IsoRay, Inc.
Annual Report 2013

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KIsoRay, Inc. - ISRFiled: September 30, 2013 (period: June 30, 2013)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, 2013 or ¨¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from __________ to ____________ Commission File No. 001-33407 IsoRay, Inc(Exact name of registrant as specified in its charter) Minnesota(State of incorporation)41-1458152(I.R.S. Employer Identification No.) 350 Hills St., Suite 106Richland, Washington(Address of principal executive offices)99354(Zip code) Registrant's telephone number, including area code: (509) 375-1202 Securities registered pursuant to Section 12(b) of the Exchange Act – Common Stock – $0.001 par value(NYSE MKT) Securities registered pursuant to Section 12(g) of the Exchange Act – Series C Preferred Share Purchase Rights Number of shares outstanding of each of the issuer's classes of common equity: ClassOutstanding as of September 27, 2013Common stock, $0.001 par value38,419,502 Indicate 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 x Indicate 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 – $26,996,983 as of December 31, 2012. Documents incorporated by reference – none. Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ISORAY, INC. Table of Contents Page ITEM 1 –BUSINESS 1ITEM 1A –RISK FACTORS 29ITEM 1B –UNRESOLVED STAFF COMMENTS 38ITEM 2 –PROPERTIES 38ITEM 3 –LEGAL PROCEEDINGS 38ITEM 4 –MINE SAFETY DISCLOSURES 38ITEM 5 –MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES 38ITEM 6 –SELECTED FINANCIAL DATA 41ITEM 7 –MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 42ITEM 7A –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 55ITEM 8 –FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 55ITEM 9 –CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 56ITEM 9A –CONTROLS AND PROCEDURES 56ITEM 9B –OTHER INFORMATION 57ITEM 10 –DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 57ITEM 11 –EXECUTIVE COMPENSATION 61ITEM 12 –SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS 63ITEM 13 –CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 64ITEM 14 –PRINCIPAL ACCOUNTANT FEES AND SERVICES 65ITEM 15 –EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 65 SIGNATURES 69 Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Information In 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 29 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 I As 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 – BUSINESS General Century 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 Information The 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 on its website at www.isoray.com.Information on this website is not a part of this Report. 1Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Operations Overview In 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 brachytherapy seed form of Cesium-131 may be used in surface, interstitial and intracavity applications for tumors with known radiosensitivity. Management believes its Cs-131 technology will allow it to become a leader in the brachytherapy market. Management believes that the IsoRayProxcelan Cesium-131 brachytherapy seed represents the first major advancement in brachytherapy technology in over 21 years with attributes that couldmake it the long-term "seed of choice" for internal radiation therapy procedures. Brachytherapy seeds are small devices used in an interstitial radiation procedure. The procedure has become one of the primary treatments for prostate cancer.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) used in the prostate, approximately 70 to 120 seeds are permanently implanted in theprostate in an outpatient procedure lasting less than one hour. The number of seeds used varies based on the size of the prostate and the activity levelspecified by the physician. When brachytherapy is combined with external beam radiation or intensity modulated radiation therapy (dual therapy), thenapproximately 40 to 80 seeds are used in the procedure. The isotope decays over time and eventually the seeds become inert. The seeds may be used as aprimary treatment or in conjunction with other treatment modalities, such as chemotherapy, or as treatment for residual disease after excision of primarytumors. The number of seeds for 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 ofthe tumor being treated and the type of therapy being utilized. 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, however, the market for the treatment has been limited generating a minimal amount of revenue for the Company. TheCompany continues to make the treatment available to interested physicians and medical facilities. In June 2009, the Company began selling its ProxcelanCs-131 seeds for treatment of head and neck tumors, commencing with treatment of a tumor that could not be accessed by other treatment modalities. TheCompany obtained clearance in August 2009 from the FDA to permit loading Cesium-131 into bioabsorbable braided strands, facilitating treatment of lung,head and neck tumors as well as tumors in other organs with Proxcelan Cs-131. 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. In March 2011, the Company received clearance to commercially deliver Proxcelan Cesium-131 brachytherapy seeds that are preloaded into bioabsorbablebraided strands into Europe. This clearance permits the product to be commercially distributed for treatment of lung, head and neck tumors as well as tumorsin other organs in 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. 2Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In May 2012, IsoRay Medical received a CE mark for the GliaSite® Radiation Therapy System which states that the Company conforms with the productrequirements of the European Council Directive 93/42/EEC. The CE mark allows the GliaSite® Radiation Therapy System to be sold in 31 Europeancountries and to be marketed in the European Free Trade Associate member states and the European Union. In June 2012, the first Cesium-131 brachytherapyseed sutured mesh was implanted on a patient suffering from a recurring meningioma tumor. Management focused in fiscal 2012 and 2013 on obtaining its regulatory clearances and final research and development of its GliaSite® Radiation TherapySystem, entering into international distribution agreements to sell the product in Europe and Australia, and marketing its brain and lung products. TheGliaSite® Radiation Therapy System is the world’s only system that enables doctors to use liquid radiation in areas where the cancer is most likely to remainafter brain surgery and tumor removal. In fiscal 2013, the Company began using a system developed at the Barrow Neurologic Institute to deliver doses ofCesium-131 to treat malignant meningioma, brain metastases, and primary cancers of the brain. A multi-institutional study was conducted to explore use byCesium-131 laden strands placed directly into the cavity following surgical resection of brain metastases. While management has not identified new opportunities to expand treatment to other sites in the body, it continues to investigate opportunities withinterested physicians and medical facilities. Management is now focusing primarily on the brain and lung markets while the Company is researching deliverysystems other than those historically used by the Company. In August 2013, IsoRay Medical received an approval for an extension to the scope of the CE mark for the GliaSite Radiation Therapy System. This approvalallows IsoRay Medical to implement certain product improvements that management believes will enhance GliaSite’s acceptance by customers in theEuropean market. Industry Information Incidence of Prostate Cancer The prostate is a walnut-sized gland located in front of the rectum and underneath the urinary bladder. Prostate cancer is a malignant tumor that begins mostoften in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body. According to the AmericanCancer Society, approximately one man in six will be diagnosed with prostate cancer during his lifetime and one man in thirty-six will die of prostate cancer.It is the most common form of cancer in men after skin cancer, and the second leading cause of cancer deaths in men following lung and bronchus cancers.The American Cancer Society estimates there will be about 238,590 new cases of prostate cancer diagnosed and an estimated 29,720 deaths associated withthe disease in the United States in 2013. (American Cancer Society, 2013) Prostate cancer accounts for about 10% of cancer related deaths in men. Prostate cancer incidence and mortality increase with age. The American CancerSociety has reported that the average age of diagnosis for prostate cancer is 67. Almost 2 of 3 prostate cancers are found in men over the age of 65. (AmericanCancer Society, 2013) Incidence of Lung Cancer An estimated 228,190 new cases of lung cancer are expected in 2013, 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 159,480 deaths, accounting for about 27% of all cancer deaths,are expected to occur in 2013. (American Cancer Society 2013) This exceeds the combined number of deaths from the next three leading causes of cancer(breast, prostate, and colon cancers). Lung cancer also accounts for 6% of all deaths from any source in the United States. (Cancer Management: AMultidisciplinary Approach, 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 80% of cases of lung cancer. The risk increasesdepending on duration of time smoking and number of packs smoked. Other risk factors include occupational or environmental exposure to secondhandsmoke, radon, asbestos (particularly among smokers), certain minerals and metals (chromium, cadmium, arsenic), some organic chemicals, radiation, airpollution, family history of lung cancer, certain vitamins (beta carotene supplements), radiation treatment to the lungs to treat other cancers, and a history oftuberculosis. Genetic susceptibility plays a contributing role in the development of lung cancer, especially in those who develop the disease at a youngerage. (American Cancer Society, 2013) 3Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 5-year survival rate is 49% for cases detected when the disease is still localized. (American Cancer Society, 2013) Incidence of Brain Cancer An estimated 23,130 new cases of malignant tumors of the brain or spinal cord are expected in 2013. The chances of a person developing a malignant tumorof the brain or spinal cord are approximately 1%. The estimated deaths related to malignant tumors in the brain or spinal cord is 14,080 (approximately 7,930men and 6,150 women). (American Cancer Society, 2013) The risk factors for developing malignant brain or spinal cord tumors are radiation exposure (i.e. most commonly some form of radiation therapy to the headto treat other cancers), family history, genetic disorders, people with a history of tuberous sclerosis, and immune system disorders. (American Cancer Society,2013) The survival rates for brain cancer depend on the type of malignant brain or spinal cord tumor and the age of the person. The survival rates for the mostcommon types of malignant brain and spinal cord tumors are as follows: low-grade (diffuse) astrocytoma between 42% and 60%, anaplastic astrocytomabetween 9% and 49%, glioblastoma between 4% and 17%, oligodendroglioma between 64% and 85%, anaplastic oligodendroglioma between 36% and65%, and ependymoma/anaplastic ependymoma between 84% and 91%. (American Cancer Society, 2013) Incidence of Head and Neck Cancers An estimated 53,640 new cases of head and neck cancer are expected to be diagnosed in the United States in 2013 including 27,450 cases of oral cavitycancer (i.e. tongue, mouth and other oral cavity), 12,260 cases of laryngeal cancer, and 13,930 cases of pharyngeal cancer. (American Cancer Society, 2013) Symptoms may include a sore in the throat or mouth that bleeds easily and does not heal, a lump or thickening in the cheek, ear pain, numbness of the mouth,voice changes, a neck mass, coughing up blood, and a red or white patch that persists on the gums, tongue, tonsil, or lining of the mouth. Difficulties inchewing, swallowing, or moving the tongue or jaw are often late symptoms. (American Cancer Society, 2013) 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 100 times the risk of these cancers to those individuals who both smoke and drinkheavily. Human Papilloma Virus (HPV) infection is associated with certain types of oropharyngeal cancer. Other risk factors for developing head and neckcancers include genetic syndromes, poor nutrition, and a weakened immune system. (American Cancer Society, 2013) Incidence of Gynecological Cancers (Vaginal and Vulvar Cancer) An estimated 7,590 new cases of vaginal (2,890) and vulvar (4,700) cancers are expected to be diagnosed in the United States in 2013. The estimated deathsrelated to vaginal and vulvar cancer are estimated to be 1,830 (990 vaginal and 840 vulvar). (American Cancer Society, 2013) There are different types of vaginal and vulvar cancers. Vaginal cancers and vulvar cancer can include squamous cell carcinoma, adenocarcinoma, melanoma,sarcoma, and basal cell carcinoma (vulvar cancer only). Vaginal cancer is rare and about 1 in 100 cancers that occur in the female reproduction system is avaginal cancer. Vulvar cancer makes up 4% of cancers within the female reproductive organs and it accounts approximately 0.6% of all cancers in women.