables have been linked to a lower risk), lack of exercise, being overweight, smoking, alcohol use and Type 2 diabetes. (AmericanCancer Society, 2011)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. (American Cancer Society, 2011)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.Prostatectomy Surgery Options. Radical prostatectomy is surgery that is done to cure prostate cancer. It is used most often if it looks like the cancer has notspread outside of the gland. In this operation, a surgeon will remove the entire prostate gland plus some of the tissue around it, including the seminal vesicles.According to a study published in the Journal of the American Medical Association in January 2000, approximately 60% of men who had a RP reportederectile 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 and robotic prostatectomy surgeries are currently being used more frequently in order to minimize the nerve damage thatleads to impotence and incontinence, but these techniques require a high degree of surgical skill. (American Cancer Society, 2011) 6Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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 seven to nine weeks. Today, standard EBRT is usedmuch less often than in the past. Side effects of EBRT can include bowel problems, bladder problems, incontinence, impotence, fatigue, lymphedema, andurethral stricture. (American Cancer Society, 2011)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 is generally more expensive than other common treatment modalities. (American CancerSociety, 2011)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. (American Cancer Society, 2011) Management estimates that at least 30% of all prostate implants are now dualtherapy 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. (American Cancer Society, 2011)Cryosurgery. Cryosurgery is sometimes used to treat prostate cancer by freezing the cells with cold metal probes. It is used only for prostate cancer that hasnot spread, but may not be a good option for men with large prostate glands. The probes are placed through cuts (incisions) between the anus and thescrotum. Cold gases are then passed through the probes, which creates ice balls that destroy the prostate gland. There are benefits and drawbacks tocryosurgery. Because it is less invasive than radical surgery, there is less loss of blood, a shorter hospital stay, shorter recovery time, and less pain. Butfreezing can damage nerves near the prostate and cause impotence and incontinence. As this is a newer treatment option, compared to surgery or radiationtreatment, doctors know much less about how well this method of treatment works in the long run. For this reason, most doctors do not include cryosurgeryamong the first options they recommend for treating prostate cancer. (American Cancer Society, 2011)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. (American Cancer Society, 2011)Watchful Waiting and Active Surveillance. Because prostate cancer often grows very slowly, some men (especially those who are older or who have othermajor health problems) may never need treatment for their cancer. Instead, their doctor may suggest approaches called watchful waiting (also called expectantmanagement or active surveillance). Until recently, watchful waiting meant waiting until the cancer was causing symptoms before starting any treatment.Now, it is more common to watch the patient closely with a combination of regular PSA tests, rectal exams, and ultrasounds to see if the cancer is growing. Ifthe cancer does seem to be growing or getting worse, the doctor may suggest starting treatment. 7Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Right now, not all experts agree how often testing should occur for active surveillance. There is also debate about when is the best time to start treatment.Still, some early studies have shown that men who choose active surveillance and those who go on to be treated do as well as those who decide to starttreatment right away. Either of these methods may be a good choice if the cancer is not causing any symptoms, is likely to grow slowly, and is small andcontained in one place in the prostate. It is less often a choice if the patient is young, healthy, and has a cancer that is growing fast. Some men choosewatchful waiting because, in their view, the side effects of strong treatment which outweighs the benefits. Others are willing to accept the possible side effectsof active treatments in order to try to remove or destroy the cancer. (American Cancer Society, 2011)Comparing Cesium-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 Cesium-131. In fact, it appears that Cesium-131 offers improved clinical outcomes over I-125 and Pd-103, given its shorter half-life andhigher energy.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).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 Cesium-131, with the shortest available half-life for a low-dose rate therapy isotope,should result in a quicker resolution of these irritative symptoms based on the shorter time interval over which normal tissue receives radiation from theimplanted sources.Preliminary data drawn from several clinical studies suggest that patients treated with Cs-131 do in fact experience a faster resolution of these side effects incomparison to similar studies published for other isotopes (Defoe SG, et al, "Is there a decreased duration of acute urinary and bowel symptoms after prostatebrachytherapy with Cesium 131 isotope?", International Journal of Radiation Oncology Biology Physics, Volume 72 (Supplement 1), S317; Jones A, et al,"IPSS Trends for Cs-131 Permanent Prostate Brachytherapy" Brachytherapy, Volume 7, Issue 2, 194; Platta CS, et al, "Early Outcomes of Prostate SeedImplants with 131Cs: Toxicity and Initial PSA Dynamics from a Single Institution" International Journal of Radiation Oncology Biology Physics, Volume72 (Supplement 1), 2008, S323-4). 8Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Cesium-131 monotherapy trial for the treatment of prostate cancer was fully enrolled in February 2007. The trial was a 100 patient multi-institutionalstudy that sought to (1) document the dosimetric characteristics of Cesium-131, (2) to summarize the side effect profile of Cesium-131 treatment, and (3) totrack biochemical (PSA) results in patients following Cesium-131 therapy. The investigators responsible for conducting the study concluded based on the results of the monotherapy trial that Cesium-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:1. Patient reported irritative urinary symptoms (IPSS Scores) were mild to moderate with relatively rapid resolution within 4-6 months. The figure belowdepicts the symptom scores in the Cesium-131 study as compared to published reports of patients who underwent I-125 brachytherapy. Especially notable isthe steep drop in the Cesium-131 group scores (purple line) as opposed to the more gradual drop in the I-125 group scores (green and blue lines). 2. 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.).3. An abstract detailing the outcomes of the 100 patient multi-institutional Cesium-131 study was prepared for the 32nd Annual Meeting of theAmerican Brachytherapy Society (April 2011), Notably, the PSA control rate at 5 years was reported as 98%. No other study of brachytherapy utilizing thecompeting isotopes Iodine-125 and Palladium-103 has reported five year rates as high as 98%. 9Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Cesium-131, Pd-103, and I-125. Thesecomparative studies have shown a clear advantage to Cesium-131 from a dosimetric point-of-view, in terms of successful gland coverage obtained (typicallymeasured by D90) while keeping unnecessary gland over-dosing (typically measured by V150 or V200) to a minimum (Musmacher JS, et al, "DosimetricComparison of Cesium-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? ADosimetric View Point." International Journal of Radiation Oncology Biology Physics, Volume 69 (Supplement 3), 2007, S677-8; Sutlief S and WallnerK, "Cs-131 Prostate Brachytherapy and Treatment Plan Parameters." Medical Physics, Volume 34, 2007, 2431; Kurtzman S, "Dosimetric Evaluation ofPermanent Prostate Brachytherapy Using Cs-131 Sources" International Journal of Radiation Oncology Biology Physics, Volume 66 (Supplement 3), S395). The monotherapy Cesium-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 Cesium-131.The prospective randomized monotherapy trial headed by Dr. Brian Moran of The Chicago Prostate Cancer Center issued four year PSA results at the 32ndAnnual Meeting of the American Brachytherapy Society (April 2011). Dr. Moran's study revealed a 95% PSA control rate at four years. When consideringrisk grouping, the four year results were 98% for low risk, 91% for intermediate risk, and 88% for high risk patients. (Moran B, et al. Cesium-131 ProstateBrachytherapy:PSA outcome. International Journal of Radiation Oncology Biology Physics 2010, 78(2 Suppl):S375.)The Company has also commissioned a dual therapy protocol. This multi-institutional trial observes the dosimetric characteristics of Cesium-131 and healthrelated quality of life (HRQOL) results following combined Cesium-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.A second combined therapy protocol incorporating a slightly attenuated dose of Cesium-131 in concert with intensity modulated radiation therapy (IMRT)has now opened and is enrolling intermediate and high risk patients. The investigators for this study are hoping to evaluate the hypothesis that a successfulcombination therapy can be developed that controls locally advanced prostate cancer while providing a very low rate of urinary side effects.During the Summer of 2011, the Company launched an online data collection system that enables standardized data collection for the Company's protocolsproviding participating institutions and physicians with a means to share data and increase collaboration.Lung Cancer Treatment OptionsLung cancer has historically been treated utilizing surgery, radiation therapy, other local treatments, chemotherapy and targeted therapy. More than one kindof treatment may be used, depending on the stage of the patient's cancer and other factors. (American Cancer Society, 2011)1. Surgery generally involves removing a portion of the lung (lobectomy, segmentectomy, and wedge resection), the entire lung (pneumonectomy) ora sleeve resection for some cancers in the large airways in the lungs. The type of operation depends on the size and place of the tumor and on how wellthe patient's lungs are working.2. Radiation treatment is the use of high-energy rays to kill cancer cells or shrink tumors. The radiation may come from outside the body (externalradiation) or from radioactive seeds placed into or next to the tumor (brachytherapy).· External Beam Radiation Therapy (EBRT) is focused from outside the body on the cancer. This is the type of radiation most often used totreat a primary lung cancer or its spread to other organs. Most often, radiation treatments are given 5 days a week for 4 to 7 weeks. Newer typesof this type of radiation are called 3D-CRT, IMRT, stereotactic body radiation therapy and another new type of radiation called Gamma Knife®. 10Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 (internal radiation therapy) is used most often to shrink tumors to relieve symptoms caused by lung cancer that is blockingan airway and is increasingly being used as part of a larger treatment plan to attempt to cure the cancer. For this type of treatment, the doctorplaces a small source of radioactive material (often in the form of seeds or pellets) right into the cancer or into the airway next to the cancer. Thisis usually done through a bronchoscope, and is increasingly done during surgery. The pellets are usually removed after a short time.Increasingly, small radioactive seeds are left in place, and the radiation gets weaker as the radiation source decays.3. Chemotherapy may be used either as a primary treatment or a secondary treatment depending on the type and stage of the lung cancer.Chemotherapy ("chemo") is treatment with anti-cancer drugs that are put into a vein or taken by mouth. These drugs enter the bloodstream and gothroughout the body, making this treatment useful for cancer that has spread (metastasized) to organs beyond the lung. Doctors give chemo in cycles,with each round of treatment followed by a break to allow the body time to recover. Chemo cycles generally last about 3 to 4 weeks, and the treatmentsmay involve 4 to 6 cycles. Chemotherapy may be used as a main treatment for more advanced cancers or for some people who are not healthy enough forsurgery, to try to shrink a tumor before surgery, or after surgery to try to kill any cancer cells that may have been left behind.The Company believes that Cesium-131, with its shorter half-life and high energy (faster rate of decay), is better suited for treating lung cancer than either I-125 or Pd-103. The bioabsorbable mesh used in this procedure to apply the Proxcelan Cesium-131 brachytherapy seeds generally dissolves after about 45days. Cesium-131 delivers 90% of its dose in 33 days and is therefore well-suited to use with bioabsorbable mesh. A report awaiting publication detailsaspects related to technical details applicable to Cesium-131 implants (Parashar, et al. Cesium-131 Permanent Seed Brachytherapy: Dosimetric Evaluationand Radiation Exposure to Surgeons, Radiation Oncology, and Staff. Brachytherapy 2011: in press).The Company has also initiated an anticipated 100 patient study of Cesium-131 brachytherapy in the treatment of early stage non-small cell lung cancer("NSCLC"). In this study, patients who are poor candidates for large surgical resections undergo a limited ("sub-lobar") resection followed by Cesium-131mesh brachytherapy. This study is based upon strong evidence collected to date suggesting that Iodine-125 mesh implants utilized in a similar way assist thelimited surgical resection in achieving high rates of local cancer control. (see Colonias, et al. Mature Follow-up for High Risk Stage I Non-Small Cell LungCarcinoma Treated with Sub-lobar Resection and Intra-operative Iodine-125 Brachytherapy. International Journal of Radiation Oncology Biology Physics2011, 79(1), 105.)Head and Neck Cancer Treatment OptionsMost head and neck cancers historically have 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)). (American Cancer Society, 2011)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 chemotherapy. (American CancerSociety, 2011)Management believes Proxcelan Cesium-131 continues to represent an improved approach to brachytherapy treatment of specific 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, 2011) 11Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 has become the most commonly used radiation treatment for most eye melanomas. Studies have shown that in many cases it is as effective assurgery (enucleation). Brachytherapy using Cesium-131, I-125, or Pd-103 is done by placing the seeds in a plaque (shaped like a small cap) that is attachedto the eyeball with minute stitches in a procedure that lasts 1 to 2 hours and are usually kept in place for 4 to 7 days. The patient generally stays in thehospital until the plaque is removed from the eye following a procedure that takes less than 1 hour. Brachytherapy cures approximately 9 out of 10 smalltumors and can preserve the vision of some patients. (American Cancer Society, 2011)Colorectal Treatment OptionsColorectal cancer has historically been treated using surgery, radiation therapy, chemotherapy, immunotherapy and other targeted therapies. (AmericanCancer Society, 2011)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, 2011)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, 2011)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 2012 include:Continue to introduce the Proxcelan Cesium-131 brachytherapy seed into the U.S. market for prostate cancer. Prostate cancer treatment represents theoriginal and core business for the Company's Proxcelan Cesium-131 product. With five year data relating to biochemical (PSA) control of prostate cancernow presented to the prostate cancer field, IsoRay intends to continue to seek to increase the number of centers making the use of Proxcelan using its directsales force. Because intermediate- to long-term follow-up data is required to convince clinicians and patients to consider any particular therapy for localizedprostate cancer, the availability of five-year data with Proxcelan in the treatment of prostate cancer represents a significant milestone. IsoRay hopes tocapture much of the incremental market growth if and when seed implant brachytherapy recovers market share from other treatments and to take market sharefrom existing competitors.Return GliaSite® radiation therapy system to market in the United States and European Union (EU). In June of 2010, the Company acquired exclusiveworldwide distribution rights to the GliaSite® radiation therapy system, the only FDA-cleared balloon catheter device used in the treatment of brain cancer,from Hologic Inc. The product possesses an established reimbursement rate for both in-patient and out-patient settings. The Company has developed adevice configuration equivalent to the original FDA-cleared device for which it submitted a 510(k). The FDA has notified the Company that the 510(k)submission has received clearance. The Company obtained the rights to manufacture the Iotrex solution (Iodine -125) for use in the GliaSite® radiationtherapy system. The Company plans to contact previous users of the product and leverage significant existing clinical data related to the safety andeffectiveness of the GliaSite system in order to restore GliaSite as a strong treatment option for patients suffering from primary and metastatic brain cancers. 12Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Increase utilization of Cesium-131 in treatment of other solid tumor applications such as head and neck, lung, chest wall, and colorectal cancers. IsoRayMedical has clearance from the FDA for its premarket notification, (510(k)) for Proxcelan™ brachytherapy seeds that are preloaded into bioabsorbablebraided strands and bioabsorbable braided strands attached to bioabsorbable mesh during fiscal year 2011. This order cleared the product for commercialdistribution for treatment of lung and head and neck tumors as well as tumors in other organs. IsoRay has successfully launched an initiative to market itsProxcelan™ source in bioabsorbable carrier material as a lung cancer treatment. IsoRay will continue to explore licenses or joint ventures with othercompanies to develop the appropriate technologies and therapeutic delivery systems for treatment of other solid tumors such as breast, liver, pancreas, andbrain cancers.Support clinical research and sustained product development. The Company plans to structure and support clinical studies on the therapeutic benefits ofCesium-131 for the treatment of solid tumors and other patient benefits. We are and will continue to support clinical studies with several leading radiationoncologists to clinically document patient outcomes, provide support for our product claims, and compare the performance of our seeds to competingseeds. IsoRay plans to sustain long-term growth by implementing research and development programs with leading medical institutions in the U.S. and othercountries to identify and develop other applications for IsoRay's core radioisotope technology. The Company recently deployed a secure, regulatoryenvironment compliant, online information system capable of large usable databases to participating investigators.Over fiscal year 2011, three presentations were accepted by the American Brachytherapy Society describing Cesium-131 treatment of prostate and eyecancers. Five presentations were accepted by the annual meeting of the American Society for Radiation Oncology (ASTRO), and six publications wereabstracted to the MEDLINE database of citations of the medical literature that reported patients treated with Cesium-131 for prostate cancer. The Companywill continue to drive to increase the number of reports made to society meetings and the peer reviewed literature in order to continue to enhance thestanding of its products in the scientific arena.Management plans to continue to build on an increasing number of studies related to Cesium-131 therapy in the management of cancer that were publishedin the medical literature and presented at relevant oncology society meetings in fiscal year 2011. The publication and presentation of speculative and real-world data contribute to the acceptability of Cesium-131 in the oncologic marketplace, and discussion in the medico-scientific community of establishedand novel Cesium-131 applications is considered a prerequisite to expansion into untapped markets.Chief among development initiatives being planned for fiscal year 2012 are applications for Proxcelan Cesium-131 sources as treatment for esophagealcancer and for delivering adjuvant radiation to the resection bed following lumpectomy for early stage breast cancer. Both initiatives will focus ondeploying the Proxcelan Cesium-131 source in tandem with existing, FDA-cleared or approved devices that have already made significant inroads into thetreatment of both esophageal and early stage breast cancers. While there exist potential regulatory and business hurdles to the introduction of these products,management believes that the treatments can be functionally accomplished through the co-administration of these cleared devices along with Proxcelansources. Early stage clinical studies are being planned for both initiatives for fiscal year 2012.Introduce Proxcelan Cesium-131 brachytherapy seeds to the European Union (EU) and Russian markets. Health Canada's Therapeutic Products Directoratehas approved IsoRay's Class 3 Medical Device License Applications for Model CS-1 Proxcelan ™ (Cesium-131) brachytherapy seeds and the Proxcelan™Sterile Implant Devices containing Model CS-1 Seeds. This allows IsoRay to market its brachytherapy seeds and related preloaded brachytherapy seedsthroughout Canada. In November 2009, the Company entered into a distribution agreement with Inter V Medical of Montreal, Quebec, Canada for exclusiverights to sell the Proxcelan Cesium-131 brachytherapy seed in Canada. Approval to market Cesium-131 seeds in Russia was also obtained in 2009; and theCompany has an exclusive distribution agreement in place with a Russian distributor, UralDial LLC, to distribute Proxcelan Cesium-131 brachytherapy seedsin Russia, however, the economic downturn in Russia has slowed the Company's market penetration efforts. The Company is focusing on the Canadian andEuropean Union (EU) markets until the Russian market recovers. 13Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Maintain ISO 13485:2003 certification. In August 2008, the Company obtained its initial ISO 13485:2003 certification. This permitted the Company toregister its products in Europe in 2008 and in Canada and Russia during fiscal year 2009. The ISO 13485:2003 certification demonstrates that the Companyis in compliance with this internationally recognized quality standard and is valid for a three year period. In July 2011, the Company received arecertification to ISO 13485:2003. This recertification was an important step as it allows the Company to continue to register its products in foreign marketsthat utilize this certification as part of their medical device approval processes. ProductsIsoRay markets the Proxcelan Cesium-131 brachytherapy seed for the treatment of prostate cancer; lung cancer; ocular melanoma; head and neck cancers;colorectal cancer, brain cancer; and gynecological cancer. The Company intends to market Cesium-131 for the treatment of other malignant disease, such asbreast cancer, in the near future through the use of existing proven technologies that have received FDA-clearance. The strategy of utilizing existing FDA-cleared technologies intends to reduce the time and cost required to develop new applications of Cesium-131 and deliver them to market.Competitive Advantages of Proxcelan Cesium-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 Cesium-131 will increase industry growth and facilitate meaningful penetration into the treatment of other forms of cancersuch as lung cancer. Isotope Delivery Over Time IsotopeHalf-LifeEnergy90% DoseTotal DoseCs-1319.7 days30.4 KeV33 days115 GyPd-10317 days20.8 KeV58 days125 GyI-12560 days28.5 KeV204 days145 GyCesium-131 Manufacturing Process and SuppliersProduct Overview. Cesium-131 is a radioactive isotope that can be produced by the neutron bombardment of Barium-130 (Ba-130). When placed into anuclear reactor and exposed to a flux of neutrons, Ba-130 becomes Ba-131, the radioactive material that is the parent isotope of Cesium-131. The radioactiveisotope Cesium-131 is normally produced by placing a quantity of stable non-radioactive barium (ideally barium enriched in isotope Ba-130) into theneutron flux of a nuclear reactor. The irradiation process converts a small fraction of this material into a radioactive form of barium (Ba-131). The Ba-131decays by electron capture to the radioactive isotope of interest (Cesium-131).To produce the Proxcelan seed, the purified Cesium-131 isotope is adsorbed onto a ceramic core containing a gold X-ray marker. This internal core assemblyis subsequently 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 Cesium-131 isotopes, potential suppliers must be capable of removing irradiatedmaterials from the reactor core on a routine basis for subsequent processing to produce ultra-pure Cesium-131. The supplier's nuclear reactor facility musthave sufficient irradiation capacity to accommodate barium targets and the nuclear reactors must have sufficient neutron flux to cost effectively producecommercially viable quantities of Cesium-131 and Ba-131.The Company has identified key reactor facilities in the U.S. and Russia that are capable of meeting these requirements. In order to maintain a stable supplyand pricing of Cesium-131 from UralDial, LLC (a Russian LLC), IsoRay renewed its supply agreement with the supplier during 2010 to provide Cesium-131isotope from Russia to the Company's facility in Richland, WA through December 31, 2011. UralDial obtains Cesium-131 from two reactors. 14Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 also receives irradiated barium from the MURR reactor located in the United States.For the fiscal year ended June 30, 2011, approximately sixty-eight percent (68%) of our Cesium-131 was supplied by one of two Russian supply sources andthirty-two percent (32%) from domestic sources.The Company has demonstrated the capability to expand Cesium-131 manufacturing capability at the MURR reactor in a cost effective manner to meet thecurrent needs of the Company, however, the Company will continue to obtain Cesium-131 from multiple suppliers to mitigate the risk of losing a keycomponent of our product.In recent years, management believed that failure to obtain deliveries of Cesium-131 from its Russian supplier (UralDial, LLC) would have a material adverseeffect on seed production. Management now believes that its existing suppliers can meet the Company's isotope requirements for the near future and thatexisting suppliers can mitigate the periodic required shutdowns at each facility. In the fiscal year 2011, the Company tested the production capabilities ofthe reactor at the MURR facility to determine whether it could produce an increased quantity of isotope in a cost effective manner. This testing processvalidated management's belief that the MURR facility can be utilized to offset either a short-term or long term supply issue with isotope that meets or exceedsthe purity levels that are specified for use in the Company's products.Quality Controls. We have established procedures and controls to comply with the FDA's Quality System Regulation. The Company constantly monitorsthese procedures and controls to ensure that they are operating properly, thereby working to maintain a high-quality product. Also, the quality, production,and customer service departments maintain open communications to ensure that all regulatory requirements for the FDA, DOT, and applicable nuclearradiation and health authorities are fulfilled.In July 2008, IsoRay had its baseline inspection by the FDA at its manufacturing and administrative offices in Richland, WA. This inspection was carried outover a five day period of time during which the investigator performed a complete inspection following Quality Systems Inspection Techniques (QSIT). Atthe end of the inspection, no report of deviations from Good Manufacturing Practices or list of observations (form FDA 483) was issued to IsoRay.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 Cesium-131 (from the international supplier's reactor), separation and purification of Cesium-131, isotopelabeling of 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 Cesium-131 isotope and the short half-life, the Company relies on sales forecasts and historicalknowledge to estimate the proper inventory levels of isotope needed to fulfill all customer orders. Consequently, some portion of the isotope is lost throughdecay and is not used in an end product. Management continues to reduce the variances between ordered isotope and isotope deliveries and is continuallyimproving its ordering process efficiencies. 15Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Automated Manufacturing ProcessIn fiscal 2011, 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 Commitments andContingencies note included in Item 7 below. Management believes that the APEL facility will be utilized for manufacturing space through fiscal year 2016which is the original lease term plus the two three-year renewal options. Management has exercised the first of two three-year renewal options to extend theAPEL facility lease through April 2013 and it believes that the Company will exercise the second three-year renewal option through April 2016.Pre-loading ServicesIn addition to providing loose seeds to customers, most brachytherapy manufacturers offer their seed product to the end user packaged in variousconfigurations provided in a sterile or non-sterile package depending on the customer's preference. These include:§ 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)§ Pre-loaded braided strands (seeds loaded into a flexible bioabsorbable strand)§ Pre-loaded braided strands attached to bioabsorbable mesh (creates planar implants out of braided strands and bioabsorbable mesh)In fiscal year 2011, the Company delivered approximately 68% of its Proxcelan seeds to customers configured in Mick cartridges, approximately 29% of theProxcelan seed configured in both stranded and braided strand forms and the remaining 3% 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 90% of Mick cartridges in our own facility which in fiscal year 2011 accounted for approximately 61% of seedssold. Approximately 33% of seeds sold are strand configurations including strands pre-loaded in needles and the remaining 6% of seeds are sold as looseseeds. Although the Company performs in-house analytical services to eliminate loss in isotope activity due to radioactive decay, the Company utilizesindependent radiopharmacies to back up its own preloading operation, 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, reduceisotope decay loss, control overall product quality and eliminate any concerns related to the handling of our product by a third party prior to receipt by theend user. 16Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. By providing custom packaging configurations that are produced by our personnel, we can enhance the overall control of the quality of our product whileproviding larger incremental margins to the Company through a decreased cost of loading seeds when compared to the cost of loading through third-partyloading service. Using the loading services of the Company allows a larger percentage of the loading pricing premiums charged to our customers to beretained by the Company. The end users of these packaging options are willing to pay a premium for these loading services in lieu of loading seedsthemselves because of the cost savings realized as the result of the risk reduction that occurs through eliminating the need for loose seed handling andloading requirements on-site by their staff, eliminating the need for additional staffing to sterilize seeds and needles after loading them, and eliminating theadditional expense of assaying of the seeds.With clearance from the FDA received in 2009 that allows for preloading flexible braided strands and bioabsorbable mesh, IsoRay became the secondcompany in the industry that has 510(k) clearance to preload both the strands and the mesh. This allows IsoRay to reduce loading costs by providing theseseeds loaded into flexible braided strands and flexible braided strands attached to bioabsorbable mesh directly to our customers. During the year ended June30, 2011, IsoRay was able to add the capability to CE mark the products which allows for shipment of seeds loaded into flexible braided strands and flexiblestrands attached to bioabsorbable mesh into the European Union.Marketing and SalesMarketing StrategyThe Company is marketing Proxcelan Cesium-131 brachytherapy seeds as the "seed of choice" for prostate brachytherapy. Based on current and preliminaryclinical studies, management believes there is no apparent clinical reason to use other isotopes when Cesium-131 is available. The advantages associatedwith the higher energy and shorter half-life of the isotope are generally accepted within the scientific community and the Company intends to help educatepotential patients about the clinical benefits from Cesium-131 for their brachytherapy seed treatment.The market for treatments for localized prostate cancer treatment is very competitive and largely hinges upon the demonstration of long term follow-up datathat has been presented to the prostate cancer treatment profession. Therefore, highly compelling technical arguments alone — absent published long termfollow-up data – can fail to provide significant marketability, even for treatments that ultimately prove highly effective. The fact that Proxcelan Cesium-131was introduced to the prostate cancer marketplace more than a decade after Iodine-125 and Palladium-103, and the resulting time for mature clinical data tobe developed has proven an obstacle to widespread market acceptance.As of April 2011, the 100 subject clinical study of Cesium-131 for the treatment of localized prostate cancer (originally enrolled beginning in 2005) hasreached the point where a five-year result has been obtained and reported to a legitimate scientific forum. In a supplement to the official journal of theAmerican Brachytherapy Society (Brachytherapy) documenting the scientific program for the Society's 2011 annual meeting, Drs. Bradley Prestidge, WilliamBice, Brian Moran and colleagues reported the five-year Freedom from Biochemical Failure (FFBF – a measure of success using prostate specific antigen) forthe 100 patients as 97.9%.Although several long-term reports exist in the literature describing outcomes for Iodine-125 and Palladium-103 as highly effective, there has been no reportmade at five years after the introduction of these isotopes detailing a FFBF as high as 97.9%. This report has been submitted for publication and, pendingeditorial review, should be published in greater detail in fiscal year 2012. Management believes that these impressive results at the five-year mark shouldcreate further scientific support for Cesium-131 as an attractive treatment for localized prostate cancer, overcoming at least some of the initial resistancepredicated on the lack of long-term follow-up reports.IsoRay has chosen to identify its proprietary Cesium-131 seed with the trademarked brand of "Proxcelan." Management is using this brand to differentiateCesium-131 seeds from seeds using the other isotopes. We continue to target the competing isotope products of Iodine-125 and Palladium-103 rather thanthe various manufacturers and distributors of these isotopes. Using this strategy, the choice of brachytherapy isotopes should be less dependent on the nameand distribution strengths of the various iodine and palladium manufacturers and distributors and more dependent on the therapeutic benefits of Cesium-131. 17Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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.com wasagain substantially updated to deliver the message that Cesium-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, physician/clinician resources, investorinformation, current events that representatives will attend, and contact information. IsoRay also maintains print and visual media (including physicianbrochures discussing the clinical advantages of Cesium-131, clinical information binders, informational DVDs, single sheet glossies with targeted clinicaldata, etc.), and advertisements in leading medical journals. In addition, the Company attends national professional meetings, including the following: §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 Cesium-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.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 on the benefits of Cesium-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. 18Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 has a direct sales organization consisting of six territorial sales managers to introduce Proxcelan Cesium-131 brachytherapy seeds to radiationoncologists and medical physicists for use in treating cancer throughout the body.With the assistance of an executive search firm, the Company is currently actively recruiting one to two additional sales persons with previous experience inradiation oncology and specifically with brachytherapy sales.In 2009, IsoRay entered into an exclusive distribution agreement with BrachySciences to market Cesium-131 seeds in the U.S. BrachySciences has a salesforce of approximately 6 sales persons and a manager, bringing the total sales personnel selling Proxcelan Cesium-131 brachytherapy seeds in the U.S. toapproximately 12. The BrachySciences sales force sold its first Cesium-131 prostate implant in August 2009; but its results to date have been disappointingand due to its failure to meet certain minimum sales requirements this contract is no longer exclusive and the Company has notified BrachySciences that theagreement will not be renewed when its current term expires at the end of 2011.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 Cesium-131 brachytherapyseeds that permitted providers to report the use of Cesium-131 directly to payers. In July 2007, CMS established two separate Cesium-131 codes forproviders to report loose seeds and stranded seeds due to the cost differential of these two products. Reimbursement for prostate brachytherapy services andsources is well established in the US and most providers (hospitals and physicians) are not faced with reimbursement challenges when providing thistreatment option to patients. 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 2012 but there is no assurance that this will occur. Private insurance companieshave historically followed the CMS reimbursement policies. The Company expects that CMS will continue its annual review of payments provided asreimbursement for our various products and that CMS will continue to provide favorable reimbursement rates for our Cesium-131 brachytherapy seeds.Other InformationCustomersThe top five physicians who perform procedures at customer facilities of the Company account for approximately 47% of the total Company product sales forthe twelve months ended June 30, 2011 include: 19Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. El Camino, Los Gatos, & other facilities (Northern CA) (1)27.3% of revenue University of Pittsburgh Medical Center (PA)6.2% of revenue Candler Hospital and Savannah Oncology Center (GA)5.2% of revenue MA Ave Surgery Center / Sibley Memorial Hospital (DC)4.1% of revenue York Cancer Center (PA)3.7% of revenue (1)The single largest physician also serves as the Company's medical director. During the fiscal year ended June 30, 2011, this physician added anadditional physician to his practice which should reduce risk associated with seasonality.The loss of either the single largest physician or a combination of the other significant physicians could have a material adverse effect on the Company'srevenues, which would continue until the Company located new customers to replace them and there can be no assurance this would occur in a timelymanner or at all.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 Cesium-131 developed by IsoRay employees. The Company is currentlyworking on developing and patenting additional methods of deriving Cesium-131 and other isotopes. There are specific conditions attached to the assignment of the Cesium-131 patent from Lane Bray. In particular, the associated Royalty Agreement providesfor 1% of gross profit payment from seed sales to Lane Bray and 1% of gross profit from any use of the Cesium-131 process patent for non-seed products. IfIsoRay reassigns the Royalty Agreement to another company, these royalties increase to 2%. The Royalty Agreement has an anti-shelving clause whichrequires IsoRay to return the patent if IsoRay permanently abandons sales of products using the invention. During fiscal years 2011 and 2010, the Companyrecorded royalty expense of $26,474 and $23,041, 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. 20Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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, 2011, IsoRay and its predecessor companies incurred approximately $1.8 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 manufacturingfacilities. The Company's predecessor obtained FDA 510(k) clearance in March 2003 to market the Proxcelan Cesium-131 seed for the treatment of localizedsolid tumors and other malignant disease and IsoRay obtained FDA 510(k) clearance in November 2006 to market preloaded brachytherapy seeds and inAugust 2009 for preloading flexible braided strands and bioabsorbable mesh.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.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 Cesium-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 Cesium-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. 21Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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 regulatoryinspections. Our customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us.In support of IsoRay's global strategy to expand marketing to Canada, 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 Canadianregistration. During fiscal year 2009, the Company received its certification to ISO 13485 and obtained approval from Health Canada for its Canadianregistration. The Company 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 Cesium-131 brachytherapy seeds and the GliaSite® radiation therapy system constituteboth medical devices and radioactive sealed sources and are subject to these regulations. We have applied for, but not yet received, sealed source deviceapproval from the State of Washington Department of Health for the GliaSite® radiation therapy system, components of which will be manufactured at ourRichland facility.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 forty-seven percent (47%) of the Company's business is dependent on fivephysicians, simultaneous vacations by these five physicians could cause significant drops in the Company's productivity during those reporting periods.EmployeesAs of September 13, 2011, 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, accounting and administrative organizations. None of theCompany's employees are represented by any collective bargaining unit. At June 30, 2011, the Company employed six direct sales people. 22Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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 Cesium-131 seed.The Company's patented Cesium-131 separation process is likely to provide a sustainable competitive advantage. Production of Cesium-131 also requiresspecialized facilities that represent high cost and long lead time if not readily available. In addition, a competitor would need to develop a method forisotope attachment and seed assembly, would need to conduct testing to meet NRC and FDA requirements, and would need to obtain regulatory clearancesbefore marketing 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 Cesium-131 seed, but none have reported efforts to do so. Best Medical obtained a seed core patent in 1992 that named ten differentisotopes, including Cesium-131, for use in their seeds. Best Medical received FDA 510(k) clearance to market a Cesium-131 seed on June 6, 1993 but to datehas not produced any products for sale. In addition to the FDA and the NRC, Best Medical would be required to submit a Cesium-131 seed to the TG-43 taskgroup of the American Association of Physicists in Medicine to determine the seed's characteristics such as anisotropy, dose rate constant, etc. To date therehas been no submission to the TG-43 task group for a competing Cesium-131 seed.Additional Growth OpportunitiesManagement of the Company sees growth opportunities through sales from expansion into international markets and additional treatment for cancers otherthan prostate. The Company plans to introduce Cesium-131 for prostate brachytherapy initially into Canada, the European Union (EU) and Russia and laterinto other international markets through partnerships and strategic alliances with channel partners for manufacturing and distribution but has no otherdistribution agreements or partnerships in place other than with respect to Canada as of September 28, 2011.Cesium-131 has FDA clearance to be used for treatments for a broad spectrum of cancers including breast, brain, lung, and liver cancer, and the Companybelieves that a major opportunity exists as an adjunct therapy for the treatment of residual lung, head and neck, and other cancers. The Company hassupplied Proxcelan™ Cesium-131 brachytherapy seeds for use in treating lung cancer; ocular melanoma; head and neck cancer; colorectal cancer; braincancer; and gynecological cancer as of the date of this Report. The Company continues to have discussions with prominent physicians and to evaluatetreatments for other cancer sites.There is also an opportunity to develop and market other radioactive isotopes to the United States market, and to market Cesium-131 isotope itself, separatefrom its use in our seeds. The Company is also in the preliminary stages of exploring alternate methods of delivering our isotopes to various organsthroughout the body. Our new liquid form of Cesium-131 may be advantageous to use in other FDA cleared devices as an alternative to our titanium-encapsulated seed to deliver radiation to these other body sites. 23Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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. Thistechnology was previously used to treat approximately 500 cases annually in some 40 hospitals worldwide however this technology has not been availablefor sale since 2007. This exclusive worldwide distribution agreement with Hologic Inc. aligns with the Company strategy to locate existing FDA-clearedtechnologies to provide new ways to treat other organs with Cesium-131. The Company has obtained the intellectual property rights to manufacture theIotrex solution (Iodine-125) for use in the GliaSite® radiation therapy system and has contracted with a company for the production of Iotrex and aradiopharmacy to handle the patient dosing of the solution for use in procedures. The Company anticipates successful negotiation of a contract with aprevious distributor of the GliaSite® radiation therapy system in the European Union for distribution rights to the system in Germany, Austria, Switzerlandand Italy but there is no assurance this will occur. The Company has modified the original FDA-cleared device and has received clearance from the FDA tomarket the product, with the modifications, which are designed to improve its performance and manufacturability, in the United States. The Company hasobtained the intellectual property rights to manufacture the Iotrex solution (Iodine-125) for use in the GliaSite® radiation therapy system, and it hascontracted with a company for the production of Iotrex and a radiopharmacy to handle the patient dosing of the solution for use in procedures.The Company is developing a liquid Cesium-131 solution for use as an alternative brachytherapy radiation source in FDA cleared devices including for usein the GliaSite® radiation therapy system as either a substitute for the Iotrex solution or as a future alternative treatment option for physicians to utilizeindependently. Research and development was conducted during the year ended June 30, 2011 in preparation to seek regulatory approval of liquid Cesium-131 for use in combination with the GliaSite® radiation therapy system but there is no assurance approval will be obtained.ITEM 1A – RISK FACTORSRisks Related to Our Industry and OperationsOur Revenues Depend Upon One Product. Until such time as the GliaSite® radiation therapy system generates sufficient revenues, our revenues dependprimarily upon the successful production, marketing, and sales of the Proxcelan Cesium-131 brachytherapy seed. The rate and level of market acceptance ofthis product varies depending on the perception by physicians and other members of the healthcare community of its safety and efficacy as compared to thatof competing products, if any; the clinical outcomes of the patients treated; the effectiveness of our sales and marketing efforts in the United States, Canada,the European Union (EU) and Russia; any unfavorable publicity concerning our product or similar products; our product's price relative to other products orcompeting treatments; any decrease in current reimbursement rates from the Centers for Medicare and Medicaid Services or third-party payers; regulatorydevelopments related to the manufacture or continued use of the product; availability of sufficient supplies of enriched barium (being utilized in productionin Russia) for Cesium-131 seed production; ability to produce sufficient quantities of this product; the ability of physicians to properly utilize the device andavoid excessive levels of radiation to patients, and the ability to use this product to treat multiple types of cancers in various organs. Because of our relianceon this product as the primary source of our revenue, any material adverse developments with respect to the commercialization of this product may cause usto continue to incur losses rather than profits in the future.Although Cleared To Treat Any Malignant Tissue, Our Sole Product Is Primarily Used To Treat A Single Type Of Cancer. Currently, the Proxcelan Cesium-131 seed is used almost exclusively for the treatment of prostate cancer (over ninety-two percent of our sales). We have been treating lung cancer whichamounts to approximately 5% of our product sales and other cancers including ocular melanoma; head and neck; colorectal; gynecological; brain and chestwall that combined constitute approximately 3% percent of our product sales. Management believes the Proxcelan Cesium-131 seed will continue to be usedto treat other types of cancers as the Company identifies existing delivery systems that can be utilized or develops new delivery methods for the product,however these delivery systems may not prove as effective as anticipated Management believes that clinical data gathered by select groups of physiciansunder treatment protocols specific to other organs will be needed prior to widespread acceptance of our product for treating other cancer sites. If our currentand future products do not become accepted in treating cancers of other sites, our sales will depend solely on treatment of prostate cancer, a market withincreasing competition and ongoing loss of market share by all brachytherapy products. 24Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Have Ongoing Cash Requirements. The Company has generated material operating losses since inception. We expect to continue to experiencesignificant net operating losses. Due to previous capital investments and substantial cost reductions, management believes cash and cash equivalents onhand at June 30, 2011 will be sufficient to meet our anticipated cash requirements for operations, debt service, and capital expenditure requirements throughat least the next ten months or until approximately April 30, 2012. Management now estimates that operational cashflow breakeven will be achieved atapproximately $700,000 in monthly revenue. However, there is no assurance as to when break-even will occur. If we are unable to generate profits andunable to obtain additional financing to meet our working capital requirements, we may have to significantly reduce or 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 2011, approximately sixty-eight percent (68%) of our Cesium-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 Cesium-131 in Russia couldincrease from current pricing. Our current contract with UralDial terminates on December 31, 2011 and will have to be renegotiated. Management will seekto negotiate favorable pricing but there is no assurance as to the outcome of these negotiations. Management is evaluating other reactors that meet currentspecifications to yield Cesium-131 of the purity that the Company requires for use in its products but thus far has only confirmed such availability fromMURR.Reliance on any single supplier increases the risks associated with concentrating isotope production at a single reactor facility which can be subject tounanticipated shutdowns. Failure to obtain deliveries of Cesium-131 from multiple sources could have a material adverse effect on seed production and theremay 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, other than MURR, capable of producing the level of output of cesium at the qualitystandards we require. Additional factors that could cause interruptions or delays in our source of materials include limitations on the availability of rawmaterials or manufacturing performance experienced by our suppliers and a breakdown in our commercial relations with one or more suppliers. Some of thesefactors may be completely out 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 and fiscal 2011 contributing to our failure to improve sales in the prostate market. Beginning in the fall of 2008, U.S.consumers significantly curtailed all spending (even for life saving medical procedures) which impacted the brachytherapy industry as a whole. In Februaryof 2009 noted urologists announced at a medical conference that prostate specific antigen (PSA) testing was not as necessary as previously believed. Theirstatements were widely publicized. Management continues to believe that many people have been influenced by these statements to cut back on PSA testingthereby decreasing in the short term the number of prostate procedures performed.In 2010, the American Cancer Society revised their advice regarding PSA testing warning that regular testing for prostate cancer is of questionable value andcan do men more harm than good.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 2011, 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 2012. 25Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Cesium-131 and Hire More Employees. IsoRay currently obtainsCesium-131 through its contract with UralDial and through reactor irradiation of natural barium and subsequent separation of Cesium-131 from the irradiatedbarium targets. The amount of Cesium-131 that can be produced from a given reactor source is limited by the power level and volume available within thereactor for irradiating targets. This limitation can be overcome by utilizing barium feedstock that is enriched in the stable isotope Ba-130. However, thenumber of suppliers of enriched 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, 2011) with UralDial in Russia to provide Cesium-131 in quantities sufficient to supply asignificant percentage of future demand for this isotope. As the result of the purchase of enriched barium in June 2007, IsoRay has access to sufficientquantities of enriched barium that may be recycled to increase the production of Cesium-131 and which will increase the production yield per irradiatedtarget. Although the UralDial agreement provides for supplying Cesium-131 in significant quantities, there is no assurance that this will result in IsoRaygaining access to a continuing sufficient supply of enriched barium feedstock. If we were unable to obtain supplies of isotopes from Russia in the future, ouroverall supply of Cesium-131 would be reduced significantly unless the Company has a source of 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 2010, the Company entered into a newagreement with UralDial to purchase Cesium-131 directly from UralDial through December 31, 2011 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 aresult, the Company continues to rely on UralDial to obtain Cesium-131 from Russian sources. UralDial has agreed to maintain at least two Russian sourcesof its Cesium-131 and through the UralDial agreement we have obtained set pricing for our Russian Cesium-131 through the end of 2011. There can be noguarantee that UralDial will always be able to supply us with sufficient Cesium-131 or will renew our existing contract on favorable terms in December 2011,which could be due in part to risks associated with foreign operations and beyond either our or UralDial's control. If we were unable to obtain supplies ofisotopes from Russia in the future, our overall supply of Cesium-131 could be reduced significantly unless we have a source of enriched barium forutilization in domestic reactors beyond the quantity that we already own. The Company has tested the utilization of other reflector regions within thereactor at MURR and found that Cesium-131 can be produced in economically viable quantities at a viable price. These reflector regions that were tested areareas located in the reactor pool, however, outside of the flux trap. The flux trap is the primary location of irradiation utilized for the production of isotopeused in our product and is located in the reactor pool at the center of the fuel array. During August 2011, the Company did not receive any isotope fromUralDial and relied on increased production at MURR.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 2012. 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 2012, 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. 26Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 competingproducts;§ seasonality of purchasing behavior in our market;§ overall economic conditions;§ the successful introduction or market penetration of alternative therapies; and§ the outcome of the FDA's evaluation of the clearance process for class II devices.We Have Limited Data on the Clinical Performance of Cesium-131. As of June 30, 2011, the Proxcelan Cesium-131 seed had been implanted in over6,000 patients and 53 research papers, including 16 papers and 14 abstracts on clinical series, had been published on the use of the Proxcelan seed andCesium-131. While there is less historical statistical data for the Proxcelan seed than is available for I-125 and Pd-103 seeds during the fiscal year ended June30, 2011, the Company reached a key milestone by collecting the first 5 year outcome data for patients that received treatment with the Proxcelan seedduring the fiscal year ended June 30, 2011. In addition, during fiscal year 2011 there were six reports of the Proxcelan seed being used in the treatment ofprostate, lung, and head and neck cancers published in peer-reviewed literature. There were three presentations accepted to the 2011 meeting of theAmerican Brachytherapy Society covering the application of the Proxcelan seed in prostate and eye cancers. While this limited data may prevent us fromdrawing statistically significant conclusions, together these clinical data support the effectiveness of Cesium-131 treatment across several cancers, combinedwith a favorable side effect profile and favorable radiation safety profile. These limited findings support management’s belief that Cesium-131 will continueto be viewed favorably as a treatment for prostate and other solid organ cancer, but we may have to gather data on outcomes from additional patients beforewe can establish statistically valid conclusions regarding the performance of our seeds. 27Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Cesium-131 seed, and on other third parties, including various radiopharmacies, to package our Proxcelan Cesium-131 seed in certain specializedpackaging forms requested by customers. We are subject to the risk that these third parties may mishandle our product, which could result in adverse effects,particularly given the radioactive nature of our product.It Is Possible That Other Treatments May Be Deemed Superior To Brachytherapy. Our Proxcelan Cesium-131 seed faces competition not only fromcompanies that sell other radiation therapy products, but also from companies that are developing alternative therapies for the treatment of cancers. It ispossible that advances in the pharmaceutical, biomedical, or gene therapy fields could render some or all radiation therapies, whether conventional orbrachytherapy, obsolete. If alternative therapies are proven or even perceived to offer treatment options that are superior to brachytherapy, physicianadoption of our product 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 Cesium-131 seedmust comply with licensing requirements specific to the state in which they do business and these licensing requirements may take a considerable amount oftime to comply with. Certain centers may choose to not offer our Proxcelan Cesium-131 seed due to the time required to obtain necessary licenseamendments. We also compete with academic institutions, government agencies, and private research organizations in the development of technologies andprocesses and in acquiring key personnel. Although we have patents granted and patents applied for to protect our isotope separation processes and Cesium-131 seed manufacturing technology, we cannot be certain that one or more of our competitors will not attempt to obtain patent protection that blocks oradversely affects our product development efforts. To minimize this potential, we have entered into exclusive agreements with key suppliers of isotopes andisotope precursors, 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 Cesium-131, our patents on additional methods for producing Cesium-131 and other isotopes, our patent pending on the manufacture of thebrachytherapy seed, and anticipated future patent applications, which have not yet been filed, have significant value, we cannot be certain that other like-kind processes may not exist or be discovered, that any of these patents is enforceable, or that any of our patent applications will result in issued patents.Failure To Comply With Government Regulations Could Harm Our Business. As a medical device and medical isotope manufacturer, we are subject toextensive, complex, costly, and evolving governmental rules, regulations and restrictions administered by the FDA, by other federal and state agencies, andby governmental authorities in other countries. Compliance with these laws and regulations is expensive and time-consuming, and changes to or failure tocomply with these laws and regulations, or adoption of new laws and regulations, could adversely affect our business. 28Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In the United States, as a manufacturer of medical devices and devices utilizing radioactive 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 Cesium-131 brachytherapy seeds and the GliaSite® radiation therapy system constitute both medical devices and radioactivesealed 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 Cesium-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.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. 29Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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 Cesium-131 from Russia under our contract withUralDial.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 Cesium-131 seed were to rapidly become the "seed of choice," it is unlikely that we couldimmediately meet demand. We could experience significant cash flow difficulties and may have difficulty obtaining the working capital required tomanufacture our products at those levels. This could cause customer discontent and invite competition. There can be no assurance that our personnel,systems, procedures, and controls will be adequate to immediately react to that growth.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 preventfraud. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be harmed. We have in the past discovered,and may 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, 2011, the Company determined that there were deficiencies that together constituted a material weakness. Specifically, the Companydid not maintain adequate segregation of finance and accounting duties, did not have a Chief Financial Officer, and did not have a human resources managerwith appropriate training and experience. The Company continues the implementation of the remediation plan to address the material weakness describedabove, along with the deficiencies also identified in the assessment, which are described under Item 9A below. Specifically, in June 2011, a vacantaccounting position at the Company's operating subsidiary was filled to address issues with segregation of duties, and the Company is assessing additionalsteps that may be taken in fiscal year 2012 to improve internal controls. We cannot be certain that these measures will ensure that we implement andmaintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internalcontrols could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of ourstock. 30Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our Reporting Obligations As A Public Company Are Costly. Operating a public company involves substantial costs to comply with reporting obligationsunder federal securities laws that have continued to increase as provisions of the Sarbanes Oxley Act of 2002 have been implemented. Section 404(b)reporting obligations were permanently exempted through legislation passed in July 2010.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.The Price Of Our Common Stock May Be Adversely Affected By The Future Issuance And Sale Of Shares Of Our Common Stock Or Other EquitySecurities. We cannot predict the size of future issuances or sales of our common stock or other equity securities future acquisitions or capital raisingactivities, or the effect, if any, that such issuances or sales may have on the market price of our common stock. The issuance and sale of substantial amounts ofcommon stock or other equity securities or announcement that such issuances and sales may occur, could adversely affect the market price of our commonstock.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, 2011, we had 26,443,118 outstanding shares of common stock, and thefollowing additional shares were reserved for issuance: 2,418,806 shares upon exercise of outstanding options, 3,819,185 shares upon exercise of outstandingwarrants, and 59,065 shares upon conversion of preferred stock. Any decline in the price of our common stock may encourage short sales, which could placefurther downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.The Issuance Of Shares Upon Exercise Of Derivative Securities May Cause Immediate And Substantial Dilution To Our Existing Shareholders. The issuanceof shares upon conversion of the preferred stock and the exercise of common stock warrants and options may result in substantial dilution to the interests ofother shareholders since these selling shareholders may ultimately convert or exercise and sell all or a portion of the full amount issuable upon exercise. If allderivative securities were converted or exercised into shares of common stock, there would be approximately an additional 6,300,000 shares of commonstock outstanding as a result. Warrants to purchase approximately 2.8 million shares are exercisable at any time at approximately a ten percent (10%)discount to the market price at the time of the filing of this Report. The issuance of these shares will have the effect of further diluting the proportionateequity interest and voting power of holders of our common stock. 31Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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, 2011 if required to comply with the Form S-3eligibility requirements. 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 that our Board deems relevant.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. 32Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 3 – LEGAL PROCEEDINGSThe Company is not involved in any material legal proceedings as of the date of this Report.ITEM 4 – [REMOVED AND RESERVED]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: 193,000,000 shares of common stock, par value of $0.001 per share; and 7,000,000 shares of preferred stock, par value of$0.001 per share. As of September 20, 2011, we had 26,493,118 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, 2011 High Low First quarter $1.48 $1.00 Second quarter 1.55 1.07 Third quarter 1.52 1.02 Fourth quarter 1.23 0.88 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 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 December7, 2010, the Board of Directors declared a dividend on the Series B Preferred Stock of all outstanding and cumulative dividends through December 31,2010. There is no Series A Preferred Stock outstanding. The total Series B accrued dividends of $10,632 were paid as of December 31, 2010. At June 30,2011, there were 59,065 Series B preferred shares outstanding and cumulative dividends in arrears were $5,316. There is no Series A or Series C PreferredStock outstanding. As of August 31, 2011, we had approximately 275 shareholders of record, exclusive of shares held in street name. The closing price of our common stock was$1.01 on September 23, 2011. 33Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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.As of June 30, 2011, 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 2,423,806 $1.78 1,327,612 Total 2,423,806 $1.78 1,327,612 Sales of Unregistered SecuritiesAll sales of unregistered securities were previously reported.Use of Proceeds from Registered SecuritiesOn October 27, 2009, 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, 2009, and 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"), which was amended on July 29,2010. On October 1, 2010 the Company instructed CKCC to commence sales via placement notice permitting "at the market" sales of common stock throughOctober 31, 2010. CKCC sold 304,227 shares of common stock on behalf of the Company receiving $250,632 in equity net of offering costs of $118,149($7,301 in commissions, $110,276 in legal and accounting expenses, and $571 in other costs). The offering of Shares pursuant to the Agreement, asamended, terminated on December 31, 2010.There was no material change in the use of proceeds from our public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b). All proceeds from this offering had been used as of June 30, 2011 as described in the table below.No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any classof our equity securities or to any other affiliates.On November 22, 2010, a securities purchase agreement was executed between an institutional investor and the Company for 2,250,000 shares of commonstock with Aurora Capital acting as the placement agent for the transaction. As part of the transaction, the investor received four series of warrants(collectively, the "Warrants"). The Series A and Series C Warrants were amended and restated via an Amendment Agreement dated December 27, 2010, andthe Series C Warrants were further amended and restated via an Amendment Agreement dated March 31, 2011. 34Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Shares and Warrants were issued pursuant to the Company's shelf registration statement (the "Registration Statement") on Form S-3 (File No. 333-162694), which became effective on November 13, 2009, and prospectus supplements filed on November 24, 2010 and on December 29, 2010.By letter agreement dated October 27, 2010, LifeTech Capital, a division of Aurora Capital, LLC, acted as placement agent in connection with the placementof the securities in the November 2010 offering. LifeTech received a cash fee of 5% of the gross proceeds received under the offering (excluding proceedsreceived on the exercise of C or D Warrants), and also received warrants to purchase 3% of the common stock sold in the offering and 3% of the Series A, Band C Warrants exercised at any time, which warrants issued to LifeTech shall not be exercisable for six months following the closing, shall have a five yearterm, and an exercise price of $1.56 per share.The November 2010 offering yielded net cash of $2,026,255 which was net of offering costs of $223,745 ($112,500 of commission expense, $108,927 oflegal and accounting expense and $2,318 of other costs). Warrant liabilities that total $1,724,000 were established related to Series A, B, and Cwarrants. Deferred financing costs of $193,051 were established related to the warrant liabilities for Series A, B, and C warrants.The Series A warrants were exercised on March 24, 2011 for 538,660 shares of common stock in exchange for $475,000 net of commission expense.The Company recorded fair value adjustments to the Series A-1 warrant liability through the exercise of the warrants on March 24, 2011. The Companyexpensed the unamortized deferred financing cost of $16,044 as financing expense in the Consolidated Statement of Operations. The Series A-1 warrantliability was reclassified to equity at the fair value reported on March 24, 2011 of $119,000 during the three months ended March 31, 2011 as the warrantholder exercised the warrants during this period.The Series B Warrants expired without being exercised.The Series C-1 warrant liability was recharacterized from a warrant liability to equity at the fair value reported using the Black-Scholes Option ValuationModel on March 31, 2011 as the warrant holder and the Company amended the agreement on that date to allow for the equity treatment of the Series C-1warrants. The fair value of the warrant liability for Series C-1 that was reclassified to equity was $1,119,000. The Company expensed the unamortizeddeferred financing cost of $142,809 as financing expense in the Consolidated Statement of Operations.There was no material change in the use of proceeds from our public offering as described in our final prospectus filed with the SEC pursuant to Rule 424 (b).Through June 30, 2011 we had begun to use the net proceeds consistent with the use of proceeds from our public offering as described in our final prospectusfiled with the SEC pursuant to Rule 424 (b) and as further described in the table below, and invested the remaining net proceeds in cash and cash equivalents.No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any classof our equity securities or to any other affiliates.The net cash received from the public offerings is: Proceeds from sales of common stock, pursuant to registered public offering, net $2,219,306 Proceeds from sales of common stock, pursuant to at the market offering, net 250,632 Proceeds from sales of common stock, pursuant to exercise of Series A warrants, net 475,000 Total proceeds from public offerings through June 30, 2011 $2,944,398 Proceeds used in the year ended June 30, 2011: Repayment of indebtedness $128,945 Purchase and installation of machinery and equipment 61,212 Indirect payment to directors and officers for database development 62,401 Direct payments of salaries to directors and officers 175,781 Working capital 403,806 Total proceeds used in the year ended June 30, 2011 $832,145 35Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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.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 asavailable-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.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 are tradedless frequently than exchange traded securities and derivative instruments, for which the model inputs are observable in the market or can becorroborated by market observable data. Examples in this category are less frequently traded mortgage-backed securities, corporate debt securitiesand 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. 36Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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, 2011, 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.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. 37Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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 years Office equipment2 to 5 years Furniture and fixtures2 to 5 yearsLeasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated useful life of the asset.Management of the Company periodically reviews the net carrying value of all of its equipment on an asset by asset basis. These reviews consider the netrealizable value of each asset to determine whether an impairment 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 $ 13,277 and $14,909 for the years ended June 30, 2011 and 2010, respectively, isincluded in financing expense on the statements of operations.Deferred financing costs related the creation of warrant liabilities as the result of the issuance of shares of common stock are deferred and amortized over theterm of the related warrant on a straight-line basis. Deferred financing cost related to the creation of the warrant liability was recorded on a proportionatebasis with the aggregate amount of the total offering. Amortization of deferred financing costs, totaling $193,052 and none for the years ended June 30,2011, and 2010, respectively is included in financing and interest expense on the consolidated statements of operations. Deferred financing costs were fullyamortized at the year ended June 30, 2011.LicensesAmortization of licenses is computed using the straight-line method over the estimated economic useful lives of the assets.Amortization of licenses was $11,721 and $11,867 for the years ended June 30, 2011 and 2010, respectively. Based on the licenses recorded at June 30,2011, 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 2012, $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 $15,129 and $16,861 for the years ended June 30, 2011 and 2010 respectively. Based on the patents and other intangibleassets recorded in other assets at June 30, 2011, 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 2012 through 2016 and $127,498 thereafter. 38Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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, 2011 and 2010, the asset retirement obligations changed as follows: 2011 2010 Beginning balance $605,391 $553,471 Accretion of discount 56,790 51,920 Ending balance $662,181 $605,391 Because the Company does not expect to incur any expenses related to its asset retirement obligations in fiscal year 2012, the entire balance as of June 30,2011 is classified as a noncurrent liability.Financial InstrumentsThe Company discloses the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the balance sheet, for which it ispracticable to estimate the fair value. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a currenttransaction between willing parties, other than a forced liquidation sale.The carrying amounts of financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, andnotes payable, approximated their fair values at June 30, 2011 and 2010.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, 2011 and 2010 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. 39Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Product Returns and AllowancesThe Company as part of normal operations allows for customers to receive credit for patient procedures cancelled after shipping to the customer for a varietyof criteria. These criteria include but are not limited to a physical symptom on the date of procedure that interferes with the patient's ability to go forwardwith the procedure, discovery that a patient's condition is beyond treatment during surgery and other criteria as determined acceptable by management.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.Research and Development ReimbursementResearch and development reimbursement recorded during the year ended June 30, 2011is the amount of cost recoverable as part of the grants related to theQualified Therapeutic Discovery Project received by the Company in October 2010. The grants allowed for "Qualified Investments" to be recovered at 50%of the amounts expended up to the specified limits by tax year.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. 40Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Income TaxesIncome taxes are accounted for under the liability method. Under this method, the Company provides deferred income taxes for temporary differences thatwill result in taxable or deductible amounts in future years based on the reporting of certain costs in different periods for financial statement and income taxpurposes. This method also requires the recognition of future tax benefits such as net operating loss 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 2009 through 2011 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 anti-dilutive due to the Company's net loss position.Securities that could be dilutive in the future as of June 30, 2011 and 2010 are as follows: 2011 2010 Preferred stock 59,065 59,065 Common stock warrants 3,819,185 3,165,768 Common stock options 2,423,806 2,274,706 Total potential dilutive securities 6,302,056 5,499,539 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 2011 Annual Report on Form 10-K.Use of EstimatesThe preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management ofthe Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actualresults could differ from those estimates and affect the amounts reported in the financial statements.Results of OperationsFinancial PresentationThe following sets forth a discussion and analysis of the Company's financial condition and results of operations for the two years ended June 30, 2011 and2010. This discussion and analysis should be read in conjunction with our consolidated financial statements appearing elsewhere in this Annual Report onForm 10-K. The following discussion contains forward-looking statements. Our actual results may differ significantly from the results discussed in suchforward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Item 1A — RiskFactors," beginning on page 24 of this Annual Report on Form 10-K. 41Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Year ended June 30, 2011 compared to year ended June 30, 2010Product sales. The Company generated revenue of $5,238,973 for the year ended June 30, 2011 compared to revenue of $5,286,084 for the yearended June 30, 2010, a decrease of $47,111 or 0.89%.While total revenue decreased 0.89% in the year ended June 30, 2011 compared to the year ended June 30, 2010, the Company experienced growthof approximately 139% in the new treatment modalities. These new treatment modalities including lung, colorectal, head and neck, chest wall,ocular melanoma, vaginal cuff and brain which increased from 3% of total revenue during the year ended June 30, 2010 to 8% of total revenueduring the year ended June 30, 2011. Additionally, the Company experienced an increase of 1.74% in the total number of cases for the year endedJune 30, 2011 as compared to the year ended June 30, 2010.Management believes that the overall market for prostate brachytherapy has received increased pressure from other treatment options with higherreimbursement rates such as intensity-modulated radiation therapy (IMRT) as revenue generated from treating this modality decreased from 97% oftotal revenue in the fiscal year ended June 30, 2010 to 92% of total revenue in the fiscal year ended June 30, 2011. Management has continued its focus on the new treatment modalities as they are expected to become a larger portion of the total revenue in thefuture.Cost of product sales. Cost of product sales was $4,081,556 for the year ended June 30, 2011 compared to cost of product sales of $4,560,287 forthe year ended June 30, 2010.The Company continued to streamline manufacturing processes which resulted in the reduction of cost of product sales of $478,731 or 11% for theyear ended June 30, 2011 as compared to the year ended June 30, 2010. The fiscal year over fiscal year cost reduction of $478,731 was impactedprimarily by research and development projects undertaken by management in the year ended June 30, 2011. These research and developmentefforts utilized personnel and materials of the Company whose related cost were transferred to the research and development operatingexpense. These cost reductions are not expected to be ongoing in nature as the research and development projects were substantially complete atJune 30, 2011.These costs savings in the year ended June 30, 2011 included a decrease of approximately $40,000 in depreciation and amortization expense asassets reached the end of their depreciable lives, a decrease in materials expense of approximately $38,000 as materials from production wereutilized in research and development projects with the cost being reclassified to reflect the consumption of these materials and a decrease ofapproximately $363,000 in payroll and benefits expense as personnel were utilized in executing research and development projects with the costbeing reclassified.Gross margin. Gross margin was $1,157,417 for the year ended June 30, 2011 compared to a gross margin of $725,797 for the year ended June 30,2010. The improvement of $431,620 or 59% was due to the utilization of production personnel on the research and development projects describedabove and continued reductions in production costs in addition to more efficient use of manufacturing resources in the year ended June 30, 2011.Research and development expenses. Research and development expenses for the year ended June 30, 2011 were $981,186 which represents anincrease of $640,227 or approximately 188% more than the research and development expenses of $340,959 for the year ended June 30, 2010.The cost increase of approximately $640,000 in the fiscal year ended June 30, 2011 was primarily due to a increase in payroll and benefits expenseof $368,000 and an increase in other organs research expense of $455,000 as the result of the new modality research undertaken that was partiallyoffset by a decrease of $193,000 in protocol expense as protocols that the Company was involved in have ended.Research and development reimbursement. Research and development reimbursement for the year ended June 30, 2011 was $515,853 as the resultof grants received during October 2010 as part of the Qualified Therapeutic Discovery Project administered by the Internal Revenue Service underthe Patient Protection and Affordable Care Act (Public Law 111-148). There was no research and development reimbursement received in the yearended June 30, 2010. 42Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Sales and marketing expenses. Sales and marketing expenses were $1,232,188 for the year ended June 30, 2011 compared to sales and marketingexpenses of $1,953,598 for the year ended June 30, 2010, which represents a decrease of $721,410 or 37%.The decrease of approximately $721,000 is primarily the net result of a reduction in wages, benefits, related taxes and share-based compensation of$278,000 that is related to both temporary and permanent attrition of personnel as well as the forfeiture of related equity stock options; a decrease of$65,000 in travel that is a result of temporary attrition and improved trip planning; a reduction of $209,000 in marketing, advertising, conventionsand tradeshow expenses as management continues to evaluate the cost effectiveness of these items on a case by case basis; and consulting expensewas reduced by approximately $110,000 as consulting agreements expired and were not renewed.General and administrative expenses. General and administrative expenses for the year ended June 30, 2011 were $2,422,884 compared to generaland administrative expenses of $2,440,140 for the year ended June 30, 2010.The decrease of approximately $17,000 is primarily the net result of decreased wages, benefits, related taxes and share-based compensation of$32,000 as the result of a temporary reduction in staff; decreased other expense in the amount of $78,000 that was the result of a decrease in bad debtexpense that is partially offset by the withdrawal of a business and occupation tax credit from prior years; an increased consulting expense of$57,000 primarily to temporarily fill the reduced staffing; and an increased public company expense of $44,000 that was primarily the result ofadditional share listing expenses.Operating loss. In the year ended June 30, 2011, the Company had an operating loss of $2,962,988 compared to $4,008,900 for the year ended June30, 2010, a decrease of $1,045,912 or 26%. The Company's operating loss reduction of approximately $1.05 million was achieved through savingsin cost of product sales of $479,000, sales and marketing of $721,000, and general and administrative of $18,000 and partially offset by an increasein research and development expense that is net of the research and development reimbursement in the amount of $124,000.Interest income. Interest income was $3,381 for the year ended June 30, 2011 compared to interest income of $11,433 for the year ended June 30,2010. The decrease of $8,052 or 70% is the result of lower average cash balances during the year ended June 30, 2011 in combination withdecreased interest rates.Gain on the fair value of warrant liability. There was a gain on the warrant liability for the year ended June 30, 2011 in the amount of $334,000as compared to no gain for the year ended June 30, 2010. The gain of $334,000 for the year ended June 30, 2011 was the result of the recording ofwarrant liabilities related to warrants issued in combination with a stock issuance that occurred in November 2010. This gain represents the net fairvalue adjustments to the warrant liability during the year ended June 30, 2011. The warrant liability was fully extinguished during the year endedJune 30, 2011.Financing and interest expense. Financing and interest expense for the year ended June 30, 2011 was $216,606 compared to $36,389 for the yearended June 30, 2010, an increase of $180,217 or 495%.Financing expense included interest expense of approximately $9,400 and $21,000 for the years ended June 30, 2011 and 2010, respectively, adecrease of $11,600. The decrease is due to the decreased debt balances in the year ended June 30, 2011.The remaining balance of financing expense represents the amortization of deferred debt financing costs of approximately $13,300 and $14,900 forthe years ended June 30, 2011 and 2010, respectively, and the amortization of deferred equity financing costs of approximately $193,100 and nonefor the years ended June 30, 2011 and 2010, respectively. 43Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. The Company has historically financed its operations through the sale of common stock and the issuance of relatedcommon stock warrants. During fiscal year 2011, the Company used existing cash reserves and cash received through sales of common stock to fund itsoperations and capital expenditures.Cash flows from operating activitiesCash used in operating activities was approximately $2.2 million in fiscal year 2011 compared to approximately $2.7 million in fiscal year 2010, a decreaseof approximately $460,000. 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 $460,000 is attributable to the reduction of the Company's net loss of $1.2 million with an offsettingreduction in non cash charges of $250,000 in fiscal year 2011 compared to fiscal year 2010 and a reduction of $490,000 in operating assets and liabilities inthe fiscal year 2011 compared to the fiscal year 2010.Cash flows from investing activitiesCash used by investing activities was approximately $160,000 for the year ended June 30, 2010 and provided by investing activities was approximately $1.6million for the year ended June 30, 2010. Cash expenditures for fixed assets were approximately $137,000 in fiscal year 2011 and approximately $22,000 infiscal year 2010. The short-term investments of the Company matured in the year ended June 30, 2010 and provided approximately $1.7 million of cashproceeds.Cash flows from financing activitiesCash provided in financing activities was approximately $2.8 million for the year ended June 30, 2011 and cash used in financing activities wasapproximately $270,000 for the year ended June 30, 2010. Cash provided in financing activities was provided primarily through sales of common stockreduced by the payment of debt and preferred dividends in the year ended June 30, 2011. Cash used in financing activities was used mainly for payments ofdebt, preferred dividends and the cash payment of stock offering costs during the year ended June 30, 2010. Use of Proceeds On April 22, 2010 we entered into a Sales Agreement (the "Agreement") with C.K. Cooper & Company, Inc. ("CKCC"), which was amended on July 29,2010. On October 1, 2010 the Company instructed CKCC to commence sales via placement notice permitting "at the market" sales of common stock throughOctober 31, 2010. CKCC sold 304,227 shares of common stock on behalf of the Company receiving $250,632 in equity net of offering costs of $118,149($7,301 in commissions, $110,276 in legal and accounting expenses, and $571 in other costs). The offering of Shares pursuant to the Agreement, asamended, terminated on December 31, 2010.There was no material change in the use of proceeds from our public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b). All proceeds from this offering had been used as of June 30, 2011 as described in the table below.On November 22, 2010, a securities purchase agreement was executed between an institutional investor and the Company for 2,250,000 shares of commonstock with Aurora Capital acting as the placement agent for the transaction. As part of the transaction, the investor received four series of warrants(collectively, the "Warrants"). The Series A and Series C Warrants were amended and restated via an Amendment Agreement dated December 27, 2010, andthe Series C Warrants were further amended and restated via an Amendment Agreement dated March 31, 2011.The Shares and Warrants were issued pursuant to the Company's shelf registration statement (the "Registration Statement") on Form S-3 (File No. 333-162694), which became effective on November 13, 2009, and prospectus supplements filed on November 24, 2010 and on December 29, 2010. 44Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. By letter agreement dated October 27, 2010, LifeTech Capital, a division of Aurora Capital, LLC, acted as placement agent in connection with the placementof the securities in the November 2010 offering. LifeTech received a cash fee of 5% of the gross proceeds received under the offering (excluding proceedsreceived on the exercise of C or D Warrants), and also received warrants to purchase 3% of the common stock sold in the offering and 3% of the Series A, Band C Warrants exercised at any time, which warrants issued to LifeTech shall not be exercisable for six months following the closing, shall have a five yearterm, and an exercise price of $1.56 per share.The November 2010 offering yielded net cash of $2,026,255 which was net of offering costs of $223,745 ($112,500 of commission expense, $108,927 oflegal and accounting expense and $2,318 of other costs). Warrant liabilities in the amount of $1,724,000 were established related to Series A, B, and Cwarrants. Deferred financing costs of $193,051 were established related to the warrant liabilities for Series A, B, and C warrants.The Series A warrants were exercised on March 24, 2011 for 538,660 shares of common stock in exchange for $475,000 net of commission expense.The Company recorded fair value adjustments to the Series A-1 warrant liability through the exercise of the warrants on March 24, 2011. The Companyexpensed the unamortized deferred financing cost of $16,044 as financing expense in the Consolidated Statement of Operations. The Series A-1 warrantliability was reclassified to equity at the fair value reported on March 24, 2011 of $119,000 during the three months ended March 31, 2011 as the warrantholder exercised the warrants during this period.The Series B Warrants expired without being exercised.The Series C-1 warrant liability was recharacterized from a warrant liability to equity at the fair value reported using the Black-Scholes Option ValuationModel on March 31, 2011 as the warrant holder and the Company amended the agreement on that date to allow for the equity treatment of the Series C-1warrants. The fair value of the warrant liability for Series C-1 that was reclassified to equity was $1,119,000. The Company expensed the unamortizeddeferred financing cost of $142,809 as financing expense in the Consolidated Statement of Operations.There was no material change in the use of proceeds from our public offering as described in our final prospectus filed with the SEC pursuant to Rule 424 (b).Through June 30, 2011 we had begun to use the net proceeds from our public offering as described in our final prospectus filed with the SEC pursuant toRule 424 (b) and as further described in the table below, and invested the remaining net proceeds in cash and cash equivalents.No offering expenses in either offering were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent ormore of any class of our equity securities or to any other affiliates.The net cash received from the public offerings is: Proceeds from sales of common stock, pursuant to registered public offering, net $2,219,306 Proceeds from sales of common stock, pursuant to at the market offering, net 250,632 Proceeds from sales of common stock, pursuant to exercise of Series A warrants, net 475,000 Total proceeds from public offerings through June 30, 2011 $2,944,398 Proceeds used in the year ended June 30, 2011: Repayment of indebtedness $128,945 Purchase and installation of machinery and equipment 61,212 Indirect payments to directors and officers for database development 62,401 Direct payments of salaries to directors and officers 175,781 Working capital 403,806 Total proceeds used in the year ended June 30, 2011 $832,145 Current Liquidity and Capital ResourcesAt June 30, 2011, cash and cash equivalents amounted to $2,112,254 compared to $1,678,869 of cash and cash equivalents at June 30, 2010. 45Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 had approximately $2.0 million of cash on hand as of September 13, 2011. As of that date management believed that the Company's monthlyrequired cash operating expenditures were approximately $185,000 which represents a decrease of approximately $38,000 from average monthly cashoperating expenditures in fiscal year 2010. Management believes that less than $200,000 will be spent on capital expenditures for the entire fiscal year2012, but there is no assurance that unanticipated needs for capital equipment may not arise. The Company's loan facility with the Hanford Area Economic Investment Fund Committee (HAEIFC) was paid during the fiscal year ended June 30,2011. 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 no remaining loan facilities outstanding as of the year ended June 30, 2011. During fiscal year 2012, the Company intends to continue its existing protocol studies and begin new protocol studies as new treatments using Cs-131 aredeveloped. Currently, the Company has budgeted approximately $150,000 in fiscal year 2012 for protocol expenses relating to lung cancer as well ascontinued work on the dual therapy prostate protocols. These expenditures may include maintenance costs for the online data collection system developedduring the fiscal year ended June 30, 2011 and deployed during the Summer of 2011. The developer of this online data collection system meets thedefinition of a related party as it is a company owned by the Chief Executive Officer. All development efforts were approved by the Board of Directors andthe CEO recused himself from the process due to his conflict of interest. Based on the foregoing assumptions, management believes cash and cash equivalents on hand at June 30, 2011 should be sufficient to meet our anticipatedcash requirements for operations, debt service, and capital expenditure requirements through April 30, 2012.Management plans to attain breakeven and generate additional cash flows by increasing revenues from the Company's existing treatment applications of theCs-131 brachytherapy seed to both new and existing customers (through our direct sales channels and through our distributors), while expanding into newmarket applications and continuing to maintain the Company's focus on cost control.Additionally, management plans to increase revenue through the addition of the FDA cleared GliaSite® radiation therapy system to the Company productline through their direct sales channels and through a European distributor. This product will be utilized in the treatment of Glioblastoma multiforme whichis the most common and aggressive primary brain cancer in humans.Management believes the Company will reach breakeven with revenues of approximately $750,000 per month with cashflow breakeven from operationsbeing reached at approximately $700,000. However, there can be no assurance that the Company will attain profitability or that the Company will be able toattain its revenue targets. Sales in the prostate market have not shown the growth necessary to breakeven during the past two fiscal years and declined duringthe year ended June 30, 2011.As management has focused on expanding into head and neck, colorectal, lung and brain applications and experienced growth in sales for non-prostateapplications in excess of 130% comparing fiscal year 2011 to fiscal year 2010, management believes the Company will need to continue to raise additionalcapital for protocols, marketing staff, production staff and production equipment as it continues to gain market share.In fiscal year 2011, management sold common stock pursuant to both an "at the market" offering and through a direct registered offering as describedbelow. Management plans to seek to sell additional common stock through an underwritten offering in fiscal 2012 but there is no assurance that an offeringwill be completed. The Company has an effective Form S-3 shelf offering registration statement available for this purpose. 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 and dilutive to shareholders. Any financing resulting in a dilution toshareholders in excess of approximately 10% of the market price must first be approved by one of the Company's institutional investors and there is noassurance they would approve this dilutive financing. Of course, funding may not be available to us on acceptable terms, or at all. If the Company is unableto raise additional funds, it will have to discontinue or significantly curtail operations. 46Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Long-Term DebtThe Company does not have any loan facilities in place as of June 30, 2011. The loan facility that was outstanding at June 30, 2010 was from the HAEIFC,which originated in June 2006 with a total facility of $1,400,000, and was reduced in September 2007 to the amount of the Company's initial draw of$418,670. The principal balance owed on the loan was paid and satisfied in full as of 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.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, 2012 $284,915 2013 282,390 2014 282,390 2015 282,390 2016 235,324 $1,367,409 The Company is subject to various local, state, and federal environmental regulations and laws due to the isotopes used to produce the Company'sproduct. As part of normal operations, amounts are expended to ensure that the Company is in compliance with these laws and regulations. While there havebeen no reportable incidents or compliance issues, the Company believes that if it relocates its current production facilities then certain decommissioningexpenses will be incurred. An asset retirement obligation was established in the first quarter of fiscal year 2008 for the Company's obligations at its newproduction facility. This asset retirement obligation will be for obligations to remove any residual radioactive materials and to remove all leaseholdimprovements.The industry that the Company operates in is subject to product liability litigation. Through its production and quality assurance procedures, the Companyworks to mitigate the risk of any lawsuits concerning its product. The Company also carries product liability insurance to help protect it from this risk.The Company received a Qualify Therapeutic Discovery Project (QTDP) grant in lieu of a QTDP credit for the Company tax years 2010 and 2011. The costsof the Company associated with these grants are subject to examination as are the tax returns of the Company. While there is no indication that the InternalRevenue Service intends to examine these returns or the costs utilized as the underlying basis for the receipt of the grants funds. These grant funds aresubject to recapture if the associated costs are determined by the Service to not meet the definition of an "Qualified Investment" during an examination.The Company has no off-balance sheet arrangements. 47Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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, 2010, the Company adopted ASU 2009-13 and this update provides amendments to the criteria in Subtopic 605-25 for separating consideration inmultiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than underexisting U.S. GAAP. The amendments in this Update establish a selling price hierarchy for determining the selling price of a deliverable. The selling priceused for each deliverable will be based on vendor specific objective evidence if available, third-party evidence if vendor-specific objective evidence is notavailable, or estimated selling price if neither vendor specific objective evidence nor third-party evidence is available. The amendments in this Update alsowill replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specificassumptions rather than assumptions of a marketplace participant. The Company's accounting policies and amounts presented in the financial statementswere not impacted by this change.Effective August 2010, the Company adopted ASU 2010-21 "Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments toRules, Forms, Schedules and Codification of Financial Reporting Policies". This amendment updates various SEC paragraphs. The Company's accountingpolicies and amounts presented in the financial statements were not impacted by this change.Effective August 2010, the Company adopted ASU 2010-22 "Technical Corrections to SEC Paragraph". This Accounting Standards Update amends variousSEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. This updateclarifies presentation requirements for financial statements as part of the SEC Form 10-Q which have not impacted filings to date, however, this clarificationmay update my impact future filings. The Company's accounting policies and amounts presented in the financial statements were not impacted by thischange.ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAs a smaller reporting company, the Company is not required to provide Item 7A disclosure in this Annual Report.ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe required accompanying financial statements begin on page F-1 of this document.ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREThere were no disagreements or reportable events with DeCoria, Maichel & Teague, P.S.ITEM 9A – CONTROLS AND PROCEDURESDisclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conductedan evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of June 30, 2011. 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. 48Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financialofficer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.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.Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financialreports or prevent fraud, our reputation and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of ourinternal controls that need improvement. In its assessment of the effectiveness in internal control over financial reporting as of June 30, 2011, the Companydetermined that there were three deficiencies that in combination constituted a material weakness. §Segregation of Duties - The Company did not employ a sufficient complement of finance and accounting personnel during the last twoquarters of 2011 to ensure that there was a proper segregation of incompatible duties related to cash management and financial reporting. In these two quarters, the Company had a single accounting professional as an employee with the appropriate combination of educationand experience to perform the finance and accounting functions that resulted in the creation of inadequate secondary review of keyaccounting estimates, filings, reports and other documentation to ensure financial information was free of material misstatement or error. Such a lack of segregation of duties is typical in a Company with limited resources. Although, the Company's CEO and Board of Directorsreview the financial statements and would most likely discover a misappropriation of funds, this cannot be assured by the existing system. §Lack of Qualified Management - The Company has not employed a Chief Financial Officer, with appropriate employment terms providingfor independence from the influence of executive management and direct access to the Audit Committee, since September 2009. The lackof a CFO reduces the likelihood of necessary oversight by executive management and the proper function of entity-level controls necessaryto mitigate other deficiencies that may exist. §Lack of a Dedicated Human Resource Function – The Company lacks an appropriately trained and experienced human resources functionexposing the Company to additional risk relating to employment laws and practices, additional risk related to the timely replacement ofkey personnel that could impact the Company's ability to continue operations or to timely meet financial reporting filing obligations.Due to these three deficiencies and the material weakness resulting from the combination of these deficiencies, management concluded that our internalcontrol over financial reporting was not effective as of June 30, 2011.The Company is in the process of developing and implementing a remediation plan to address the material weaknesses as described above.The Company has taken the following actions to improve internal control over financial reporting: §In June 2011, the Company filled the open accounting position to address issues with segregation of duties. §The Company plans to continue to enhance staff knowledge through continued training and periodic reviews. 49Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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, 2011. 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, 2011 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.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, 2011 that have not beenalready disclosed on a Form 8-K filed with the SEC.PART IIIITEM 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. 50Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Audit 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, 2011 were as follows:Name Age Position Held Term*Dwight Babcock 63 Chairman, Chief Executive Officer AnnualBrien Ragle 42 Controller, Principal Financial and Accounting Officer Robert Kauffman 71 Vice-Chairman AnnualThomas LaVoy 51 Director AnnualAlbert Smith 67 Director AnnualFredric Swindler 64 Vice-President, Regulatory and Quality Affairs William Cavanagh III 45 Vice President, Research and Development * For directors onlyDwight Babcock – Mr. Babcock was appointed CEO of the Company on February 18, 2009. He was previously appointed Chairman and Interim CEO of theCompany on February 26, 2008 and has served as a Director of the Company since 2006. Mr. Babcock has served as Chairman and Chief Executive Officerof Apex Data Systems, Inc., an information technology company, since 1975. Apex Data Systems automates the administration and claims adjudicationneeds of insurance companies both nationally and internationally. Mr. Babcock was formerly President and CEO of Babcock Insurance Corporation (BIC)from 1974 until 1985. BIC was a nationally recognized third party administrator operating within 35 states. Mr. Babcock has knowledge and experience inthe equity arena and has participated in various activities within the venture capital, private and institutional capital markets. Mr. Babcock studiedmarketing and economics at the University of Arizona where he currently serves on the University of Arizona Astronomy Board. Mr. Babcock brings over 35years of CEO-level experience to his service on the Company's Board.Brien Ragle – Mr. Ragle has over 15 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. Mr. Ragle filed for personal bankruptcy under Chapter 13 of the U.S.Bankruptcy Code on January 26, 2011. 51Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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. (OTCBB: 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. (OTCBB: 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.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.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. 52Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 is 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 EmployeesA significant employee of our subsidiary, IsoRay Medical, Inc., and his age as of the date of this report are set forth in the table below. Also provided is abrief description of the experience of our significant employee during the past five years.Name Age Position Held & TenureLane Bray 83 Chief ChemistLane 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.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 30,2011, except as follows – Dwight Babcock (one Form 4); Robert Kauffman (two Form 4s); Thomas LaVoy (one Form 4); and Brien Ragle (two Form 4s). Eachof these Form 4s was filed late, except for one Form 4 which has not yet been filed for Mr. Kauffman.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. 53Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 Non-equity deferred Stock Option incentive plan compensation All other Salary Bonus awards awards compensation earnings compensation Total Name and principal position Year ($) ($) ($) ($) (1) ($) ($) ($) Dwight Babcock 2011 271,000 - - 84,576 - - - 355,576 Chairman and CEO 2010 237,539 25,000 - 136,000 - - - 398,539 Frederic Swindler 2011 160,000 - - 15,224 - - - 175,224 VP–QA / RA 2010 160,000 - - 24,480 - - - 184,480 William Cavanagh, III 2011 136,308 11,500 - 19,980 - - - 167,788 VP–Research and Development 2010 53,539 - - 62,820 - - - 116,359 Robert Bilella 2011 97,200 102,775 - 3,526 - - - 203,501 Territory Sales Manager 2010 97,200 100,650 - 5,610 - - - 203,460 §Amounts represent the ASC 718, Compensation – Stock Compensation valuation for the fiscal years ended June 30, 2011 and 2010, 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.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 (#) ($) date Dwight Babcock, 50,000(1) - - 6.30 03/31/2016Chairman and CEO 50,000(1) - - 3.80 06/23/2016 50,000(1) - - 3.11 08/15/2016 100,000(1) - - 0.75 05/13/2018 200,000(1) - - 0.26 06/01/2019 100,000(1) - - 1.43 06/30/2020 100,000(1) - - 0.99 06/07/2021 Fred Swindler 10,000(3) - - 4.40 03/02/2017Vice-President, Quality Assurance and 10,000(4) - - 4.14 06/01/2017Regulatory Affairs 10,000(5) - - 0.65 07/01/2018 50,000(6) - - 0.26 06/01/2019 20,000(7) - - 1.43 06/30/2020 20,000(8) - - 0.99 06/07/2021 William Cavanagh, III 30,000(9) - - 0.84 01/08/2020Vice-President, Research and Development 35,000(7) - - 1.43 06/30/2020 35,000(8) - - 0.99 06/07/2021 Robert Bilella 84,236(3) - - 4.15 06/23/2015Territory Sales Manager 18,000(6) - - 0.26 06/01/2019 5,000(7) - - 1.43 06/30/2020 5,000(8) - - 0.99 06/07/2021 54Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 options issued to Mr. Babcock which were all immediately vested and exercisable. The grant dates are 10 years prior to the expiration datein the table above.(2)Represents the June 23, 2005 grant, all of which were exercisable as of June 23, 2008.(3)Represents the March 2, 2007 grant, all of which were exercisable as of March 2, 2010.(4)Represents the June 1, 2007 grant, all of which were exercisable as of June 1, 2010.(5)Represents a July 1, 2008 grant, one-third of which became exercisable on July 1, 2009, one-third of which became exercisable on July 1, 2010, andthe final third became exercisable on July 1, 2011.