(American Cancer Society, 2013) Common known risk factors for vaginal cancers (cancers that start in the vagina) and vulvar cancers (cancers that start in the vulva) include age, humanpapilloma virus (HPV), cervical cancer or other genital cancers, smoking, and human immunodeficiency virus. (American Cancer Society, 2013) 4Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Incidence of Ocular Melanoma The American Cancer Society estimates that 2,800 new cases of cancers of the eye and orbit (primarily melanoma) will be diagnosed in 2013 and about 320deaths from cancer of the eye will occur in 2013 in the United States. Primary eye cancer can occur at any age but most occur in people over 50 years of age.Secondary eye cancers, i.e. cancers that spread to the eye from a different part of the body, are more common than primary eye cancer. (American CancerSociety, 2013) 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, 2013) Incidence of Colorectal Cancer An estimated 142,820 new cases of colorectal cancer are expected in the United States in 2013 including 102,480 new cases of colon cancer and 40,340 newcases of rectal cancer. (American Cancer Society, 2013) 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. The symptoms generally occur in the more advanced disease stage. (American Cancer Society, 2013) Risk factors related to colorectal cancers are classified in two groups: those that patients cannot control and those that patients can control. The risk ofdeveloping colorectal cancer in a lifetime is about 1 in 20 or approximately 5%. Colorectal cancer is the third leading cancer death in the Unites States whenmen and women are combined and third when they are considered separately. (American Cancer Society, 2013) 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, personal history of Type 2 diabetes, family history of colorectal cancer, certain familyinherited syndromes (i.e. gene changes or inherited mutations) and racial or ethnic background. (American Cancer Society, 2013) 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, and alcohol use. (American Cancer Society,2013) 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 stage IV.(American Cancer Society, 2013) Prostate Cancer Treatment Options and Protocol The 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 treatment altogether at a higher rate 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 (Grimm, et al., British Journalof Urology International, Vol. 109 (Suppl 1), 2012; Merrick, et al., Techniques in Urology, Vol. 7, 2001; Potters, et al., Journal of Urology, May 2005;Sharkey, et al., Current Urology Reports, 2002). 5Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 brachytherapy, localized prostate cancer can be treated with prostatectomy surgery (RP for radical prostatectomy), external beam radiationtherapy (EBRT), three-dimensional conformal radiation therapy (3D-CRT), intensity modulated radiation therapy (IMRT), dual or combination therapy,permanent low dose rate brachytherapy (LDR), high dose rate brachytherapy (HDR), cryosurgery, hormone therapy, and watchful waiting. The success of anytreatment is measured by the feasibility of the procedure for the patient, morbidities associated with the treatment, overall survival, and cost. When thecancerous tissue is not completely eliminated, the cancer typically returns to the primary site, often with metastases 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, 2013) Primary External Beam Radiation Therapy (EBRT). EBRT involves directing a beam of radiation from outside the body at the prostate gland to destroycancerous tissue. EBRT treatments are received on an outpatient basis five days per week usually over a period of seven to nine weeks. Today, standardEBRT is used much less often than in the past. Side effects of EBRT can include bowel problems, bladder problems, urinary incontinence, impotence, fatigue,lymphedema, and urethral stricture. (American Cancer Society, 2013) Three-dimensional Conformal Radiation Therapy (3D-CRT). 3D-CRT uses a special computer to map the location of the prostate and then radiation beamsare aimed at the prostate from several directions. This makes it less likely that the radiation will damage healthy normal tissue. This radiation therapy hasbeen determined to be at least as effective as EBRT with fewer side effects. (American Cancer Society, 2013) Intensity Modulated Radiation Therapy. IMRT is considered a more advanced form of 3D-CRT 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 but requires daily doses over a period ofseven to nine weeks to deliver the total dose of radiation prescribed to kill the tumor. An increasingly popular therapy for patients with more advancedprostate cancer is a combination of IMRT with seed brachytherapy, known as combination or dual therapy. IMRT is generally more expensive than othercommon treatment modalities. (American Cancer Society, 2013) 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, 2013) Management estimates that at least 25% of all U.S. prostate implants are now dualtherapy cases. Low Dose Rate Permanent Brachytherapy. LDR permanent brachytherapy involves placing pellets or seeds of radioactive material inside thin needles whichare then placed into the prostate. The pellets/seeds are left in place and emit low dose rate radiation for weeks or months. The pellets/seeds can deliver a largedose of radiation to a small area of the body thereby reducing the damage done to healthy tissue that is close to the prostate. (American Cancer Society, 2013) 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-192 seed into the catheters one by one. This procedure is typically repeated at leastthree times while the patient is hospitalized for at least 24 hours. (American Cancer Society, 2013) 6Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Cryosurgery. Cryosurgery 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, and 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, which results in a high rate of impotence. For this reason, most doctors do not include cryosurgery among thefirst options they recommend for treating prostate cancer. (American Cancer Society, 2013) Additional Treatments. Additional treatments include hormone therapy, vaccine treatment and chemotherapy. Hormone therapy is generally used to shrinkthe tumor or make it grow more slowly but will not eradicate the cancer. Likewise, chemotherapy will not eradicate the cancer but can slow the tumor growthand can be given by mouth or by an injection into a vein. Additionally, vaccine treatment can be used to extend the life of a patient with advanced prostatecancer that does not respond to hormone therapy. The vaccine is made specifically for each individual man and it is made with the man’s own white bloodcells and the cells are used to help other immune system cells fight the prostate cancer. Generally, these treatment alternatives are used by doctors to extendpatients' lives once the cancer has reached an advanced stage or in conjunction with other treatment methods. Hormone therapy can cause impotence,decreased libido, fatigue, weight gain, depression, osteoporosis, anemia, hot flashes, and breast enlargement. Most recently, hormone therapy has been linkedto an increased risk of cardiovascular disease in men with certain pre-existing conditions such as heart disease or diabetes. Chemotherapy can cause anemia,nausea, hair loss, loss of appetite, diarrhea, mouth sores, lowered resistance to infection, and fatigue. The vaccine treatment is milder than the hormone orchemotherapy treatments but some common side effects include fever, back and joint pain, chills, fatigue, and headaches. (American Cancer Society, 2013) 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 ultrasound exams to see if the cancer isgrowing. If the cancer seems to be growing or getting worse, the doctor may suggest starting treatment. Not all experts agree how often testing should occur for active surveillance. There is also debate about the best time to start treatment. Still, some earlystudies have shown that among men who choose active surveillance, those who elect not to be treated do as well as those who decide to start treatment rightaway. Active surveillance may be a good choice if the cancer is not causing any symptoms, is likely to grow slowly, and is small and contained in one placein the prostate. If the patient is young, healthy, and has a cancer that is growing fast, active surveillance may not provide adequate protection from the cancerspreading to other parts of the body. Some men choose watchful waiting because, in their view, the side effects of strong treatment outweigh the benefits.Others are willing to accept the possible side effects of active treatments in order to try to remove or destroy the cancer. (American Cancer Society, 2013) Comparing Cesium-131 to I-125 and Pd-103 Clinical Results Long-term survival data is now available for brachytherapy with I-125 and Pd-103, which support the efficacy of brachytherapy in the treatment of clinicallylocalized cancer of the prostate gland. Clinical data indicate that brachytherapy offers success rates for early-stage prostate cancer treatment that are equal toor better than those of RP or EBRT. While historically clinical studies of brachytherapy have focused primarily on results from brachytherapy with I-125 andPd-103, management believes that these data are also relevant for brachytherapy with Cesium-131. In fact, it appears that Cesium-131 offers improvedclinical outcomes over I-125 and Pd-103, perhaps due to its shorter half-life. The most recent evidence is described in the multi-institutional 5 year outcomepresentation by Prestidge and others, wherein a group of nearly 100 patients, heavily weighted towards “intermediate risk” patients (who are at greater risk offailure compared to most prostate cancer patients) exhibited a PSA disease-free rate of 98% at five years (Prestidge B. et al. Five-year biochemical controlfollowing Cesium-131 Permanent Prostate Brachytherapy in a Multi-Institutional Trial. Brachytherapy 2011 10(3S1)S27.) 7Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 study of 2,963 prostate cancer patients who underwent brachytherapy as theirsole therapeutic modality at 11 institutions across the U.S. concluded that low-risk patients (who make up the majority of localized cases) who underwentadequate implants experienced rates of PSA relapse survival of greater than 90% between eight and ten years (Zelefsky MJ, et al, "Multi-institutional analysisof long-term outcome for stages T1-T2 prostate cancer treated with permanent seed implantation" International Journal of Radiation Oncology BiologyPhysics, Volume 67, Issue 2, 2007, 327-333). Other 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 beam radiotherapy andbrachytherapy; Seattle experience", International Journal of Radiation Oncology Biology Physics, Vol. 67, Issue 1, 2007, 57-64). The cumulative effect ofthese studies has been the conclusion by leaders in the field that brachytherapy offers a disease control rate as high as surgery, though with a lesser side-effectprofile 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). These irritative symptoms can range from an increased frequency of urination to significant pain upon urination.Because the portion of the urethra that runs through the prostate takes high doses from the implant, these side effects are fairly common following prostatebrachytherapy. Recent completed studies show that Cesium-131, with the shortest available half-life of the commonly used implantable isotopes, results in a quickerresolution of these irritative symptoms based on the shorter time interval over which normal tissue receives radiation from the implanted sources than forlonger lived isotopes such as I-125. (Shah H, et al. A comparison of AUA symptom scores following permanent low-dose-rate prostate brachyhtherapy withiodine-125 and cesium-131. Brachytherapy 2013:12(SI)S64)). 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) summarize the side effect profile of Cesium-131 treatment, and (3) trackbiochemical (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: 8Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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. 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 the AmericanBrachytherapy Society (April 2011), Notably, the PSA control rate at 5 years was reported as 98%. No other study of brachytherapy utilizing the competingisotopes Iodine-125 and Palladium-103 has reported five year rates as high as 98%. Several other studies 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 – the radiation dose covering 90% of the prostate gland) while keeping unnecessary gland over-dosing (typically measured by V150 orV200 – the volume of the gland absorbing, respectively, 1.5 and 2 times the target dose) to a minimum (Musmacher JS, et al, "Dosimetric Comparison ofCesium-131 and Palladium-103 for Permanent Prostate Brachytherapy" International Journal of Radiation Oncology Biology Physics, Volume 69,(Supplement 3), 2007, S730-1; Yaparpalvi R, et al, "Is Cs-131 or I-125 or Pd-103 the Ideal Isotope for Prostate Boost Brachytherapy? A Dosimetric ViewPoint." International Journal of Radiation Oncology Biology Physics, Volume 69 (Supplement 3), 2007, S677-8; Sutlief S and Wallner K, "Cs-131 ProstateBrachytherapy and Treatment Plan Parameters." Medical Physics, Volume 34, 2007, 2431; Kurtzman S, "Dosimetric Evaluation of Permanent ProstateBrachytherapy Using Cs-131 Sources" International Journal of Radiation Oncology Biology Physics, Volume 66 (Supplement 3), S395). The 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 considering riskgrouping, 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.) 9Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of April 2011, the 100 subject clinical study of Cesium-131 for the treatment of localized prostate cancer (originally enrolled beginning in 2005) hadreached the point where a five-year result had been obtained and reported in a supplement to the official journal of the American Brachytherapy Society(Brachytherapy) documenting the scientific program for the Society's 2011 annual meeting. In this supplement, Drs. Bradley Prestidge, William Bice, BrianMoran and colleagues reported the five-year Freedom from Biochemical Failure (FFBF – a measure of success using prostate specific antigen) for the 100patients 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%. Management believes that these impressive results at the five-year mark should create further scientific support for Cesium-131 as an attractive treatment for localized prostate cancer, overcoming at least some of theinitial resistance predicated on the lack of long-term follow-up reports. A combined therapy study incorporating a slightly attenuated dose of Cesium-131 in concert with intensity modulated radiation therapy (IMRT) has nowopened 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. To date, thecombined therapy study has accrued 44 patients. During the Summer of 2011, the Company launched an online data collection system that enables standardized data collection for the Company's studiesproviding participating institutions and physicians with a means to share data and increase collaboration. Non-Prostate Product Offerings Lung Cancer Treatment Options Lung 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, 2013) 1.Surgery generally involves removing a portion of the lung (lobectomy, segmentectomy, and wedge resection), the entire lung (pneumonectomy) or asleeve 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. (American Cancer Society, 2013) 2.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 incycles, 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 thetreatments may involve 4 to 6 cycles. Chemotherapy may be used as a main treatment for more advanced cancers or for some people who are nothealthy enough for surgery, to try to shrink a tumor before surgery, or after surgery to try to kill any cancer cells that may have been left behind.(American Cancer Society, 2013) 3.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 5 to 7 weeks. Newer typesof this type of radiation are called 3D-CRT, IMRT, and stereotactic body radiation therapy (SBRT). (American Cancer Society, 2013) 10Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. · High Dose Rate (HDR) Brachytherapy (internal radiation therapy) is used most often to shrink tumors to relieve symptoms caused by lungcancer that is blocking an airway and is increasingly being used as part of a larger treatment plan to attempt to cure the cancer. For this type oftreatment, the doctor places a small source of radioactive material (often in the form of seeds or pellets) right into the cancer or into the airwaynext to the cancer. This is usually done through a bronchoscope, and is increasingly done during surgery. The pellets are usually removed aftera short time. (American Cancer Society, 2013) · Low Dose Rate Brachytherapy is most often used in combination with surgery in early stage (stages I and II) non-small cell lung cancers forpatients who cannot tolerate the surgical removal of a large portion of their lung. In these cases, a smaller amount of lung tissue than usual isremoved at surgery, at which time a number of permanently implanted seeds are placed into the cut tissue. The addition of brachytherapy tosurgery in these patients has been shown to reduce the recurrence of cancer regrowth (Colonias A, et al. International Journal of RadiationOncology, Biology, Physics Volume 79, p 105-9, 2011.) The Company believes that Cesium-131, with its shorter half-life (faster rate of decay) and relatively high energy, is better suited for treating lung cancer inStages I and II than I-125. The bioabsorbable mesh used in this procedure to apply the Proxcelan Cesium-131 brachytherapy seeds generally dissolves afterabout 45 days. Cesium-131 delivers 90% of its dose in 33 days and is therefore well-suited to use with bioabsorbable mesh. A report was published inNovember 2011 describing the more technical details applicable to Cesium-131 implants (Parashar B, et al. Cesium-131 Permanent Seed Brachytherapy:Dosimetric Evaluation and Radiation Exposure to Surgeons, Radiation Oncology, and Staff. Brachytherapy 10(6):508-513, 2011). In April 2012, the Company initiated a 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-131 meshbrachytherapy. 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.) As of June 30, 2013, thirty-one patients were enrolled in the study and entered in the study database. Brain Cancer Treatment Options Most brain and spinal cord tumors are difficult to treat and require several specialists. The most common forms of treatment are resection at surgery(craniotomy); radiation therapy which may include external beam radiation therapy (EBRT), three-dimensional conformal radiation therapy (3D-CRT),intensity modulated radiation therapy (IMRT), conformal proton beam radiation therapy, stereotactic radiosurgery, and brachytherapy; chemotherapy;targeted therapy; and other types of drugs (including corticosteroids and anti-seizure drugs). (American Cancer Society, 2013) Treatment is determined based on an individual’s specific type of tumor as well as other factors and in many cases the best course of action is a combinationof the treatment options discussed above. The treatment of brain cancer with Cesium-131 now has several delivery methods, including the implantable mesh described above, single seed applications,implantable strands, and by implantable device, including GliaSite® Radiation Therapy System (which uses only Iotrex, a form of liquid Iodine, as of thedate of this report, and not Cesium-131), the world’s only liquid radiation balloon catheter device used in the treatment of brain cancer. During the yearended June 30, 2013, there were forty-one patients treated with Company products for brain cancer. Head and Neck Cancer Treatment Options Most 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; full or partial glossectomy (tongue); neck dissection; pedicle or free flap reconstruction;tracheostomy; gastrostomy tube or dental extraction and implants; chemotherapy and radiation therapy including external beam radiation therapy (EBRT)accelerated and hyperfractionated radiation therapy, three-dimensional conformal radiation therapy (3D-CRT) and intensity modulated radiation therapy(IMRT), and brachytherapy (both high-dose rate (HDR) and low-dose rate (LDR)). (American Cancer Society, 2013) 11Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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, 2013) Management believes Proxcelan Cesium-131 continues to represent an improved approach to brachytherapy treatment of specific head and neck cancers.During the year ended June 30, 2013, there were eight patients that were treated with Company products for head and neck cancers. Gynecological Cancer Treatment Options (Vaginal and Vulvar Cancer) In addition to brachytherapy to treat gynecological cancers such as vaginal and vulvar cancers, other treatment options include surgery, laser surgery,radiation therapy, chemotherapy, and topical treatments. Surgery is often only used for vaginal cancers when it is a small stage I tumor and for cancers thathave not been cured by radiation alone. (American Cancer Society, 2013) Surgery for vaginal cancers can include local excision, vaginectomy, trachelectomy, hysterectomy, vaginal reconstruction, lymphadenectomy, and pelvicexenteration. Surgery options for vulvar cancer include laser surgery, excision, vulvectomy, pelvic exenteration, inguinal lymph node dissection, andsentinel lymph node biopsy. (American Cancer Society, 2013) Radiation therapy options for vaginal cancer and vulvar cancer includes external beam radiation and is delivered much like getting a diagnostic x-ray. Thecommon side effects of radiation therapy include upset stomach, fatigue, and loose bowels. (American Cancer Society, 2013) Chemotherapy uses anti-cancer drugs most often prescribed intravenously, taken by mouth or applied to the skin as an ointment. Often it may be given beforeor after surgery to assist in shrinking the cancer or to make radiation work better for vaginal cancers. In more advanced vulvar cancers, it is can be given withradiation therapy before surgery to attempt to shrink the tumor before surgery. The common side effects of chemotherapy for both vaginal and vulvar cancersinclude nausea and vomiting, temporary loss of hair, increased or decreased appetite, mouth or vaginal sores, and changes in menstrual cycles, prematuremenopause, or infertility. (American Cancer Society, 2013). During the year ended June 30, 2013, there were eleven patients treated with Company productsfor gynecological cancers. Ocular Melanoma Treatment Options In addition to brachytherapy to treat ocular melanoma, other treatment options include surgery, external beam radiation, chemotherapy, and laser therapy.Surgery could include 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 asthe use of radiation therapy has grown. External beam radiation (including conformal proton beam radiation therapy and stereotactic radiosurgery) involvessending radiation 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 used now to treat ocular melanoma, burns the cancerous tissue by using a highly focused, high-energy light beam. (American Cancer Society, 2013) 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 attached tothe eyeball with minute stitches in a procedure that lasts 1 to 2 hours and is usually kept in place for 4 to 7 days. The patient generally stays in the hospitaluntil the plaque is removed from the eye following a procedure that takes less than 1 hour. Brachytherapy cures approximately 9 out of 10 small tumors andcan preserve the vision of some patients. (American Cancer Society, 2013) Management believes that while Cesium-131 provides the best treatmentalternative, it is at a disadvantage to I-125 or Pd-103 as a result of Cs-131's short half-life, which requires it to be ordered and manufactured and unable to beinventoried. Most patients are unwilling to wait for it to be ordered when the other products are often available immediately. The treatment of ocularmelanoma was the first opportunity for the Company to utilize the Cs-131 brachytherapy seed in a treatment other than a prostate application but does notcomprise a significant portion of the Company’s business. 12Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Colorectal Treatment Options Colorectal cancer has historically been treated using surgery, radiation therapy, chemotherapy, immunotherapy and other targeted therapies. (AmericanCancer Society, 2013) 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, 2013) 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, and Stivarga) can be used. (American Cancer Society, 2013) 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. The treatment of colorectal cancer is an additional non-prostate application of theCompany’s product which by itself is not a significant portion of the Company’s business. However, when aggregated with the other non-prostateapplications, it contributes to the overall growth in the Company’s non-prostate applications. Brachytherapy Isotope Comparison Increasingly, 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.) 13Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Rapid Resolution of Side EffectsStudies demonstrate that objective measures of common side-effects showed an early peak in symptoms in the 2- week to 1-month time frame.Resolution of morbidity resolved rapidly within 4-6 months. (Prestidge B, et. al. Clinical Outcomes of a Phase-II, Multi-institutional Cesium-131Permanent Prostate Brachytherapy Trial. Brachytherapy. 2007: 6 (2)78.) (Moran B, et al. Cesium-131 Prostate Brachytherapy: An Early Experience.Brachytherapy 2007:6(2)80.) (Jones A, et al. IPSS Trends for Cs-131 Permanent Prostate Brachytherapy. Brachytherapy 2008:7(2)194.) (DeFoe SG,et al. Is There Decreased Duration of Acute Urinary and Bowel Symptoms after Prostate Brachytherapy with Cesium 131 Radioisotope? Int. J.Radiation Oncology Biol. Phys. 2008:72(S1)S317.) Later studies with longer follow-up periods continue to support the resolution of urinary andrectal side effects in a rapid fashion following treatment with Cesium-131. (Jacobs B, et al. Acute lower urinary tract symptoms after prostatebrachytherapy with Cesium-131. Urology. 2010:76(5)1143.) A study presented during the 2013 fiscal year provides confirmatory data to the hypothesis that the shorter half-life of Cesium-131 leads to a shorterduration of irritative side effects as compared to longer lived isotopes such as the more commonly used Iodine-125. Dr. Amit Shah reported at theAnnual Meeting of the American Brachytherapy Society that “Our data suggests that shorter half-life of Cs-131 versus I-125 (10 versus 60 days)results in a more rapid resolution of urinary side effects and lower intensity of urinary morbidity beyond the initial three months.” (Shah H, et al. Acomparison of AUA symptom scores following permanent low-dose-rate prostate brachyhtherapy with iodine-125 and cesium-131. Brachytherapy2013:12(SI)S64)). 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 report very high rates of PSA control post-treatment with Cesium-131 for prostate 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 fiveyears. (Prestidge B. et al. Five-year biochemical control following Cesium-131 Permanent Prostate Brachytherapy in a Multi-Institutional Trial.Brachytherapy 10(3) Suppl. 1:S27.) A recent report from the University of Pittsburgh Medical Center confirms these high rates of prostate cancer control with definitive Cesium-131treatment – 162 patients exhibited PSA control of 93% at five years (Rajagopalan M, et al. Five year biochemical outcome in patients treated with131 Cs brachytherapy as monotherapy for prostate cancer. Brachytherapy 2013:12(SI)S66)). 14Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Strategy The key elements of IsoRay's strategy for fiscal year 2014 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 using Proxcelan through its direct sales force.Because intermediate- to long-term follow-up data is required to convince clinicians and patients to consider any particular therapy for localized prostatecancer, the availability of five-year data with Proxcelan in the treatment of prostate cancer represents a significant milestone. IsoRay hopes to capture muchof the incremental market growth if and when seed implant brachytherapy recovers market share from other treatments, take market share from existingcompetitors, and expand the use of Cesium-131 as a dual therapy option where it has experienced success. Improve distribution of the GliaSite® radiation therapy system in the United States, European Union (EU), New Zealand and Australia. In June of 2010, theCompany acquired exclusive worldwide distribution rights to the GliaSite® Radiation Therapy System, the only FDA-cleared balloon catheter device usedin the treatment of brain cancer, from Hologic Inc. The Company received a CE Mark in May 2012 allowing distribution in 31 countries. The Companydistributes the product using a German distributor to Germany (the location of the first European sale in July 2012) and other European nations. To date,three cases in Europe and five cases in the U.S. have been treated with GliaSite RTS sold by the Company directly or through a distributor. In fiscal 2013, theCompany entered into distribution agreements with independent distributors in Greece, New Zealand and Australia. Management believes that all regulatoryrequirements will be met in those countries in fiscal 2014 and sales in these countries will then be permitted. The Company plans to contact previous users ofthe product and leverage significant existing clinical data related to the safety and effectiveness of the GliaSite system in order to restore GliaSite as a strongtreatment option for patients suffering from primary and metastatic brain cancers. Increase utilization of Cesium-131 in treatment of other solid tumor applications such as lung, brain, head and neck, chest wall, and colorectal cancers.IsoRay Medical has clearance from the FDA for its premarket notification (510(k)) for Proxcelan brachytherapy seeds that are preloaded into bioabsorbablebraided strands and bioabsorbable braided strands attached to bioabsorbable mesh. This order cleared the product for commercial distribution for treatment oflung and head and neck tumors as well as tumors in other organs. IsoRay has successfully launched an initiative to market its Proxcelan source inbioabsorbable carrier material as a lung cancer treatment. It has begun selling its lung cancer treatment product but has not been in the market long enough todetermine long-term success of the product. IsoRay will continue to explore licenses or joint ventures with other companies to develop the appropriatetechnologies and therapeutic delivery systems for treatment of other solid tumors. Early clinical data support management’s initiatives into brain cancers and early stage non-small cell lung cancers. Local control – defined as success inpreventing the re-growth of cancer in the immediate vicinity of the treatment area – has been excellent to date. Support clinical research and sustained product development. The publication and presentation of speculative and real-world data contribute to theacceptability of Cesium-131 in the oncologic marketplace, and discussion in the medico-scientific community of established and novel Cesium-131applications is considered a prerequisite to expansion into untapped markets. The Company structures and supports clinical studies on the therapeuticbenefits of Cesium-131 for the treatment of solid tumors and other patient benefits. We are and will continue to support clinical studies with several leadingradiation oncologists to clinically document patient outcomes, provide support for our product claims, and compare the performance of our seeds tocompeting seeds. IsoRay plans to sustain long-term growth by implementing research and development programs with leading medical institutions in theU.S. and other countries to identify and develop other applications for IsoRay's core radioisotope technology. The Company has deployed a secure,regulatory environment compliant, online information system capable of large usable databases to participating investigators. 15Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Over fiscal year 2013, four presentations were accepted by and presented at the annual meeting of the American Brachytherapy Society describing Cesium-131 treatment of prostate and ocular cancers. Six presentations were accepted by and presented at the annual meeting of the American Society for RadiationOncology (ASTRO). The Company will continue to seek to increase the number of reports made to society meetings and the peer reviewed literature in orderto seek to enhance the standing of its products in the scientific community. 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 the initial certification was valid for a three year period. In June 2012, theCompany received a recertification to ISO 13485:2003 for an additional three year period, which was affirmed through a surveillance audit in June 2013. This recertification was important as it allows the Company to continue to register its products in foreign markets that utilize this certification as part oftheir medical device approval processes. Products Proxcelan Cesium-131 IsoRay 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; pelvic/abdominal cancer; and gynecological cancer. The Company intends to market Cesium-131 for the treatment of othermalignant diseases as opportunities are identified in the future through the use of existing proven technologies that have received FDA-clearance. Thestrategy of utilizing existing FDA-cleared technologies reduces the time and cost required to develop new applications of Cesium-131 and deliver them tomarket. Competitive Advantages of Proxcelan Cesium-131 Management 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 TimeIsotope Half-Life Energy 90% Dose Total DoseCs-131 9.7 days 30.4 KeV 33 days 115 GyPd-103 17 days 20.8 KeV 58 days 125 GyI-125 60 days 28.5 KeV 204 days 145 Gy Cesium-131 Manufacturing Process and Suppliers Product Overview Cesium-131 is a radioactive isotope that can be produced by the neutron bombardment of Barium-130 (Ba-130). When placed into a nuclear reactor andexposed to a flux of neutrons, Ba-130 becomes Ba-131, the radioactive material that is the parent isotope of Cesium-131. The radioactive isotope Cesium-131 is normally produced by placing a quantity of stable non-radioactive barium (ideally barium enriched in isotope Ba-130) into the neutron flux of anuclear reactor. The irradiation process converts a small fraction of this material into a radioactive form of barium (Ba-131). The Ba-131 decays by electroncapture to the radioactive isotope of interest (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. 16Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Isotope Suppliers Due to the short half-life of both the Ba-131 and Cesium-131 isotopes, potential suppliers must be capable of removing irradiated materials from the reactorcore on a routine basis for subsequent processing to produce ultra-pure Cesium-131. The supplier's nuclear reactor facility must have sufficient irradiationcapacity to accommodate barium targets and the nuclear reactors must have sufficient neutron flux to cost effectively produce commercially viable quantitiesof 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 IsoRay entered into a supply agreement with a new supplier, The Open Joint Stock Company ‹‹Isotope››, a Russian company("JSC Isotope"), during January 2013 to provide Cesium-131 isotope from Russia to the Company's facility in Richland, WA through June 30, 2014. JSCIsotope relies on a single Russian reactor for its supply of Cesium-131. In June 2013, the Company negotiated a contract with E&H Scientific, LLC toprovide logistical support related to the packaging, export and import of the supply of Cs-131 being shipped from Russia. The contract will expire on June30, 2014. The Company also receives irradiated barium from the MURR reactor located in the United States. For the fiscal year ended June 30, 2013, we obtained moreCesium from our domestic source than ever before as approximately seventy percent (70%) of our Cesium-131 was supplied by our Russian supplier andapproximately thirty percent (30%) from domestic sources. The Company has demonstrated the capability to expand Cesium-131 manufacturing capabilityat the MURR reactor in a cost effective manner to meet the current needs of the Company, however, the Company will continue to obtain Cesium-131 fromits foreign supplier to mitigate the risk of reliance on a single source. In recent years, management believed that failure to obtain deliveries of Cesium-131 from its Russian supplier (JSC Isotope) would have a material adverseeffect on seed production. Management now believes that its existing domestic supplier can meet the Company's isotope requirements for the near future andcan mitigate the periodic required shutdowns at the foreign facility. In the fiscal year 2013, the Company continued testing the production capabilities of thereactor at the MURR facility to determine whether it could produce an increased quantity of isotope in a cost effective manner. These tests focused on areaswithin the reactor previously thought to be impracticable. This testing process validated management's belief that the MURR facility can be utilized to offseteither a short-term or long term supply issue with isotope that meets or exceeds the purity levels that are specified for use in the Company's products. TheCompany has also identified other reactors that could provide irradiation services but until further testing is completed management is not certain whetherthey are adequate to meet the needs of the Company. Quality Controls We have established procedures and controls to comply with the FDA's Quality System Regulation. The Company constantly monitors these procedures andcontrols to ensure that they are operating properly, thereby working to maintain a high-quality product. Also, the quality, production, and customer servicedepartments maintain open communications to ensure that all regulatory requirements for the FDA, DOT, and applicable nuclear radiation and healthauthorities 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. Anadditional inspection of IsoRay was conducted by FDA in April 2013. Again the FDA reported no deviations from Good Manufacturing Practices and did notlist any observations, (FDA Form 483). In July 2011, IsoRay completed a recertification to ISO13485:2003 audit by BSI (British Standards Institution) with no nonconformities. The Company issubject to a comprehensive audit every three years with a maintenance audit occurring in the other two years of the audit cycle. The completion of an auditwithout nonconformities confirms the Company’s commitment and success in achieving the standards of manufacturing and quality systems which allowsthe Company to continue to market products in Canada and Europe. 17Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Order Processing The Company has implemented a just-in-time production process that is responsive to customer input and orders to ensure that individual customers receivea higher level of customer service than received from our competitors who have the luxury of longer lead times due to longer half-life products. Time fromorder confirmation to completion of product manufacture is reduced to several working days, including receipt of irradiated barium (from the domesticsupplier's reactor) or unpurified Cesium-131 (from the international supplier's reactor), separation and purification of Cesium-131, isotope labeling of thecore, 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 order moreseeds than necessary to assure themselves that they have a sufficient quantity. Upon receipt of an order, the Company either delivers the seeds from its facilitydirectly to the physician in either loose or preloaded form or sends the order to an independent preloading service that delivers the seeds preloaded intoneedles or cartridges just prior to implant. If the implant is postponed or rescheduled, the short half-life of the seeds makes them unsuitable for use andtherefore they must be re-ordered. Due to the lead time for obtaining and processing the Cesium-131 isotope and its 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. Automated Manufacturing Process In fiscal 2013, IsoRay continued to evaluate opportunities for automation as identified by management to reduce cost and increase radiation safety whileallowing an expansion of product loading configurations. There were no significant opportunities to automate processes that were identified in FY2013,however, the Company continued to identify and refine previously implemented solutions. In fiscal year 2014, the Company intends to continue to evaluateand implement automation in the future that supports process improvement, employee safety and resource management. The Company continued to contractwith a third party to outsource certain sub-processes where cost effective throughout the fiscal year ended June 30, 2013. Pre-loading Services In 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 bioabsorbable rigid "carrier sleeve")§Preloaded strands (strands of seeds loaded into a needle)§Pre-loaded braided strands (seeds loaded into a flexible bioabsorbable braided strand)§Pre-loaded braided strands attached to bioabsorbable mesh (creates planar implants out of braided strands and bioabsorbable mesh) In fiscal year 2013, the Company delivered approximately 54% of its Proxcelan seeds to customers configured in Mick cartridges, approximately 35% of theProxcelan seed configured in both stranded and braided strand forms and the remaining 11% 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. 18Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of June 30, 2013, IsoRay had no radiopharmacies that were able to assay, preload, and sterilize loose seeds but did have radiopharmacies which werecapable of providing these services at other times during the fiscal year. Shipping Cs-131 brachytherapy seeds to independent radiopharmacies requiresloading the seeds with additional isotope activity than would be required if the seeds were to be preloaded utilizing our in-house loading facility whichcauses the Company to incur additional isotope cost to allow for the additional isotope decay created by the additional processing time. The Company pre-loaded 93% and 88% of the Cs-131 brachytherapy seeds that it sold to customers during the fiscal years ended June 30, 2013 and June 30, 2012,respectively. The Company has historically utilized external loading services to supplement our own custom preloading operation and to meet the specificrequests of the ordering physicians. We loaded approximately 95% of Mick cartridges in our own facility in fiscal year 2013 which accounted for approximately 60% of seeds sold.Approximately 29% of seeds sold are strand configurations including strands pre-loaded in needles and the remaining 11% of seeds are sold as loose seeds.The Company anticipates continuing to load 100% of its customer orders during fiscal year 2014 unless there is a specific customer requirement for whichthe Company does not have the loading capability or capacity. 