(6)Represents a June 1, 2009 grant, one-third of which became exercisable on June 1, 2010, one-third of which became exercisable on June 1, 2011, andthe final third will become exercisable on June 1, 2012.(7)Represents a June 30, 2010 grant, one-third of which became exercisable on June 30, 2011, one-third of which will become exercisable on June 30,2012, and the final third will become exercisable on June 30, 2013.(8)Represents a June 7, 2011 grant, one-third of which will become exercisable on June 30, 2012, one-third of which will become exercisable on June 30,2013, and the final third will become exercisable on June 30, 2014.(9)Represents a January 8, 2010 grant, one-third of which became exercisable on January 8, 2011, one-third of which will become exercisable on January8, 2012, and the final third will become exercisable on January 8, 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.Director Compensation Non-equity Non-qualified Fees earned Stock Option incentive plan deferred All other or paid in awards awards compensation compensation compensation Name cash ($) ($) ($) ($) ($) ($) Total ($) Robert Kauffman 62,500 - 21,144 - - - 83,644 Thomas LaVoy 50,500 - 21,144 - - - 71,644 Albert Smith 30,500 - 21,144 - - - 51,644 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 shares of theCompany's common stock outstanding as of June 30, 2011 as follows - Mr. Kauffman and Mr. LaVoy each had stock options to purchase 150,000 shares ofcommon stock and Mr. Smith had stock options to purchase 175,000 shares of common stock. 55Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 MATTERSThe following tables set forth certain information regarding the beneficial ownership of the Company's common stock and preferred stock as of September 20,2011 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 20, 2011, the Company had 26,493,118 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 Common SharesOptionsExercisable Within CommonStock Percent of Name of Beneficial Owner Owned 60 Days Warrants Class (1) Dwight Babcock (2) 130,856 650,000 12,500 2.93%Brien Ragle - 13,667 - —%Robert Kauffman 88,802 150,000 - —%Thomas LaVoy 65,423 150,000 - —%Albert Smith 198,101 175,000 - 1.40%Directors and Executive Officers as a group 483,182 1,138,667 12,500 5.92% 1)Percentage ownership is based on 26,493,118 shares of Common Stock outstanding on September 20, 2011. Shares of Common Stock subjectto stock options or warrants which are currently exercisable or will become exercisable within 60 days after September 20, 2011 are deemedoutstanding for computing the percentage ownership of the person or group holding such options or warrants, but are not deemed outstandingfor computing the percentage ownership of any other person or group. 2)Mr. Babcock's common shares owned include 2,695 shares owned by his spouse. Preferred Stock Share Ownership Preferred Shares Percent of Name of Beneficial Owner Owned Class (1) Aissata Sidibe (2) 20,000 33.86%William and Karen Thompson Trust (3) 14,218 24.07%Jamie Granger (4) 10,529 17.83%Hostetler Living Trust (5) 9,479 16.05%Leslie Fernandez (6) 3,688 6.24%(1)Percentage ownership is based on 59,065 shares of Preferred Stock outstanding on September 20, 2011.(2)The address of Ms. Sidibe is 229 Lasiandra Ct, Richland, WA 99352.(3)The address of the William and Karen Thompson Trust is 285 Dondero Way, San Jose, CA 95119.(4)The address of Jamie Granger is 53709 South Nine Canyon Road, Kennewick, WA 99337.(5)The address of the Hostetler Living Trust is 9257 NE 175th Street, Bothell, WA 98011.(6)The address of Leslie Fernandez is 2615 Scottsdale Place, Richland, WA 99352. 56Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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 $26,474 and $23,041for the years ended June 30, 2011 and 2010, 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. 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, 2011 2010 1.Audit fees $56,250 $65,861 2.Audit-related fees 13,684 22,750 3.Tax fees 10,350 10,350 4.All other fees 17,732 - Totals $98,016 $98,961 57Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Audit fees include fees for the audit of our annual financial statements, reviews of our quarterly financial statements, and related consents for documents filedwith the SEC. Audit-related fees include consulting fees to meet the compliance requirements of the Sarbanes-Oxley Act. Tax fees include fees for thepreparation of our federal and state income tax returns. All other fees are related to consulting costs related to the accounting and recording of complexaccounting transactions that occurred in the year ended June 30, 2011.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 on August3, 2005.3.1 Articles of Incorporation and By-Laws are incorporated by reference to the Exhibits to the Company's Registration Statement of September15, 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 on February7, 2007.3.5 Amended and Restated By-Laws of the Company dated as of January 8, 2008, incorporated by reference to the Form 8-K filed on January14, 2008.4.2 Intentionally Omitted.4.3 Intentionally Omitted.4.4 Intentionally Omitted.4.5 Intentionally Omitted.4.6 Intentionally Omitted.4.7 Amended and Restated 2005 Stock Option Plan incorporated by reference to the Form S-8 filed on August 19, 2005.4.8 Amended and Restated 2005 Employee Stock Option Plan incorporated by reference to the Form S-8 filed on August 19, 2005.4.9 Intentionally Omitted.4.10 Intentionally Omitted.4.11 Form of IsoRay, Inc. Common Stock Purchase Warrant, incorporated by reference to the Form SB-2/A1 filed on March 24, 2006. 58Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 4.12 2006 Director Stock Option Plan, incorporated by reference to the Form S-8 filed on August 18, 2006.4.13 Intentionally Omitted.4.14 Form of IsoRay, Inc. Common Stock Purchase Warrant, dated August 9, 2006, incorporated by reference to the Form 8-K filedon August 18, 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 by reference 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, incorporatedby reference 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, 2008.4.22 Form of Series [A] [B] [C] Warrant to Purchase Common Stock, incorporated by reference to the Form 8-K filed on November22, 2010.4.23 Form of Series D Warrant to Purchase Common Stock, incorporated by reference to the Form 8-K filed on November 22, 2010.10.2 Universal License Agreement, dated November 26, 1997 between Donald C. Lawrence and William J. Stokes of PacificManagement Associates 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 by reference to the Form SB-2 filed on November 10, 2005.10.4 Intentionally Omitted.10.5 Section 510(k) Clearance from the Food and Drug Administration to market Lawrence CSERION Model CS-1, dated March 28,2003, incorporated by reference to the Form SB-2 filed on November 10, 2005.10.6 Intentionally Omitted.10.7 Intentionally Omitted.10.8 Intentionally Omitted.10.9 Development Loan Agreement for $230,000, dated September 15, 2004 between Benton-Franklin Economic DevelopmentDistrict and IsoRay Medical, Inc., incorporated by reference to the Form SB-2/A2 filed on April 27, 2006.10.10 Registry of Radioactive Sealed Sources and Devices Safety Evaluation of Sealed Source, dated September 17, 2004,incorporated by reference 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 byreference to the Form 10-QSB filed on November 21, 2005.10.20 Intentionally Omitted.10.21 Intentionally Omitted.10.22 Agreement dated August 9, 2005 between the Curators of the University of Missouri and IsoRay Medical, Inc., incorporated byreference to the Form SB-2/A2 filed on April 27, 2006 (confidential treatment requested). 59Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10.23 Intentionally Omitted.10.24 Intentionally Omitted.10.25 Economic Development Agreement, dated December 14, 2005, by and between IsoRay, Inc. and the Pocatello DevelopmentAuthority, 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 theForm 8-K filed on March 24, 2006 (confidential treatment requested).10.27 Intentionally Omitted.10.28 Service Agreement between IsoRay, Inc. and Advanced Care Medical, Inc., dated March 1, 2006, incorporated by reference tothe Form SB-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 EconomicInvestment Fund 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 EffectiveAmendment No. 2 filed 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 byreference to the 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 by reference 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 theForm 8-K filed 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., incorporatedby reference to the Form 8-K filed on February 24, 2009 (confidential treatment requested for redacted portions).10.51 Amendment No. 1 to Service Agreement, dated February 18, 2009, by and between IsoRay Medical, Inc. and Biocompatibles,Inc., incorporated by reference to the Form 8-K filed on February 24, 2009 (confidential treatment requested for redactedportions).10.52 Intentionally Omitted.10.53 Intentionally Omitted.10.62 Letter Agreement between IsoRay, Inc. and LifeTech Capital, a division of Aurora Capital, LLC dated October 27, 2010,incorporated by reference to the Form 8-K filed on November 22, 2010. 60Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 10.63 Form of Securities Purchase Agreement, dated as of November 22, 2010, by and between IsoRay, Inc. and the signatoriesthereto, incorporated by reference to the Form 8-K filed on November 22, 2010.10.64 Form of Lock-Up Agreement, dated as of November 22, 2010, by and between IsoRay, Inc. and the signatories thereto,incorporated by reference to the Form 8-K filed on November 22, 2010.10.66 License Agreement dated as of June 1, 2011, by and between Dr. Reddy's Laboratories (EU) Ltd. and IsoRay Medical, Inc.,incorporated by reference to the Form 8-K filed on June 7, 2011 (confidential treatment requested for redacted portions).10.67 Financial Consulting Agreement, dated August 1, 2011, by and between Shareholder Relations and IsoRay Medical, Inc.,incorporated by reference to the Form 8-K filed on August 5, 2011.21.1 Subsidiaries of the Company, filed herewith.23.1 Consent of DeCoria, Maichel & Teague, P.S., filed herewith.31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer, filed herewith.31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer, filed herewith.32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.Reports on Form 8-KOn May 16, 2011, the Company filed a Current Report on Form 8-K announcing its financial results for the quarter ended March 31, 2011.On June 7, 2011, the Company filed a Current Report on Form 8-K announcing that its wholly-owned subsidiary, IsoRay Medical, Inc., entered into a LicenseAgreement with Dr. Reddy's Laboratories (EU) Ltd.On August 5, 2011, the Company filed a Current Report on Form 8-K announcing its entry into a Financial Consulting Agreement with ShareholderRelations.On August 19, 2011, the Company filed an amended Current Report on Form 8-K/A, amending its Current Report on Form 8-K filed on June 7, 2011, toattach two annexures to the exhibit to the Report. 61Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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, 2011 and 2010F-3Consolidated Statements of Operations for the years ended June 30, 2011 and 2010F-4Consolidated Statement of Changes in Shareholders' Equity for the years ended June 30, 2011 and 2010 F-5Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010F-6Notes to Consolidated Financial Statements F-7 F-1Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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, 2011 and 2010,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, 2011 and 2010, 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 26, 2011 F-2Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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, 2011 2010 ASSETS Current assets: Cash and cash equivalents $2,112,254 $1,678,869 Accounts receivable, net of allowance for doubtful accounts of $63,867 and $36,390, respectively 792,835 896,266 Inventory 749,849 681,677 Other receivables 425,901 3,998 Prepaid expenses and other current assets 141,154 255,977 Total current assets 4,221,993 3,516,787 Fixed assets, net of accumulated depreciation and amortization 3,208,911 3,959,983 Restricted cash 180,809 180,154 Other assets, net of accumulated amortization 277,182 285,871 Total assets $7,888,895 $7,942,795 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $372,259 $404,401 Accounts protocol expense 98,159 242,029 Accrued radioactive waste disposal 108,060 60,060 Accrued payroll and related taxes 125,014 186,513 Accrued vacation 70,706 68,525 Notes payable, due within one year - 49,445 Total current liabilities 774,198 1,010,973 Notes payable, due after one year - 130,550 Asset retirement obligation, noncurrent 662,181 605,391 Total liabilities 1,436,379 1,746,914 Commitments and contingencies (Note 18) Shareholders' equity: Preferred stock, $.001 par value; 7,000,000 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 Series C: 1,000,000 shares allocated; no shares issued and outstanding - - Common stock, $.001 par value; 193,000,000 shares authorized; 26,443,118 and 23,048,754 shares issued andoutstanding 26,443 23,049 Treasury stock, at cost, 13,200 and 13,200 shares (8,390) (8,390)Additional paid-in capital 51,180,237 48,084,783 Accumulated deficit (44,745,833) (41,903,620) Total shareholders' equity 6,452,516 6,195,881 Total liabilities and shareholders' equity $7,888,895 $7,942,795 The accompanying notes are an integral part of these consolidated financial statements. F-3Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 For the year ended June 30, 2011 2010 Product sales $5,238,973 $5,286,084 Cost of product sales 4,081,556 4,560,287 Gross income 1,157,417 725,797 Operating expenses: Research and development expenses 981,186 340,959 Research and development reimbursement (515,853) - Sales and marketing expenses 1,232,188 1,953,598 General and administrative expenses 2,422,884 2,440,140 Total operating expenses 4,120,405 4,734,697 Operating loss (2,962,988) (4,008,900) Non-operating income (expense): Interest income 3,381 11,433 Gain on fair value of warrant liability 334,000 - Financing and interest expense (216,606) (36,389) Non-operating income (loss) , net 120,775 (24,956) Net loss (2,842,213) (4,033,856)Preferred stock dividends (10,632) (10,632) Net loss applicable to common shareholders $(2,852,845) $(4,044,488) Basic and diluted loss per share $(0.11) $(0.18) Weighted average shares used in computing net loss per share: Basic and diluted 25,131,563 22,960,421 The accompanying notes are an integral part of these consolidated financial statements. F-4Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc and SubsidiariesConsolidated Statement of Changes in Shareholders' Equity Series B Preferred Stock Common Stock Treasury Stock Additional Accumulated Shares Amount Shares Amount Shares Amount Paid-in Capital Deficit Total 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 to exercise of options 106,666 107 30,226 30,333 Payment of dividend to preferred shareholders (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 Issuance of common stock and stock purchase warrantspursuant to registered pubilc offering, net 2,250,000 2,250 2,217,056 2,219,306 Initial fair value of derivative warrant liablity (1,724,000) (1,724,000)Exercise of derivative warrant liability 119,000 119,000 Reclassification of derivative warrant liability to equity 1,119,000 1,119,000 Expiration of derivative warrant liability 152,000 152,000 Issuance of common stock pursuant to at the market, net 304,227 304 250,328 250,632 Issuance of common stock pursuant to exercise ofwarrants, net 765,004 765 674,054 674,819 Issuance of common stock pursuant to exercise of options 75,133 75 55,959 56,034 Payment of dividend to Preferred shareholders (10,632) (10,632)Share-based compensation 242,689 242,689 Net loss (2,842,213) (2,842,213) Balances at June 30, 2011 59,065 $59 26,443,118 $26,443 13,200 $(8,390) $51,180,237 $(44,745,833) $6,452,516 The accompanying notes are an integral part of these consolidated financial statements. F-5Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 For the Year ended June 30, 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,842,213) $(4,033,856)Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization of fixed assets 888,568 953,243 Amortization of deferred financing expense and other assets 233,180 43,637 Gain on fair value of warrant liabilities (334,000) - Accretion of asset retirement obligation 56,790 51,920 Share-based compensation 242,689 273,033 Changes in operating assets and liabilities: Accounts receivable, net 103,431 (149,698)Inventory (68,172) 107,569 Other receivables (421,902) 1,193 Prepaid expenses, other current assets and other assets (89,951) (7,387)Accounts payable and accrued expenses (32,142) (12,593)Accrued protocol expense (143,870) 20,141 Accrued radioactive waste disposal 48,000 60 Accrued payroll and related taxes (61,499) 82,627 Accrued vacation 2,181 (16,292) Net cash used by operating activities (2,418,910) (2,686,403) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets (137,496) (21,742)Additions to licenses and other assets (19,718) (11,721)Change in restricted cash (655) (1,539)Proceeds from the sale or maturity of short-term investments - 1,679,820 Net cash provided (used) by investing activities (157,869) 1,644,818 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable (179,995) (157,465)Preferred dividends paid (10,632) (36,679)Proceeds from sales of common stock, pursuant to registered public offering, net 2,219,306 - Proceeds from sales of common stock, pursuant to at the market, net 250,632 - Proceeds from sales of common stock, pursuant to exercise of warrants, net 674,819 - Proceeds from cash sales of common stock, pursuant to exercise of options 56,034 30,333 Payments on stock offering costs - (106,479) Net cash provided (used) by financing activities 3,010,164 (270,290) Net increase (decrease) in cash and cash equivalents 433,385 (1,311,875)Cash and cash equivalents, beginning of year 1,678,869 2,990,744 CASH AND CASH EQUIVALENTS, END OF YEAR $2,112,254 $1,678,869 Supplemental disclosures of cash flow information: Cash paid for interest $10,720 $18,698 Non-cash investing and financing activities: Initial fair value of warrant liabilities $1,724,000 $- Reclassification of warrants from liabilities to equity $(1,390,000) $- The accompanying notes are an integral part of these consolidated financial statements. F-6Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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, 2011 and 20101.OrganizationCentury Park Pictures Corporation (Century) was organized under Minnesota law in 1983. Century had no operations during the period from 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 toIsoRay, Inc. (IsoRay or the Company). In the merger, the Medical stockholders received approximately 82% of the then outstanding securities of theCompany.Medical, a Delaware corporation, was incorporated effective June 15, 2004 to develop, manufacture and sell isotope-based medical products and devicesfor the treatment of cancer and other malignant diseases. Medical is headquartered in Richland, Washington.2.Summary of Significant Accounting PoliciesCritical Accounting Policies and EstimatesManagements' discussion and analysis of our financial condition and results of operations are based upon financial statements which have been preparedin accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets andliabilities. On an on-going basis, management evaluates our critical accounting policies and estimates, including those related to long-lived assets,share-based compensation, revenue recognition, overhead allocation, allowance for doubtful accounts, inventory, and deferred taxes. Management basesits estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results maydiffer from these estimates under different assumptions or conditions.Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of ourconsolidated financial statements. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts ofrevenues and expenses during the reporting periods. Changes to these judgments and estimates could adversely affect the Company's future results ofoperations and cash flows.ConsolidationThe 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. F-7Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 onmanagement's judgment, considering historical experience write-offs, collections and current credit conditions. Balances which remain outstanding aftermanagement has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to the applicableaccounts receivable. 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.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,are written off to cost of product sales at the time it is determined that the product is no longer useable.Prepaid AssetsPrepaid assets, which include other receivables, accrued interest receivable, prepaid expenses, prepaid insurance expense, prepaid marketing expense,prepaid rent and lease deposits are recorded at cost. The Company periodically reviews the carrying values of other receivables for collectability and toevaluate the requirement to establish an allowance for the collectability of the other receivables.Fixed AssetsFixed assets are capitalized and carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense asincurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain orloss is recognized in operations.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 thenet realizable value of each asset to determine whether there is a impairment in value which has occurred, and there is a need for any asset impairmentwrite-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. F-8Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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. Thevalue of the shares issued was the estimated market price of the shares as of the date of issuance. Amortization of deferred financing costs, totaling$13,277 and $14,909 for the years ended June 30, 2011 and 2010, respectively, is included in financing and interest expense on the consolidatedstatements of operations. Financing costs related to the creation of warrant liabilities as the result of their issuance with shares of common stock soldwere recorded on a proportionate basis with the aggregate amount of the total offering. Such financing costs, totaling $193,052 and none for the yearsended June 30, 2011, and 2010, respectively are included in financing and interest expense on the consolidated statements of operations.LicensesLicenses include costs related to licenses related to the use of technology or operational licenses. These licenses are recorded at stated cost, lessaccumulated amortization. Amortization of licenses is computed using the straight-line method over the estimated economic useful lives of theassets. Amortization of licenses was $11,721 and $11,867 for the years ended June 30, 2011 and 2010, respectively. The Company periodically reviewsthe carrying values of licenses and evaluates the recorded basis for any impairments. Any impairments are recognized when the expected future operatingcash flows to be derived from the licenses are less than their carrying value. The Company periodically reviews the carrying values of patents and anyrelated impairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value. Basedon the licenses recorded at June 30, 2011, and the determination that no impairment of the underlying assets exists, the annual amortization expense foreach fiscal year ending June 30 is expected to be as follows: $11,721 for 2012, $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 usingthe straight-line method over the estimated economic useful lives of the assets. The Company periodically reviews the carrying values of patents andany related 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 $15,129 and $16,861 for the years ended June 30, 2011 and 2010, respectively. Based on the patents and otherintangible assets recorded in other assets at June 30, 2011, and assuming no subsequent impairment of the underlying assets, the annual amortizationexpense for each fiscal year ending June 30 is expected to be as follows: $15,139 for 2012 through 2016, and $127,498 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 fixed assets. The initial recorded obligation is discounted using the Company's credit-adjusted risk-free rate and isreviewed 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 theleased assets.Financial InstrumentsAt June 30, 2011 and 2010, the carrying value of financial instruments such as accounts receivable, other receivables, accounts payable and accruedliabilities, approximated fair value based on the short-term maturities of these instruments. There is long-term long term debt at June 30, 2011 and 2010approximated fair value because the underlying interest rate reflects a market rate at the report date.The Company discloses the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the balance sheet, for whichit is practicable 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. F-9Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Fair Value MeasurementASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those assets and liabilities measured at fair value whichdistinguishes between assumptions based on market data (observable inputs). The hierarchy consists of: Level 1 – quoted market prices in an activemarkets for identical instruments; Level 2 – inputs other than Level 1inputs that are observable; and Level 3 – unobservable inputs developed usingestimates and assumptions determined by the Company.At June 30, 2011 and 2010, there were no assets or liabilities measured at fair-value on a recurring basis which were measured using Level 1inputs. Certain assets and liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair-value on anongoing basis, but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). TheCompany had no assets measured at fair value on a nonrecurring basis during the year ended June 30, 2011 or 2010. The Company had one liability, theAsset Retirement Obligation, non-current, that was measured at fair value on a nonrecurring basis using Level 2 inputs during the years ended June 30,2011 and 2010.ASC Topic 825, Financial Instruments, permits entities to choose to measure many financial assets and liabilities at fair value. The Company did notchoose to measure any financial assets or liabilities at fair value at June 30, 2011 or 2010.Warrant LiabilitiesFor the warrant liabilities which are measured at fair value on a recurring basis, the Company uses the Black-Scholes valuation model with the followinginputs as of November 24, 2010, December 31, 2010, March 31, 2011 and May 24, 2011: Black-Scholes Valuation ModelInput variables used in fair value calculationsInput Variables November 24, 2010 December 31, 2010 Stock Price $1.360 $1.130 Exercise Price $1.038 $0.984 Term 3 to 36 months 3 to 36 months Volatility 65.40% to 156.60% 59.28% to 155.92% Discount Rate 0.187% to 0.810% 0.167% to 1.020% Input Variables March 31, 2011 May 24, 2011 Stock Price $1.260 $1.070 Exercise Price $0.921 $0.876 Term 6 to 36 months 36 months Volatility 63.41% to 153.35% 56.88%Discount Rate 0.170% to 1.290% 0.110%Revenue RecognitionThe Company recognizes revenue related to product sales when (i) persuasive evidence of an arrangement exists, (ii) shipment has occurred, (iii) the feeis fixed or determinable, and (iv) collectability is reasonably assured. Revenue for the fiscal years ended June 30, 2011 and 2010 was derived primarily from sales of the Proxcelan Cs-131 brachytherapy seed, which is usedin the treatment of cancer. The Company recognizes revenue once the product has been shipped to the customer. Prepayments, if any, received fromcustomers prior to the time that products are shipped are recorded as deferred revenue. In these cases, when the related products are shipped, the amountrecorded as deferred revenue is then recognized as revenue. The Company accrues for sales returns and other allowances at the time ofshipment. Although the Company does not have an extensive operating history upon which to develop sales returns estimates, we have used theexpertise of our management team, particularly those with extensive industry experience and knowledge, to develop a proper methodology. F-10Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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 valuationmodel to estimate fair value for all stock options on the date of grant. For stock options that vest over time, the Company recognizes compensation coston 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 nottreated as an expense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as researchand development expense in the year recognized.Research and Development ReimbursementResearch and development reimbursement includes allowable costs that have been incurred for related grants and other cost sharing arrangements forproduct research and development, these amounts have been recorded in prepaid expenses and other current assets. An accrual in prepaid expenses andother current assets for these cost reimbursements is recorded in the year in which it is earned and the accrual is relieved when the reimbursement isreceived. Research and development reimbursements were $515,853 and none for the year ended June 30, 2011 and 2010 respectively. As of June 30,2011 and 2010, $ 406,537 and $0 were receivable from the Internal Revenue Service and recorded in prepaid expense and other current assets. Theseamounts were the result of the receipt of three grants received from the Internal Revenue Service in October 2010 as part of the IRS Qualified TherapeuticDiscovery Project, which covered expenses incurred during the fiscal and tax years ended June 30, 2011 and 2010, respectively.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 $83,815 and $292,727 for the years ended June 30, 2011 and 2010,respectively. Marketing costs of $4,300 and $8,900 were included in prepaid expenses at June 30, 2011 and 2010 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 federalenvironmental regulations and laws due to the isotopes used to produce the Company's product. As part of normal operations, amounts are expended toensure that the Company is in compliance with these laws and regulations. While there have been no reportable incidents or compliance issues, theCompany believes that if it relocates its current production facilities then certain decommissioning expenses will be incurred and has recorded an assetretirement obligation for these expenses. F-11Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 incurredand the amount of the loss is reasonably estimable. Estimating probable losses requires analysis of multiple factors, in some cases including judgmentsabout the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, theCompany does not believe any probable legal proceedings or claims will have a material adverse effect on its financial position or results ofoperations. However, if actual or estimated probable future losses exceed the Company's recorded liability for such claims, it would record additionalcharges as other expense during the period 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 differencesthat will result in taxable or deductible amounts in future years based on the reporting of certain costs in different periods for financial statement andincome tax purposes. This method also requires the recognition of future tax benefits such as net operating loss carry-forwards, to the extent thatrealization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in operations in the period that includes the enactment of the change. Management has determined that the Company,its subsidiary, and its predecessors are subject to examination of their income tax filings in the United States and state jurisdictions for the 2009 through2011 tax years. In the event that the Company is assessed penalties and or interest, penalties will be charged to other operating expense and interest willbe charged to interest expense.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 commonshares outstanding, and does not include the impact of any potentially dilutive common stock equivalents, including preferred stock, common stockwarrants or options 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, 2011 and 2010 are as follows: 2011 2010 Preferred stock 59,065 59,065 Common stock warrants 3,819,185 3,165,768 Common stock options 2,423,806 2,274,706 Total potential dilutive securities 6,302,056 5,499,539 Subsequent EventsEffective April 1, 2009, the Company adopted ASC 855, Subsequent Events. This Statement establishes the accounting for, and disclosure of, materialevents that occur after the balance sheet date, but before the financial statements are issued. In general, these events will be recognized if the conditionexisted at the date of the balance sheet, and will not be recognized if the condition did not exist at the balance sheet date. Disclosure is required for non-recognized events if required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidanceprovided in accounting literature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through thedate our financial statements were issued—the filing time and date of our 2011 Annual Report on Form 10-K. F-12Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 requiresmanagement of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notesincluding the allowance for doubtful accounts receivable; net realizable value of the enriched barium inventory; the estimated useful lives used incalculating depreciation and amortization on the Company's fixed assets, patents, trademarks and other assets; estimated amount and fair value of theasset retirement obligation related to the Company's production facilities; and inputs used in the calculation of expense related to share-basedcompensation including volatility, estimated lives and forfeiture rates of options granted. Accordingly, actual results could differ from those estimatesand affect the amounts reported in the financial statements.Impact of Recently Issued Accounting PronouncementsOn July 1, 2010, the Company adopted ASU 2009-13. This update provides amendments to the criteria in Subtopic 605-25 for separating considerationin multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances thanunder existing U.S. GAAP. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. Theselling price used for each deliverable will be based on vendor specific objective evidence if available, third-party evidence if vendor-specific objectiveevidence is not available, or estimated selling price if neither vendor specific objective evidence nor third-party evidence is available. The amendmentsin this update also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is basedon entity-specific assumptions rather than assumptions of a marketplace participant. The Company's accounting policies and amounts presented in thefinancial statements were not impacted by this change.Effective August 2010, the Company adopted ASU 2010-21 "Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendmentsto Rules, Forms, Schedules and Codification of Financial Reporting Policies". This amendment updates various SEC paragraphs. The Company'saccounting policies and amounts presented in the financial statements were not impacted by this change.Effective August 2010, the Company adopted ASU 2010-22 "Technical Corrections to SEC Paragraph". This Accounting Standards Update amendsvarious SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SABtopics. This update clarifies presentation requirements for financial statements as part of the SEC Form 10-Q which have not impacted filings to date,however, this clarification may impact future filings. The Company's accounting policies and amounts presented in the financial statements were notimpacted by this change. 3.InventoryInventory consisted of the following at June 30, 2011 and 2010: 2011 2010 Raw materials $625,394 $546,080 Work in process 120,180 130,840 Finished goods 4,275 4,757 Total inventory $749,849 $681,677 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 atan off-site storage location in Richland, Washington and is included in raw materials at June 30, 2011 and 2010. F-13Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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.Prepaid Expenses and Other Current AssetsPrepaid expenses and other current assets consisted of the following at June 30, 2011 and 2010: 2011 2010 Prepaid insurance $26,285 $6,757 Prepaid rent 23,697 – Other prepaid expenses 64,479 222,527 Other current assets 26,693 26,693 $141,154 $255,977 5.Other ReceivablesOther receivables consisted of receivables that are not the result of revenue creating activities of the Company. The other receivable recorded as of June30, 2011 was primarily a receivable that was created as the result of Qualified Therapeutic Discovery Project grants received by the Company in October2010. Research and development reimbursements for project related costs are recorded as operational expense recoveries with the related entry beingrecorded in other receivables as earned. The payment of this other receivable was received in July 2011 and was $406,537 of the total other receivablesamount of $425,901. 6.Fixed AssetsFixed assets consisted of the following at June 30, 2011 and 2010: 2011 2010 Production equipment $3,047,899 $3,114,894 Office equipment 103,597 169,890 Furniture and fixtures 148,265 148,265 Leasehold improvements (a) 4,122,417 4,643,965 Construction in progress 123,613 – 7,545,791 8,077,014 Less accumulated depreciation (4,336,880) (4,117,031) $3,208,911 $3,959,983 (a)Balance includes asset retirement addition of $473,096 as of June 30, 2011 and 2010.Depreciation and amortization expense related to fixed assets totaled $888,568 and $953,243 for 2011 and 2010, respectively. 7.Restricted CashThe Washington Department of Health, effective October 2007, has required the Company to provide collateral for the decommissioning of itsfacility. To satisfy this requirement, the Company funded two certificates of deposits (CDs) totaling $172,500 in separate banks. The CDs both haveoriginal maturities of three months but are termed restricted cash and classified as a long-term asset as the Company does not anticipatedecommissioning the facility until the end of the current lease plus the one remaining three-year lease option period. The end date of the current leaseincluding the one remaining three-year renewal option is April 2016. Interest earned on the CDs is rolled-over at the maturity of each CD and becomespart of the restricted cash balance. Interest earned and added to restricted cash during the fiscal year ended June 30, 2011 and 2010 was $655 and$1,539, respectively. These funds will be used to settle a portion of the Company's remaining asset retirement obligations (Note 2). F-14Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 8.Other AssetsOther assets, net of accumulated amortization, consisted of the following at June 30, 2011 and 2010: 2011 2010 Deferred charges $73,988 $54,270 Deferred financing costs - 13,277 Patents and trademarks, net of accumulated amortization of $55,513 and $40,383 203,194 218,324 $277,182 $285,871 Deferred charges consist of prepaid legal fees for patents and trademarks which have not yet been obtained, and prepayments and deposits on fixed assetsand contracts. Amortization of patents and trademarks was $15,130 and $15,139 for the years ended June 30, 2011 and 2010, respectively. 9.Notes PayableNotes payable consisted of the following at June 30, 2010: 2010 Hanford Area Economic Investment Fund Committee (HAEIFC) note payable $179,995 179,995 Less amounts due within one year (49,445) Amounts due after one year $130,550 In June 2006, the Company entered into a note payable with HAEIFC, which was collateralized by receivables, inventory, equipment, and certain lifeinsurance policies. The loan originally had a total facility of $1,400,000 which was reduced in September 2007 to the amount of the Company's initialdraw of $418,670. The note contains certain restrictive covenants relating to: financial ratios; payment of compensation to officers and directors; andpayment of dividends and employee bonuses. The note accrues interest at 9% and is payable in monthly installments with the final installment due inSeptember 2013. The Company paid off the note amount of $179,995 during the year ended June 30, 2011. The Company received confirmation of thenote being fully satisfied from HAEIFC releasing their interest in the collateral and the Company from the terms of the loan covenants as a result. 10.Asset Retirement ObligationIn September 2007, an asset retirement obligation of $473,096 was established representing the discounted cost of the Company's estimate of theobligations to remove any residual radioactive materials and all leasehold improvements at the end of the lease term at its new production facility. Theestimate was developed by qualified production personnel and the general contractor of the new facility using level 2 inputs. Management has reviewedthe estimate and believes that the original estimate continues to be applicable.During the years ended June 30, 2011 and 2010, the asset retirement obligations changed as follows: 2011 2010 Beginning balance $605,391 $553,471 Accretion of discount 56,790 51,920 Ending balance $662,181 $605,391 F-15Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Because the Company does not expect to incur any expenses related to its asset retirement obligations in fiscal year 2012, the entire balance as of June30, 2011 is classified as a noncurrent liability. 11.Share-Based CompensationThe following table presents the share-based compensation expense recognized in during the years ended June 30, 2011 and 2010: 2011 2010 Cost of product sales $35,087 $22,615 Research and development 22,380 5,206 Sales and marketing expenses 10,004 74,745 General and administrative expenses 175,218 170,467 Total share-based compensation $242,689 $273,033 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, 2011, totalunrecognized compensation cost related to stock-based options and awards was $273,599 and the related weighted-average period over which it isexpected to be recognized is approximately 1.19 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 ofcommon stock to directors, officers, key employees and service providers of the Company. The Employee Plan allows the Board of Directors to grantoptions to purchase up to 2,000,000 shares of common stock to officers and key employees of the Company. The Director Plan allows the Board ofDirectors to grant options to purchase up to 1,000,000 shares of common stock to directors of the Company. Options granted under all of the plans havea ten year maximum term, an exercise price equal to at least the fair market value of the Company's common stock on the date of the grant, and varyingvesting periods as determined by the Board. For stock options with graded vesting terms, the Company recognizes compensation cost on a straight-linebasis over the requisite service period for the entire award.A summary of stock option information within the Company's share-based compensation plans as of June 30, 2011 is as follows: Shares Price (a) Life (b) Value (c) Outstanding at June 30, 2011 2,423,806 $1.78 6.53 $462,663 Vested and expected to vest at June 30,2011 2,322,364 $1.83 6.48 $420,608 Vested and exercisable at June 30, 2011 1,951,114 $2.01 6.26 $358,370 (a)Weighted average exercise price per share. (b) Weighted average remaining contractual life. (c) Aggregate intrinsic valueThe aggregate intrinsic value of options exercised during the years ended June 30, 2011 and 2010 was $15,598 and $109,700, respectively. TheCompany's current 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 years ended June 30, 2011 and 2010: F-16Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. Years ended June 30, 2011 (a) 2010 (b) Weighted average fair value of options granted $0.84 $1.26 Key assumptions used in determining fair value: Weighted average risk-free interest rate 1.54% 1.90%Weighted average life of the option (in years) 4.83 4.78 Weighted average historical stock price volatility 130.04% 168.79%Expected dividend yield 0.00% 0.00% (a)During the year ended June 30, 2011, the Company granted 357,500 stock options. (b)During the year ended June 30, 2010, the Company granted 290,000 stock options.The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions andare fully 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 subjectiveinput assumptions can materially affect the fair value estimate, this valuation model does not necessarily provide a reliable single measure of the fairvalue of its stock 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 ofgrant. The expected option lives, volatility, and forfeiture assumptions are based on historical data of the Company.A summary of the Company's stock option activity and related information for the years ended June 30, 2011 and 2010 is as follows: 2011 2010 Shares Price (a) Shares Price (a) Beginning balance outstanding 2,274,706 $1.96 2,708,166 $2.08 Granted (b) 357,500 0.99 290,000 1.34 Expired (133,267) 3.28 (616,794) 2.48 Exercised (75,133) 0.75 (106,666) 0.28 Ending balance outstanding 2,423,806 $1.78 2,274,706 $1.96 Exercisable at end of year 1,951,114 $2.01 1,730,961 $2.36 (a)Weighted average exercise price per share. (b)All options granted had exercise prices equal to or greater than the ending closing market price of the Company's common stock on thegrant date. The options were granted to employees and management by the Board of Directors and had vesting periods from immediate tothree years.The following table summarizes additional information about the Company's stock options outstanding as of June 30, 2011: Options Outstanding Options Exercisable Range of Exercise Prices Shares Price (a) Life (b) Shares Price (a) $0.26 640,534 $0.26 7.93 yrs 493,682 $0.26 $0.65 to $0.84 150,000 0.76 5.30 yrs 119,999 0.75 $0.99 307,500 0.99 8.64 yrs 125,000 0.99 $1.00 to $1.43 367,802 1.32 7.70 yrs 254,463 1.31 $2.00 300,000 2.00 4.08 yrs 300,000 2.00 $3.11 299,534 3.11 5.13 yrs 299,534 3.11 $3.80 100,000 3.80 4.99 yrs 100,000 3.80 $4.14 to $4.15 114,936 4.15 4.50 yrs 114,936 4.15 $4.40 23,500 4.40 5.68 yrs 23,500 4.40 $6.25 to $6.50 120,000 6.29 4.71 yrs 120,000 6.29 Total options 2,423,806 1,951,114 F-17Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. (b)Weighted average remaining contractual life.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 7,000,000 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 common stockat the rate of one share of common stock for each share of Series A preferred stock, and are subject to automatic conversion into common stock upon theclosing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale ofcommon stock in which the gross proceeds to the Company are at least $4 million. Series A preferred shareholders have voting rights equal to the votingrights of common stock, except that the vote or written consent of a majority of the outstanding preferred shares is required for any changes to the Company'sArticles of Incorporation, Bylaws or Certificate of Designation, or for any bankruptcy, insolvency, dissolution or liquidation of the Company. Uponliquidation of the Company, the Company's assets are first distributed ratably to the Series A preferred shareholders. At June 30, 2011 and 2010, there wereno Series A preferred shares outstanding.Series BSeries B preferred shares are entitled to a cumulative 15% dividend annually on the stated par value per share. These shares are convertible into shares ofcommon stock at the rate of one share of common stock for each share of Series B 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 offer and saleof common stock in which the gross proceeds to the Company are at least $4 million. Series B preferred shareholders have voting rights equal to the votingrights of common stock, except that the vote or written consent of a majority of the outstanding preferred shares is required for any changes to the Company'sArticles of Incorporation, Bylaws or Certificate of Designation, or for any bankruptcy, insolvency, dissolution or liquidation of the Company. Uponliquidation of the Company, the Company's assets are first distributed ratably to the Series A preferred shareholders, then to the Series B preferredshareholders.On December 8, 2010, the Board of Directors declared a dividend on the Series B Preferred Stock of all outstanding and cumulative dividends throughDecember 31, 2010. The total dividends of $10,632 were paid as of December 31, 2010. The Company anticipates paying any cash dividends on the SeriesB Preferred Stock on or before December 31, 2011 if required to comply with the Form S-3 eligibility requirements. At June 30, 2011, there were 59,065Series B preferred shares outstanding and cumulative dividends in arrears were $5,316. Series CSeries C preferred shares are entitled to a quarterly dividend equal, per share, to the greater of $1.00 or 100 times the dividends declared on the common stockin such quarter. Each share of Series C preferred stock has voting rights equal to the voting rights of 100 shares of common stock. The Series C preferredstock was created upon adoption of the Company's share rights plan in 2007. Upon liquidation of the Company, the Company's assets are first distributedratably to the Series A preferred shareholders, then the Series B preferred shareholders, then the Series C preferred shareholders. At June 30, 2011 and 2010,there were no Series C preferred shares outstanding. F-18Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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, 2011 and 2010.Common Stock OfferingOn 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 ofthe Company’s common stock, par value $0.001 per share (the “Shares”). CKCC was not required to sell any specific number or dollar amount of Shares butused 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, were 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 received from us a commission of 2.0% based on the gross sales price per share for any shares sold through it asagent under the Agreement. The Company also agreed to reimburse CKCC for certain expenses incurred in connection with entering into the Agreement andprovided CKCC with customary indemnification rights. We filed a prospectus supplement relating to the Agreement described above on April 23, 2010.On July 29, 2010, the Company entered into an amendment (the “Amendment”) to the Agreement to extend the term of the offering of Shares by CKCC as theCompany’s sales agent through December 31, 2010. The offering of Shares pursuant to the Amendment terminated on December 31, 2010.On October 1, 2010, the Company instructed CKCC via placement notice permitting “at the market” sales of common stock through October 31,2010. CKCC sold 304,227 shares of common stock on behalf of the Company receiving $250,632 in equity net of offering costs of $118,149 ($7,302 incommissions, $110,276 in legal and accounting expenses, and $571 in other costs).No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any classof our equity securities or to any other affiliates.Warrants to Purchase Common StockOn November 22, 2010, the Company entered into a Securities Purchase Agreement (as amended on December 27, 2010 and March 31, 2011) as part of theCompany’s registered offering with an institutional investor and closed the transaction on November 24, 2010 for the sale of 2,250,000 shares of commonstock and four series of warrants. The total warrants exercisable in Series A, Series B and Series C will be a maximum aggregate of 2,168,026 for a maximumnumber of below market securities issued, together with the shares of common stock sold in the offering, of no greater than 4,418,026 shares of commonstock, which is the maximum issuable under the NYSE AMEX requirements without obtaining shareholder approval for the issuance. Series D Warrantswhich are not below market securities are expected to be exercisable to purchase 1,873,641 shares of common stock.By letter agreement dated October 27, 2010, LifeTech Capital, a division of Aurora Capital, LLC, acted as placement agent in connection with the placementof the securities in this offering. LifeTech received a cash fee of 5% of the gross proceeds received under the Offering (excluding proceeds received on theexercise of C or D Warrants), and will also receive warrants to purchase 3% of the common stock sold in the Offering and 3% of the Series A, B andC Warrants exercised at any time, which warrants issued to LifeTech were not exercisable for six months following the closing, have a five year term, and anexercise price of $1.56 per share.Based on the guidance contained in ASC 815, management had concluded that the warrants in Series A-1, Series B-1, and Series C-1 should be classified aliability and had recorded a liability at fair value. The Company determined the fair value of the warrants using the Black-Scholes fair value model. TheCompany determined the fair value of the warrants to be $1,724,000 on the date of the offering. The Company has recognized a gain on the change in fairvalue of $334,000 in the year ended June 30, 2011. F-19Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. On March 24, 2011, the warrant holder exercised the Series A-1 warrants and received 538,660 shares of common stock at exercise in exchange for $475,000,net of commission expense. The Company reclassified the fair value as of the exercise date of the Series A-1 warrant liability in the amount of $119,000 toadditional paid in capital.At March 31, 2011, the Company and the warrant holder agreed to a modification of the Series C-1 warrants that allowed the Company to reclassify thesewarrants as equity. The Company reclassified the fair value as of March 31, 2011 of the Series C-1 warrant liability in the amount of $1,119,000 to additionalpaid in capital.The warrant holder allowed the Series B warrants to expire on May 24, 2011. The Company reclassified the fair value as of the expiration date of the SeriesB-1 warrant liability in the amount of $152,000 to additional paid in capital.The November 2010 public registered offering yielded cash in the amount of $2,026,254. This amount is net of offering costs in the amount of$223,745. These offering costs were $112,500 of commission expense, $108,927 of legal and accounting expense and $2,318 of other costs.No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any classof our equity securities or to any other affiliates.In October 2010, the Company offered a temporary reduction in the exercise price of certain warrants to purchase shares of common stock previously issued,pursuant to §4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in 2005 and 2006.On October 20, 2010 the Company commenced soliciting warrant exercises from existing holders at a reduced exercise price of $0.95 per warrant exercisedprior to October 31, 2010. Warrant holders exercised warrants to purchase 226,344 shares of common stock. This solicitation of warrants yielded $199,818net of offering costs.The warrants activity is summarized as follows for the years ended June 30, 2011 and 2010: 2011 2010 Warrants Price (a) Warrants Price (a) Beginning balance outstanding 3,165,768 $5.62 3,216,644 $5.55 Cancelled/expired (816,100) 5.00 (56,876) 0.70 Warrants exercised (765,004) 0.97 - - Granted 2,234,521 1.00 6,000 1.18 Ending balance outstanding 3,819,185 $3.69 3,165,768 $5.62 (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 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 expired between October 2010 and February 2011. No other terms or conditions of the warrants were changed. The change in expiration datesaffected outstanding warrants to purchase 2,102,142 shares of common stock. Of these outstanding warrants, there were warrants to purchase 12,500 commonshares held by the Chairman and CEO of the Company. Prior to the original extension, warrants to purchase 1,286,219 shares of common stock had passedtheir original expiration dates.The change in expiration date was a modification of the original warrant based on market conditions and was accounted for as a financing transaction similarto an extension of time in the offering of shares in a stock sale. Therefore, there was no effect on the statement of operations as the Company had previouslydetermined that under ASC Topic 815, Derivatives and Hedging, these warrants were equity instruments rather than derivatives. F-20Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 common warrants outstanding as of June 30, 2011:Number of Warrants Range of Exercise Prices Expiration Date 53,000 $6.00 October 2011 162,500 $6.00 November 2011 835,719 $6.00 December 2010 570,250 $6.00 January 2012 81,968 $6.00 February 2012 182,361 $6.50 February 2012 206,526 $4.40 March 2012 6,000 $1.18 June 2015 25,000 $2.00 July 2015 1,628,361 $0.98 November 2015 67,500 $1.56 November 2015 3,819,185 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 repurchaseplan expired on June 30, 2009. The Company repurchased no shares of its common stock during the years ended June 30, 2011 and June 30, 2010. 14.Income TaxesThe federal income taxes of the Company and its wholly-owned subsidiary IsoRay Medical, Inc are filed on a consolidated basis.The Company did not record an income tax provision or benefit for the years ending 2011 and 2010.The significant deferred tax components using a 35% federal income tax rate for the years end June 30, 2011 and 2010 are as follows: 2011 2010 Property, plant and equipment $85,305 $39,659 Stock based compensation 180,503 95,562 Reserves 22,353 12,737 Other accruals 19,798 - Asset retirement obligation 231,763 211,887 Net operating loss 12,428,072 11,510,709 Total deferred tax assets 12,967,794 11,870,553 Valuation allowance (12,967,794) (11,870,553)Net deferred tax asset $- $- As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, avaluation allowance equal to 100% of the net deferred tax asset has been recorded at year ends June 30, 2011 and 2010.At June 30, 2011, the Company has federal net operating loss carry-forwards of approximately $35.6 million available losses that can be used to offsetfuture regular taxable income. These net operating loss carry-forwards losses expire at various times through the years 2025 to 2031. F-21Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 statutory rate reconciliation is as follows: 2011 2010 Expected income tax benefit base on statutory rate of 35% $(994,775) $(1,411,850)Travel and entertainment 11,891 15,206 Lobbying - 18,621 Officer’s life insurance 84 130 Non deductible penalties 2,459 688 Warrant liability (116,900) - Increase in valuation allowance 1,097,241 1,377,206 Income tax expense (benefit) $- $- The Company has reviewed the tax positions taken and concluded that it does not have to book a liability for uncertain tax positions.Fiscal years ending June 30, 2011, June 30, 2010, and June 30, 2009 remain open for audits by taxing authorities. 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 sellits thirty 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.In December 2010 and December 2011, the Company negotiated contracts to purchase Cs-131 from UralDial. Under the contract, 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 most recent contract entered into in December 2010 continues to stabilize the supply arrangements for the 12 months beginning in December2010 and ending in December 2011.The Company has an existing distribution agreement with UralDial that allows UralDial to distribute Proxcelan Cs-131 brachytherapy seeds inRussia. The Company, through UralDial, has regulatory approval to sell Cs-131 seeds in Russia. However, the economic downturn in Russia hascontinued to slow the Company's market penetration efforts. There was no revenue from this agreement in the years ended June 30, 2011 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. Sales generatedwere not high enough to maintain the exclusivity of the agreement, and the agreement is now non-exclusive. The Company has notified BrachySciencesthat the agreement will not be renewed when it expires at the end of 2011. F-22Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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. 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) inexchange for a royalty equal to 1% of the Gross Profit, as defined, from the sale of "seeds" incorporating the technology. The patent and associatedroyalty obligations were 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 thirdparties. The royalty agreement will remain in force until the expiration of the patents on the assigned technology, unless earlier terminated inaccordance with the terms of the underlying agreement.During fiscal years 2011 and 2010, the Company recorded royalty expenses of $26,474 and $23,041, 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 royaltybased on the Net Factory Sales Price, as defined in the agreement, of licensed product sales. Because the licensor's patent application was ultimatelyabandoned, only a 1% "know-how" royalty based on Net Factory Sales Price, as defined in the agreement, remains applicable. To date, managementbelieves that there have been no product sales incorporating the "know-how" and therefore no royalty is due pursuant to the terms of theagreement. Management believes that ultimately no royalties should be paid under this agreement as there is no intent to use this "know-how" in thefuture.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 onOctober 31, 2007, the Company participated in nonbinding mediation regarding this matter; however, no settlement was reached with the LawrenceFamily Trust. After additional settlement discussions, which ended in April 2008, the parties failed to reach a settlement. The parties may demandbinding arbitration at any time.Operating Lease AgreementsThe Company leases office and laboratory space and production and office equipment under non-cancelable operating leases. The lease agreementsrequire monthly lease payments and expire on various dates through April 2016 (including renewal dates). The Company's significant lease is describedbelow.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 theCompany has moved all manufacturing operations to this new leased space as of September 2007 and vacated its leased space at the PEcoS-IsoRayRadioisotope Laboratory (PIRL). The APEL lease was renewed in May 2010 for occupancy of 15,932 square feet of manufacturing and office space witha three year term expiring on April 30, 2013, plus an option to renew for one additional three-year term, and monthly rent of approximately $23,100,subject to annual increases based on the Consumer Price Index, plus monthly janitorial expenses of approximately $400. Due to the severe economicpenalty associated with not exercising the one lease renewal option remaining, the Company currently intends to exercise the one remaining three-yearrenewal option at the appropriate time in the lease.Future minimum lease payments under operating leases including the one three-year renewal of the APEL lease, which the Company intends to exercise,are as follows: F-23Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Year ending June 30, 2012 $284,915 2013 282,390 2014 282,390 2015 282,390 2016 235,324 $$1,367,409 Rental expense amounted to $282,654 and $306,212 for the years ended June 30, 2011 and 2010, respectively.Qualified Therapeutic Discovery Project GrantThe Company received three grants during the fiscal year under the Internal Revenue Service administered Qualified Therapeutic DiscoveryProject. These grants are subject to examination by the Service. Management believes that the Company complied with the guidance provided by theservice for "Qualified Investments" includible in the QTDP. The QTDP guidance provided broad language allowing the Service the ability to disallowcosts. The total amount of the grants is included in the research and development reimbursement section of the Consolidated Statement of Operations inthe amount of $515,853 and this amount is subject to examination by the Service. 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-terminvestments, 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, 2011, cash balances uninsured by the FDIC totaled approximately $214,000.The Company's accounts receivable result from credit sales to customers. The Company had two customers whose sales were greater than 10% for theyear ended June 30, 2011 and three customers whose sales were greater than 10% for the year ended 2010. These customers represented a combined28.4% and 33.1% of the Company's total revenues for the years ended June 30, 2011 and 2010, respectively. These same customers accounted for acombined 28.8% and 42.3% of the Company's net accounts receivable balance at June 30, 2011 and 2010, respectively.The loss of any of these significant customers would have a temporary adverse effect on the Company's revenues, which would continue until theCompany located new customers to replace them.The Company routinely assesses the financial strength of its customers and provides an allowance for doubtful accounts as necessary. F-24Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. InventoriesMost components used in the Company's product are purchased from outside sources. Certain components are purchased from single suppliers. Thefailure of any such supplier to meet its commitment on schedule could have a material adverse effect on the Company's business, operating results andfinancial condition. 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 meetits supply commitments, the process of locating and qualifying alternate sources could require up to several months, during which time the Company'sproduction could be delayed. Such delays could have a material adverse effect on the Company's business, operating results and financial condition. 20.Related Party TransactionDuring the fiscal year ended June 30, 2011, the Company engaged the services of APEX Data Systems, Inc., owned by Dwight Babcock, Chairman andChief Executive Officer, to build a web interfaced data collection application to aggregate patient data in a controlled environment. The systemspecifications were evaluated based on the input of the potential end users, discussions were conducted and individuals in industry were consulted toestablish an expected range of cost to develop a system meeting the identified system specifications. Company management consulted with the Board ofDirectors and the Board voted to use APEX Data Systems with Mr. Babcock recusing himself from the vote due to his conflict of interest. The Companyincurred $62,401 in costs related to this application, which are recorded as a fixed asset at June 30, 2011. The amount accrued for payment to APEXData Systems, Inc. at June 30, 2011 was $5,320. F-25Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 besigned on its behalf by the undersigned, thereunto duly authorized.Dated: September 28, 2011ISORAY, INC., a Minnesota corporation By /s/ Dwight BabcockDwight Babcock, Chief Executive Officer and Chairman By /s/ Brien L. RagleBrien L. Ragle, Controller, Principal Financial and Accounting OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.Dated: September 28, 2011 /s/ Dwight BabcockDwight Babcock, Chief Executive Officer and Chairman /s/ Brien L. RagleBrien L. Ragle, Controller, Principal Financial and Accounting Officer Robert Kauffman, Director and Vice-Chairman /s/ Thomas LaVoyThomas LaVoy, Director /s/ Albert SmithAlbert Smith, Director 62 Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.EXHIBIT 21SUBSIDIARIES OF THE REGISTRANTIsoRay Medical, Inc., a Delaware corporationIsoRay International LLC, a Washington limited liability company Source: IsoRay, Inc., 10-K, September 28, 2011Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the registration statements Nos. 333-127717 and 333-136728 on Form S-8 and Nos. 333-140246 and333-141934 on Form S-3 of our report dated September 26, 2011, with respect to the consolidated balance sheets of IsoRay, Inc. and Subsidiaries as of June30, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended, whichreport appears in the Form 10-K filing for IsoRay, Inc. to be filed on or about September 27, 2011. DeCoria, Maichel & Teague, P.S.Spokane, WashingtonSeptember 26, 2011 Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 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) and15d-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 withinthose entities, 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 designed underour 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 tomaterially affect, 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, 2011 /s/ Dwight BabcockDwight BabcockChief Executive Officer Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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) and15d-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 withinthose entities, 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 forexternal purposes 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 tomaterially affect, 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, 2011/s/ Brien L. RagleBrien L. RaglePrincipal Financial and Accounting Officer Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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 ofIsoRay, 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, 2011 (the Report) fully complieswith the requirements 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 material respects, the financial condition and results of operations of the Company. Dated: September 28, 2011 /s/ Dwight Babcock Dwight Babcock Chief Executive Officer (Principal Executive Officer)Dated: September 28, 2011 /s/ Brien L. Ragle Brien l. ragle Controller (Principal Financial and Accounting Officer) Source: IsoRay, Inc., 10-K, September 28, 2011Powered 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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