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. 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. In fiscal year 2012, IsoRay obtained a CE mark which allows shipment of seeds loaded into flexible braided strands and flexible strands attached tobioabsorbable mesh into the European Union. GliaSite® Radiation Therapy System IsoRay markets the GliaSite® Radiation Therapy System (RTS) for the treatment of brain cancer, i.e. primary and recurrent gliomas and metastic brain tumors.Specifically, the intended use of GliaSite® RTS is the management of surgically resectable brain tumors where adjuvant radiation therapy of the post-resection tissue bed is indicated. In August 2013, the Company successfully amended its CE mark on the GliaSite RTS which incorporated five changes.These changes included a change in the sterilization method of the right angle clip; a change in the packaging of the right angle clip; an extension of theGliaSite RTS catheter tray expiration date to 3 years; the qualification of a second manufacturer of the Iotrex solution and the extension of the shelf life ofIotrex from 19 days to 30 days. 19Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Overview GliaSite® RTS is the only FDA cleared balloon catheter device used in the treatment of brain cancer. The main components included in the GliaSite® RTSare the GliaSite Catheter Tray, Iotrex Radiotherapy Solution, GliaSite Access Tray and Iotrex Solidifier. Manufacturing Process and Key Suppliers The catheter tray includes a GliaSite® RTS catheter, two non-coring needles, and two right anchoring clips. On one end of the catheter subassembly is aballoon device which is filled with Iotrex radiotherapy solution and on the other end is an infusion port which is attached to the skull and punctured by aneedle to get the solution to the balloon at the end of the catheter. The GliaSite catheter is available in 3 different sizes, including 2, 3, and 4 cm. Theappropriate size to be used is determined at time of implant by the physician to ensure adequate conformance of the resection cavity. A dual balloon configuration is used to act as a primary and secondary reservoir for the Iotrex radiotherapy solution within the resection cavity in the brain.The size of the balloon differs in accordance with the size of the catheter with sizes ranging from 5 cc, 15 cc and 35 cc for a 2cm, 3cm and 4cm catheter,respectively. The balloon catheter is manufactured by Vesta and conforms to the applicable required IsoRay quality standards. In addition IsoRay ensuresthat testing is performed to ensure that the balloons are properly produced and will not leak. The infusion port consists of a port body, reservoir base, and a self-sealing septum. The infusion port is produced by Smith Medical and conforms to theapplicable required IsoRay quality standards. It is attached to the catheter subassembly and is bonded in place. It is designed to allow repeated punctureswith a 20 gauge needle and the design prevents complete penetration of the reservoir with the needle. The Iotrex radiotherapy solution is inserted in the balloon catheter through the infusion port using a needle. Iotrex is the radiation source with the GliaSite®catheter to deliver the intracranial radiation therapy. Iotrex is supplied in sterile unit dose vials with each containing 195 mCi at the time of calibration. Thekey suppliers of the Iotrex radiotherapy solution are Iso-Tex and Anazao. The typical treatment doses of Iotrex radiotherapy solution are 1 - 3 vials. Other accessories sold and packaged with the GliaSite® catheter trays include access trays and solidifier. These accessories assist in the delivery of the Iotrexand subsequent removal after completion of the radiotherapy treatment. Included in the access tray package are infusion sets, syringe assemblies, safetylumen access supplies, gauze pads, etc. each of which assist in the surgical implant and removal of the GliaSite® device and are assembled at the IsoRayfacility. The solidifier (IS 8000 Solidifier) is a product that solidifies liquid radioactive waste associated with the Iotrex. All accessories are obtained fromdistributors and are sterilized and tested by the Company to ensure compliance with quality standards. From start to finish, including the creation of the GliaSite catheter subassemblies, the manufacture of the device takes approximately 4 weeks. The Companymaintains on hand a number of subassemblies that reduce the manufacture time to 2 weeks, which includes sterilization of the final product. Thesubassemblies are maintained in a clean room facility and are not dated until the entire GliaSite medical device is Gamma sterilized. Managementperiodically evaluates the appropriate lot sizes in which to manufacture the GliaSite product to ensure that sterilization capacity is optimized, enoughproduct is on hand to meet customer needs, and manage the risk of expired product utilizing the history of prior GliaSite device manufacturers and salesforecasts. Quality Control We have established procedures and controls to comply with the FDA's Quality System Regulation. The Company constantly monitors these procedures andcontrols to ensure that they are operating properly, thereby working to maintain a high-quality product. Also, the quality, production, and customer servicedepartments maintain open communications to ensure that all regulatory requirements for the FDA, DOT, and applicable nuclear radiation and healthauthorities 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. Anadditional inspection of IsoRay was conducted by FDA in April 2013. Again the FDA reported no deviations from Good Manufacturing Practices and did notlist any observations (FDA Form 483). 20Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In July 2011, IsoRay completed an annual ISO13485:2003 audit from BSI (British Standards Institution) with no nonconformities. The Company is subjectto an audit every three years with a maintenance audit every year. In June 2012, the Company received a recertification to ISO 13485:2003 for an additionalthree-year period, which was affirmed through a surveillance audit in June 2013. The successful audit confirms the Company’s commitment and success inmeeting the standards of manufacturing and quality systems that allows the Company to continue to market products in Canada and Europe. Order Processing IsoRay Medical encourages hospitals to have 6 GliaSite catheters available at time of surgical implant in the patient, which includes 2 catheters of each size.The facilities are encouraged to maintain an inventory of the 6 catheters and to re-order after an implant to ensure that these levels are maintained. At the timeof the surgical implant the catheter size is determined based on the size of the resection and an extra is on hand in the case of a failure with the implant of thefirst catheter. The Company implements a just-in-time order process for the Iotrex radiotherapy solution. The Iodine-125 stock is ordered by the Company and dropshipped to Iso-Tex or Anazao, the Company’s contracted manufacturers of Iotrex. The Iodine-125 is tested by the manufacturer and if accepted, is used tomanufacture the Iotrex radiotherapy solution which has a 30 day shelf life once manufactured. Once manufacture is complete by Iso-Tex or Anazao, testing isperformed on the product and the test results are sent to IsoRay along with the batch record for review and acceptance. Facilities performing the implants canchoose to receive the isotope in vials or the vials can be preloaded into dose-specific vials. Due to the lead time for obtaining and processing the Iodine-125 by Iotrex, the Company relies on sales forecasts and historical knowledge from priormanufacturers to estimate the proper inventory levels of catheters as well as Iotrex given the 1 year and 30 day shelf life respectively. Consequently, someportions of the product including the Iotrex or the GliaSite device itself are lost through decay and are subsequently destroyed. Manufacturing Facility The 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 8 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 second of three three-year renewal options to extendthe APEL facility lease through April 2016 and it believes that the Company will exercise the third three-year renewal option through April 2019. Marketing and Sales Marketing Strategy The 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. Management believes that the impressive results achieved for treatment with Cesium-131 at the five-year mark should create further scientific support for Cesium-131 as an attractive treatment for localized prostate cancer, overcoming at leastsome of the initial resistance predicated on the lack of long-term follow-up reports. 21Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 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-125 and Palladium-103 manufacturers and distributors and more dependent on the therapeutic benefits ofCesium-131. The professional and patient market segments each play a role in the ultimate choice of cancer treatment and the specific isotope chosen for seedbrachytherapy treatment. The Company has developed a customized brand message for each audience. The Company's website (www.isoray.com) delivers themessage that Cesium-131 is for the treatment of cancers throughout the body and includes sections that provide background information on the Company,cancer treatment utilizing brachytherapy in prostate, lung, ocular and brain, physician/clinician resources, investor information, current events thatrepresentatives will attend, and contact information. IsoRay also maintains print and visual media (including physician brochures discussing the clinicaladvantages of Cesium-131, clinical information binders, informational DVDs, single sheet glossies with targeted clinical data, etc.), and advertisements inleading 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);§Congress of Neurological Surgeson (CNS);§Society for Neuro-Oncology (SNO);§American Association of Neurological Surgeons (AANS);§American Association for Thoracic Surgery (AATS);§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. 22Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Apart from clinical studies and papers sponsored by the Company, several physicians across the country have independently published papers and studies onthe benefits of Cesium-131. The Company’s marketing plan with regard to non-prostate segments includes identifying and exhibiting at scientific meetings attended by specialtyphysicians who perform procedures related to Company’s product offerings; direct sales contact with such physicians (for example thoracic surgeons andneuro-surgeons); and the development and dissemination of training videos and other media that outline Company’s products. The Company also continuesto work with its existing radiation oncology physician customers and to educate them as to additional or new Company products. Sales and Distribution According 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 physicists whoprovide expertise in radiation therapy treatments and serve as consultants for urologists and prostate cancer patients. We target the radiation oncologists andthe medical physicists as well as urologists as key clinical decision-makers in the type of radiation therapy offered to prostate cancer patients. With respect to non-prostate applications, the Company targets neurosurgeons and thoracic surgeons in addition to radiation oncologists. After thesedecision makers determine to use the Company's radiation therapy, the Company then needs approval for the procedure from the medical physicists on staff.The sales cycle for non-prostate applications has proved a longer process than prostate and often takes nine months before the Company is licensed in a newhospital and can make its first sale. IsoRay has a direct sales organization consisting of seven territorial sales managers to introduce Proxcelan Cesium-131 brachytherapy seeds to radiationoncologists and medical physicists for use in treating cancer throughout the body. All of the Company's sales force solicit potential specialist physicians inall areas of the body and none specialize solely in the prostate or other organs. This approach allows our sales representatives to call on a single location forthe various specialties so that if a particular physician is unavailable they can contact those who are available, resulting in a more efficient sales approach.Compensation paid to the sales force is uniform for sales made regardless of the organ treated. 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. 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. As of September 27, 2013, the Company had independent distributors in Germany (with a territory covering Germany, Austria, Switzerland, Italyand Luxembourg), Greece, New Zealand and Australia. This strategy should reduce the time and expenses required to identify, train and penetrate the keyimplant centers and establish relationships with the key opinion leaders in these markets. Using established distributors also should reduce the time spentacquiring the proper radiation handling licenses and other regulatory requirements of these markets. Reimbursement Reimbursement 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. 23Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Prostate brachytherapy is typically performed in an outpatient setting, and as such, is covered by the CMS Outpatient Prospective Payment System, whichsince 2010 has provided a fixed reimbursement per seed for stranded and loose seeds. Iodine, palladium and cesium each have their own reimbursementvalues for stranded and loose seeds. If reported correctly when seeds are submitted for payment to CMS, providers are reimbursed at a flat rate that isequivalent to the cost of the seeds. It is expected that this reimbursement system established in January 2010 will continue as it is currently scheduledthrough calendar 2014 but there is no assurance that this will occur. Private insurance companies have historically followed the CMS reimbursementpolicies. The Company expects that CMS will continue its annual review of payments provided as reimbursement for our various products and that CMS willcontinue to provide favorable reimbursement rates for our Cesium-131 brachytherapy seeds although the Company experienced a slight decrease inreimbursement from 2012 to 2013. Unlike prostate brachytherapy implants, lung and brain procedures utilizing either seed brachytherapy or the GliaSite RTS are performed when the patienthas been admitted to the hospital. In-patient procedures, as they are known, are covered by CMS which remits a set amount depending on the kind of surgerybeing performed and the status of the patient. Under this Diagnostic Related Group or “DRG” system, the hospital pays for all the items involved in the careof the patient excluding physician fees. The brachytherapy seeds or the GliaSite RTS in these in-patient cases are not paid for separately by CMS, but ratherthe hospital pays for the seeds out of the DRG payments from CMS. Because the Company's seeds may be more expensive than the cost incurred by a hospitalfor a competing treatment, this reimbursement method can sometimes result in greater difficulty convincing the hospitals to use the Company's products. Other Information Customers The following top five customers, facilities or physician practices that utilize multiple surgical facilities at which primarily prostate brachytherapyprocedures are performed accounted for approximately 48.38% of the total Company product sales for the twelve months ended June 30, 2013: El Camino, Los Gatos, & other facilities (Northern CA) (1) 24.68% of revenueUniversity of Pittsburgh Medical Center 8.42% of revenueBiocompatibles, Inc. 5.36% of revenueYork Cancer Center 5.08% of revenueNew York Presbyterian Hospital 4.84% of revenueTotal 48.38% of revenue (1)The head of the single largest physician practice also serves as the Company's medical director. As the medical director, this physician is a memberof the Medical Advisory Board; advises the Company Board of Directors and management; provides technical advice related to productdevelopment and research and development; and provides internal training to the Company sales staff and professional training to our sales staffand to other physicians. During the fiscal year ended June 30, 2013, this physician added additional physicians to the practice which is expectedto reduce risk associated with seasonality. The loss of either the single largest physician practice or a combination of the other significant facilities and customers could have a material adverse effecton the Company's revenues, which would continue until the Company located new customers to replace them and there can be no assurance this would occurin a timely manner or at all. Proprietary Rights The 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 April 28, 2019. 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. 24Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 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 2013 and 2012, the Companyrecorded royalty expense of $14,168 and $19,497, respectively, related to this patent. The terms of a license agreement with the Lawrence Family Trust (successor to Don Lawrence) for a patent application and related "know-how" require thepayment of a royalty based on the Net Factory Sales Price, as defined in the agreement, of licensed product sales. Because the licensor's patent applicationwas ultimately abandoned, only a 1% "know-how" royalty remains applicable. To date, management believes that there have been no product salesincorporating the "know-how;" and therefore believes no royalty is due pursuant to the terms of the agreement. Management believes that ultimately noroyalties should be paid under this agreement as there is no intent to use this "know-how" in the future. The Lawrence Family Trust has disputed management's contention that it is not using this "know-how". On September 25, 2007 and again on October 31,2007, the Company participated in nonbinding mediation regarding this matter; however, no settlement was reached with the Lawrence Family Trust. Afteradditional settlement discussions, which ended in April 2008, the parties failed to reach a settlement. The parties may demand binding arbitration at anytime. Research and Development During the three-year period ended June 30, 2013, IsoRay and its subsidiaries 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 Regulation The 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 System Regulations,also known as the Good Manufacturing Practices, which include extensive record keeping and periodic inspections of manufacturing facilities. TheCompany's predecessor obtained FDA 510(k) clearance in March 2003 to market the Proxcelan Cesium-131 seed for the treatment of localized solid tumorsand other malignant disease and IsoRay obtained FDA 510(k) clearance in November 2006 to market preloaded brachytherapy seeds and in August 2009 forpreloading 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. 25Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the research, testing, manufacture, safety, labeling,storage, record keeping, approval, distribution, use, reporting, advertising and promotion of such products. Noncompliance with applicable requirements canresult in civil penalties, recall, injunction or seizure of products, refusal of the government to approve or clear product approval applications, disqualificationfrom sponsoring or conducting clinical investigations, preventing us from entering into government supply contracts, withdrawal of previously approvedapplications, and criminal prosecution. In the United States, medical devices are classified into three different categories over which the FDA applies increasing levels of regulation: Class I, Class II,and Class III. Most Class I devices are exempt from premarket notification [510(k]); most Class II devices require premarket notification [510(k)]; and mostClass III devices require premarket approval. Our Proxcelan 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. There isa shorter FDA review and clearance process for Class II medical devices, the premarket notification or 510(k) process, whereby a company can market certainClass II medical devices that can be shown to be substantially equivalent to other legally marketed devices. Since brachytherapy seeds have been classifiedby 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 its current Good Manufacturing Practices,or cGMP. These regulations require that we and any of our contract manufacturers design, manufacture and service products, and maintain documents in aprescribed manner with respect to manufacturing, testing, distribution, storage, design control, and service activities. Modifications or enhancements thatcould significantly affect the safety or effectiveness of a device or that constitute a major change to the intended use of the device require a new 510(k)premarket notification for any significant product modification. The Medical Device Reporting regulation requires that we provide information to the FDA on deaths or serious injuries alleged to be associated with the useof our devices, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. Labeling andpromotional activities are regulated by the FDA and, in some circumstances, by the Federal Trade Commission. As a medical device manufacturer, we are also subject to laws and regulations administered by governmental entities at the federal, state and local levels. Forexample, our facility is licensed as a medical device manufacturing facility in the State of Washington and is subject to periodic state regulatory inspections.Our customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us. In support of IsoRay's global strategy to expand marketing to Canada, the European Union (EU) and Russia, we initiated the process in fiscal year 2008 toobtain the European CE Mark, Canadian registration, and certification to ISO 13485:2003, an internationally recognized quality system. European lawrequires that medical devices sold in any EU Member State comply with the requirements of the European Medical Device Directive (MDD) or the ActiveImplantable Medical Device Directive (AIMDD). IsoRay's brachytherapy seeds are classified in Europe as an active implantable and are subject to theAIMDD and GliaSite RTS is an EU Class 3 device subject to the Medical Device Directive, (MDD). Compliance with the AIMDD, MDD, and obtaining a CEMark involves being certified to ISO 13485:2003 and obtaining approval of the product technical file by a notified body that is recognized by competentauthorities of a Member State. Compliance with ISO 13485:2003 is also required for registration of a company for sale of its products in Canada. Many of therecognized EU Notified Bodies are also recognized by Health Canada to conduct the ISO 13485:2003 inspections for Canadian registration. During fiscalyear 2009, the Company received its certification to ISO 13485:2003 and obtained approval from Health Canada for its Canadian registration. The Companyhas had no success in selling the product in the Canadian or Russian markets and through its distributors is currently focusing on the markets in Germany,Austria, Switzerland, Luxembourg, Italy, Greece, Australia and New Zealand. The Company reached agreements with distributors for Greece, Australia andNew Zealand during the fiscal year ended June 30, 2013 and has actively supported these distributors in achieving regulatory clearance in their distributionmarket. The Company extended its agreement to August 31, 2014 with the German distributor whose market includes Germany, Austria, Switzerland,Luxembourg and Italy. The agreement with the distributor for Greece was effective on May 1, 2013 with a two year term and may be renewed upon mutualagreement of the parties. The agreement with the distributor for New Zealand and Australia was effective on June 1, 2013 with a termination date of May 31,2015 with certain conditions that provide for 12 month renewal periods if those conditions are mutually agreed upon. 26Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In the United States, as a manufacturer of medical devices and devices utilizing radioactive byproduct material, we are subject to extensive regulation by notonly federal governmental authorities, such as the FDA, but also by state and local governmental authorities, such as the Washington State Department ofHealth, to ensure such devices are safe and effective. In Washington State, the Department of Health, by agreement with the federal Nuclear RegulatoryCommission (NRC), regulates the possession, use, and disposal of radioactive byproduct material as well as the manufacture of radioactive sealed sources toensure compliance with state and federal laws and regulations. Our Cesium-131 brachytherapy seeds and the GliaSite® RTS constitute both medical devicesand radioactive sealed sources and are subject to these regulations. The Company has received sealed source device approval from the State of WashingtonDepartment of Health for the GliaSite® RTS, components of which are manufactured at our Richland 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. 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. In April 2012, IsoRay Medical received a CE mark for the GliaSite® Radiation Therapy System which states that the Company conforms to the productrequirements of the European Council Directive 93/42/EEC. The CE mark allows the GliaSite® Radiation Therapy System to be sold in 31 Europeancountries and to be marketed in the European Free Trade Associate member states and the European Union. In August 2013, the Company successfullyamended its CE mark on the GliaSite RTS which incorporated five changes. These changes included a change in the sterilization method of the right angleclip; a change in the packaging of the right angle clip;an extension of the GliaSite RTS catheter tray expiration date to 3 years; the qualification of a secondmanufacturer of the Iotrex solution and the extension of the shelf life of Iotrex from 19 days to 30 days. Seasonality The 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 approximately forty-eight percent (48%) of the Company's business is dependent on fivecustomers, physician practices or facilities, simultaneous vacations by the physicians at these four physician practices or facilities or supplied by the onecustomer that supplies multiple facilities could cause significant drops in the Company's productivity during those reporting periods. Employees As of September 17, 2013, IsoRay employed thirty-six full-time individuals and two part-time individuals. 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, 2013, the Company employed eight direct sales people, which hasdecreased to seven as of the date of this Report. 27Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Competition The 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 original Pd-103 seed, claimed over 59% of the Pd-103 market share (through CR Bard, other distributors, and direct distribution) in 2008. (Source: Millennium ResearchCorp, 2008). Although factors other than being first to market contribute to becoming a market leader, the Company believes it has the opportunity to obtaina 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. The GliaSite RTS and the Company’s brachytherapy products used in non-prostate applications typically compete with external beam radiation therapy(EBRT), which can be provided as conventional or intensity modulated radiation therapy, or as stereotactic radiosurgery, a technique that delivers high dosesof radiation to a target in a much lower number of sessions than other forms of EBRT. Manufacturers of EBRT equipment include Varian Medical Systems, Siemens Healthcare, Elekta AB, and Accuray Incorporated, among others. In the cases of lung and brain tumors (and other solid tumors), a surgeon will remove the tumor if it is medically prudent and this offers the patient somebenefit in terms of controlling the growth of the cancer or its symptoms. In many cases, radiation therapy is added following the surgery; this is known as“adjuvant” radiation therapy. The Company believes that its form of adjuvant radiation therapy deployable in such cases offers advantages over externalbeam methods. However, external beam holds the vast majority of the market for adjuvant radiation therapy. There are also various vaccines that are available for brain cancer but have not proven effective to date. Additional Growth Opportunities Management of the Company sees growth opportunities through sales from expansion into international markets and additional treatment for cancers otherthan prostate. The Company plans to continue to introduce Cesium-131 brachytherapy seed therapy for the treatment of prostate, lung and brain cancers intothe European Union (EU), New Zealand and Australian markets and later into other international markets through partnerships and strategic alliances withchannel partners for manufacturing and/or distribution and has distribution agreements or partnerships in place for brachytherapy seeds as of September 27,2013 in Greece, New Zealand and Australia. The Company also has a distribution agreement with a German distributor for its GliaSite® RTS. 28Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 has suppliedProxcelan™ Cesium-131 brachytherapy seeds for use in treating lung cancer; ocular melanoma; head and neck cancer; colorectal cancer; brain cancer; andgynecological cancer as of the date of this Report. Although it has clearance for breast cancer, management has determined not to focus on this applicationuntil it obtains greater market acceptance for its lung and brain applications. The Company continues to have discussions with prominent physicians and toevaluate treatments for other cancer sites. There is also an opportunity to develop and market other radioactive isotopes to the United States market, and to market 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, but it has not been approved by the FDA for use and there is no assurance that it will beapproved. 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® RTS, the world's only FDA-cleared balloon catheter device used in the treatment of brain cancer. This technology waspreviously used to treat approximately 500 cases annually in some 40 hospitals worldwide however this technology has not been available for sale since2007. This exclusive worldwide license agreement with Hologic Inc. aligns with the Company strategy to locate existing FDA-cleared technologies toprovide new ways to treat other organs. The Company has obtained the intellectual property rights to manufacture the Iotrex solution (Iodine-125) for use inthe GliaSite® radiation therapy system and has contracted with a company for the production of Iotrex and a radiopharmacy to handle the patient dosing ofthe solution for use in procedures. The Company negotiated a contract with a previous distributor of the GliaSite® RTS in the European Union fordistribution rights to the system in Germany, Austria, Switzerland, Luxembourg and Italy. During fiscal 2013, the Company negotiated agreements for thedistribution of the GliaSite RTS in Greece, New Zealand and Australia and is supporting those distributors in their efforts to obtain regulatory clearance tosell the product in their respective markets. The Company has modified the original FDA-cleared device and has received clearance from the FDA to marketthe product, with the modifications, which are designed to improve its performance and manufacturability, in the United States. The Company has obtainedthe intellectual property rights to manufacture the Iotrex solution (Iodine-125) for use in the GliaSite® RTS, and it has contracted with a company for theproduction of Iotrex and a radiopharmacy to handle the patient dosing of the solution for use in procedures. With receipt of a CE Mark for the GliaSite® RTS,the product may be sold in 31 European countries. The Company developed a liquid Cesium-131 solution for use as an alternative brachytherapy radiation source in the GliaSite® radiation therapy system aseither a substitute for the Iotrex solution or as a future alternative treatment option for physicians to utilize independently. Research and development wasconducted during the year ended June 30, 2012 in preparation to seek regulatory approval of liquid Cesium-131 for use in combination with the GliaSite®RTS but there is no assurance approval will be obtained. A 510(k) has been submitted by the Company to the FDA and the Company is waiting for a responsefrom the FDA to the submittal. ITEM 1A – RISK FACTORS Risks Related to Our Industry and Operations Our Revenues Depend Upon One Product. With the exception of the GliaSite® radiation therapy system which the Company began selling in the 2012 fiscalyear, our revenues depend solely upon the successful production, marketing, and sales of the Proxcelan Cesium-131 brachytherapy seed. The rate and level ofmarket acceptance of this product varies depending on the perception by physicians and other members of the healthcare community of its safety andefficacy as compared to that of competing products, if any; the clinical outcomes of the patients treated; the effectiveness of our sales and marketing efforts inthe United States, the European Union (EU), Greece, New Zealand and Australia; any unfavorable publicity concerning our product or similar products; ourproduct's price relative to other products or competing treatments; any decrease in current reimbursement rates from the Centers for Medicare and MedicaidServices or third-party payers; regulatory developments related to the manufacture or continued use of the product; availability of sufficient supplies ofbarium for Cesium-131 seed production; ability to produce sufficient quantities of Cesium-131; the ability of physicians to apply the correct dosage of seedsand avoid excessive levels of radiation to patients; and the ability to use this product to treat multiple types of cancers in various organs. Because of ourreliance on this product as the primary source of our revenue, any material adverse developments with respect to the commercialization of this product maycause us to continue to incur losses rather than profits in the future. 29Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Although Cleared To Treat Any Malignant Tissue, Our Dominant Product Is Primarily Used To Treat A Single Type Of Cancer. Currently, the ProxcelanCesium-131 seed is used almost exclusively for the treatment of prostate cancer (approximately eighty-two percent of our sales). We have been treating lungcancer which amounted to approximately 8% of our product sales and other cancers including head and neck; colorectal; gynecological and brain thatcombined constituted approximately 6% of our product sales in fiscal year 2013. The GliaSite Radiation Therapy System contributed 4% of our product salesin fiscal year 2013. Management believes the Proxcelan Cesium-131 seed will continue to be used to treat other types of cancers as the Company identifiesexisting delivery systems that can be utilized or develops new delivery methods for the product, however these delivery systems may not prove as effective asanticipated. Management believes that clinical data gathered by select groups of physicians under treatment protocols specific to other organs will be neededprior to widespread acceptance of our product for treating other cancer sites. If our current and future products do not become accepted in treating cancers ofother sites, our sales will depend primarily on treatment of prostate cancer, a market with increasing competition and ongoing loss of market share by allbrachytherapy products. 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 our recent successful capital raise, previous capital investments and substantial cost reductions, management believescash and cash equivalents on hand at September 27, 2013 will be sufficient to meet our anticipated cash requirements for operations, debt service, and capitalexpenditure requirements through at least the next two fiscal years. Management now estimates that operational cashflow breakeven will be achieved atapproximately $750,000 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 Five Customers. Approximately forty-eight percent (48%) of the Company’s revenues are dependent on five customers andapproximately twenty five percent (25%) on one customer. The loss of any of these customers would have a material adverse effect on the Company’srevenues which may not be replaced by other customers particularly as these customers are in the prostate sector which is facing substantial declines on anannual basis. 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 2013, approximately seventy percent (70%) of our Cesium-131 was supplied through JSC Isotope from a reactor located in Russia. Our current contractwith JSC Isotope terminates on June 30, 2014 and will have to be renegotiated. Management will seek to negotiate favorable pricing but there is no assuranceas to the outcome of these negotiations. Management is evaluating other reactors that meet current specifications to yield Cesium-131 of the purity that theCompany requires for use in its products but thus far has only confirmed such availability from MURR. 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 two 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 either supplier. Any interruption or delay in thesupply of materials required to produce our products could harm our business if we were unable to obtain an alternative supplier or substitute equivalentmaterials in a cost-effective and timely manner. To mitigate any potential interruptions, the Company continually evaluates its inventory levels andmanagement believes that the Company maintains a sufficient quantity on hand to alleviate any potential disruptions. 30Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Virtually all of the components used in the production of the GliaSite RTS are from single sources. We do not have formal written agreements with thosesuppliers. Any interruption or delay in the supply of these components could harm our business as the cost and / or time required to meet the regulatoryrequirements of the Food and Drug Administration for the United States and our notified body for our CE mark British Standards Institute in the EuropeanUnion may be prohibitive. 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 year 2013 contributing to our failure to improve sales in the prostate market. Beginning in the fall of 2008, U.S. consumerssignificantly curtailed all spending (even for life saving medical procedures) which impacted the brachytherapy industry as a whole. In February of 2009noted urologists announced at a medical conference that prostate specific antigen (PSA) testing was not as necessary as previously believed. Their statementswere widely publicized. In May 2012 the U.S. Preventive Services Task Force recommended against routine PSA screenings for healthy men withoutsymptoms. We believe this recommendation has led to a renewed decline in PSA screenings. In addition, we believe there has been an increase in “activesurveillance”, a practice where no immediate medical treatment is provided; but the physician and patient closely monitor the patient’s cancer for signs thatthe cancer is growing. We believe that declines in PSA screenings have led to a decline in the number of men diagnosed with prostate cancer. A decline inthe number of PSA screenings would in turn lead to a decline in the number of procedures to treat prostate cancer, including brachytherapy procedures. Anincrease in the proportion of men diagnosed with prostate cancer but not seeking immediate medical treatment would also lead to a decline in the number ofprocedures to treat prostate cancer. As of the end of fiscal 2013, the American Cancer Society has not further revised its advice regarding PSA testing, continuing to advise that the decision tobe screened for prostate cancer should be made after getting information about the uncertainties, risks, and potential benefits of prostate cancer screening.This advice has led to an increased number of men electing to forgo PSA testing. 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 2013, each of these factors continued 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 2014. Doctors And Hospitals May Not Adopt Our Products And Technologies At Levels Sufficient To Sustain Our Business Or To Achieve Our Desired GrowthRate. To date, we have attained very limited penetration of the total potential market for most of our products, particularly our non-prostate applications. Ourfuture growth and success depends upon creating broad awareness and acceptance of our products by doctors, hospitals and freestanding clinics, as well aspatients. This will require substantial marketing and educational efforts, which will be costly and may not be successful. The target customers for ourproducts may not adopt these technologies or may adopt them at a rate that is slower than desired. In addition, potential customers who decide to utilize anyof our devices may later choose to purchase competitors’ products. Important factors that will affect our ability to attain broad market acceptance of ourproducts include: ·doctor and/or patient awareness and acceptance of our products;·the real or perceived effectiveness and safety of our products;·the relationship between the cost of our products and the real or perceived medical benefits of our products;·the relationship between the cost of our products and the financial benefits to our customers using our products, which will be greatly affected by thecoverage of, and reimbursement for, our products by governmental and private third-party payors; and·market perception of our ability to continue to grow our business and develop enhanced products. Failure of our products to gain broad market acceptance could cause our revenues to decline and our business to suffer. 31Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Entered Into An Agreement With A Single Supplier For Our Cesium-131 From Russia. In January 2013, the Company entered into a new agreementthrough June 30, 2014, with JSC Isotope to purchase Cesium-131 directly from JSC Isotope instead of directly from Institute of Nuclear Materials (INM) andResearch Institute of Atomic Reactors (RIAR) as the Company had done prior to the original agreement with UralDial LLC in December 2008. As a result,the Company now relies on JSC Isotope to obtain Cesium-131 from its single Russian source. Through the JSC Isotope agreement we have obtained setpricing for our Russian Cesium-131 through the end of June 2014. There can be no guarantee that JSC Isotope will always be able to supply us withsufficient Cesium-131 or will renew our existing contract on favorable terms in June 2014, which could be due in part to risks associated with foreignoperations and beyond either our or JSC Isotope's control. If we were unable to obtain supplies of isotopes from Russia in the future, our overall supply ofCesium-131 could be reduced significantly unless we have a source of enriched barium for utilization in domestic reactors beyond the quantity that wealready own. While recent testing of regions within the reactor at MURR has found that Cesium-131 can be produced in economically viable quantities at aviable price, there is no assurance that we can obtain the increased quantity of isotope at the pricing and quantities that the Company requires in the longterm. However the due diligence that has been conducted by the Company and the University of Missouri at the Missouri University Research Reactor hasdemonstrated that the Company would be able to continue producing enough Cesium-131 utilizing its existing three target locations and naturally occurringbarium that has been enriched using the inventory of enriched barium that the Company currently owns. Management estimates that the supply of enrichedbarium that it currently owns should last from 24 to 36 months which would allow time to expand into other irradiation sites within MURR or at anotherreactor to supplement its supply of Cs-131. 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 2014 but there is no assurance this will occur. 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 IsoRay anticipates a slight decrease in reimbursement, we do not believe it will have a material impact for 2014.These changes can positively or negatively affect market demand for our products. We monitor these changes and provide comments, as permitted, whenchanges are proposed, prior to implementation. In 2011, IsoRay introduced the GliaSite RTS that had an existing reimbursement code. As an in-patient procedure covered by CMS, hospitals are paid basedon the type of surgery and the status of the patient. These procedures are done as part of a Diagnostic Related Group or “DRG” system under which thehospital pays for all items involved in the care of the patient exclusive of the physician fees. Hospitals are less receptive to treatments which require out ofpocket costs. 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. A reductionin 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 65% of all U.S. prostate brachytherapy cases and management anticipates this percentage to increase annually. We are unable to predict theimpact of the healthcare reform passed in 2010, those reforms that may be enacted in the future, whether other healthcare legislation or regulations affectingthe business may be proposed or enacted in the future or what effect any such legislation or regulations would have on our business, financial condition orresults 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; 32Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. §hospital, clinic and physician purchasing decisions;§research and development and manufacturing expenses;§patient outcomes from our therapy;§physician acceptance of our products;§government or private healthcare reimbursement policies;§healthcare reform;§our manufacturing performance and capacity;§incidents, if any, that could cause temporary shutdown of our manufacturing facility;§the amount and timing of sales orders;§rate and success of future product approvals;§timing of FDA clearance, if any, of competitive products and the rate of market penetration of competing products;§seasonality of purchasing behavior in our market;§overall economic conditions;§the 2.3% excise tax on medical devices effective January 2013;§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 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 brachytherapy product could be negatively affected and our revenues from our brachytherapy 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. As physicians migrate to medical devices such as external beamradiation and robotic surgery that have a much higher capital cost to repay and higher profit margins, this puts increasing pressure on all brachytherapyproducts to compete regardless of their superior treatment results. The market share for brachytherapy continues to decline as a result of this pressure fromincreasing usage by oncologists of external beam radiation. In addition, centers that wish to offer the Proxcelan Cesium-131 seed or the GliaSite RadiationTherapy System must comply with licensing requirements specific to the state, province, and/or country in which they do business and these licensingrequirements may take a considerable amount of time to comply with. Certain centers may choose not to offer our Proxcelan Cesium-131 seed or the GliaSiteRadiation Therapy System due to the time required to obtain necessary license amendments. We also compete with academic institutions, governmentagencies, and private research organizations in the development of technologies and processes and in acquiring key personnel. Although we have patentsgranted and patents applied for to protect our isotope separation processes and Cesium-131 seed manufacturing technology, we cannot be certain that one ormore of our competitors will not attempt to obtain patent protection that blocks or adversely affects our product development efforts. To minimize thispotential, we have entered into exclusive agreements with key suppliers of isotopes and isotope precursors, The Company’s Gliasite RTS brachytherapyproducts typically compete with external beam radiation therapy (EBRT), which can be provided as conventional or intensity modulated radiation therapy,or as stereotactic radiosurgery, a technique that delivers high doses of radiation to a target in a much fewer number of sessions than other forms of EBRT.Manufacturers of EBRT equipment include Varian Medical Systems, Siemens Healthcare, Elekta AB, and Accuray Incorporated, among others. In the case ofbrain tumors, a surgeon will remove the tumor and radiation therapy is added following the surgery; this is known as “adjuvant” radiation therapy. TheCompany believes that its form of adjuvant radiation therapy deployable in such cases offers advantages over external beam methods. However, externalbeam holds the vast majority of the market for adjuvant radiation therapy. Our revenues have faced annual historical declines as our non-brachytherapycompetitors gain greater market share of prostate treatments. Medical Device Tax. Significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the PPACA).The PPACA includes provisions that, among other things, require the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax(the Medical Device Tax) on the U.S. sales of most medical devices beginning in 2013. The Internal Revenue Service (IRS) has only recently issued the finalregulations for the Medical Device Tax, and many questions remain regarding the applicability of this tax to varying points in the supply chain. While wecontinue to evaluate the impact of the Medical Device Tax on our overall business, we currently believe this tax will be applicable to 100% of our productsales. Our estimate is subject to change due to, among other things, future IRS guidance and interpretations of the Medical Device Tax regulations, andchanges in our product mix. This revenue-based tax will have a material impact on our consolidated results of operations, cash flows, and financial condition 33Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 May Be Unable To Adequately Protect Or Enforce Our Intellectual Property Rights Or Secure Rights To Third-Party Patents. Our ability and the abilitiesof our partners to obtain and maintain patent and other protection for our products will affect our success. We are assigned, have rights to, or have exclusivelicenses to patents and patents pending in the U.S. and numerous foreign countries. The patent positions of medical device companies can be highlyuncertain and involve complex legal and factual questions. Our patent rights may not be upheld in a court of law if challenged. Our patent rights may notprovide competitive advantages for our products and may be challenged, infringed upon or circumvented by our competitors. We cannot patent our productsin 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. We are also subject to the federal anti-kickback statute, False Claims Act, Foreign Corrupt Practices Act and the Physician Payment Sunshine Act. 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 is monitoredthrough periodic inspections by the FDA Office of Regulatory Affairs (ORA). We anticipate both announced and unannounced inspections by the FDA. Suchinspections could result in non-compliance reports (Form 483) which, if not adequately responded to, could lead to enforcement actions. The FDA caninstitute a wide variety of enforcement actions ranging from public warning letters to more severe sanctions such as fines; injunctions; civil penalties; recallof our products; operating restrictions; suspension of production; non-approval or withdrawal of pre-market clearances for new products or existing productsand criminal prosecution. There can be no assurance that we will not incur significant costs to comply with these regulations in the future or that theregulations will not have a material adverse effect on our business, financial condition and results of operations. 34Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Significant reforms to the healthcare system were adopted in the form of the PPACA. CMS has published final regulations that would implement provisionsin PPACA related to disclosure of payments made by manufacturers to physicians and teaching hospitals, effective April 2013. Because we manufacture anumber of devices that are covered by the regulations, all payments that we make to physicians and teaching hospitals would be subject to this reportingrequirement even if the payment relates to a device that is not considered a covered device. The tracking and reporting of these payments could have anadverse impact on our business and/or consolidated results of operations and financial condition and on our relationships with customers and potentialcustomers. In addition to the PPACA, various healthcare reform proposals have also emerged at the state level. Like the PPACA, these proposals could reduce medicalprocedure volumes and impact the demand for our products or the prices at which we sell our products. The impact of these proposals could have a materialadverse effect on our business and/or consolidated results of operations and financial condition. The automatic spending cuts of nearly $1 trillion over the next 10 years that were included under the Budget Control Act of 2011, including a 2% cut toMedicare providers and suppliers, took effect in 2013. Medicaid is exempt from these cuts. Any cuts to Medicare reimbursement which affect our productscould have a material adverse effect on our business and/or our consolidated results of operations and financial condition. 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. Our brachytherapy seed products deliver a highly concentrated and confined dose ofradiation directly to the organ in which it is implanted from within the patient’s body. Surrounding tissues and organs are typically spared excessiveradiation exposure. It is an inherent risk of the industries in which we operate that we might be sued in a situation where one of our products results in, or isalleged to result in, a personal injury to a patient, health care provider, or other user. Although we believe that as of the current date we have adequateinsurance to address anticipated potential liabilities associated with product liability, any unforeseen product liability exposure in excess of, or outside thescope of, such insurance coverage could adversely affect our financial condition and operating results. Any such claim brought against us, with or withoutmerit, could result in significant damage to our business. Insurance coverage is expensive and difficult to obtain, and, although we currently have a fivemillion 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 renew sufficientinsurance at an acceptable cost or if a successful product liability claim is made against us, whether fully covered by insurance or not, our business could beharmed. The FDA’s medical device reporting regulations require us to report any incident in which our products may have caused or contributed to a death orserious injury, or in which our products malfunctioned in a way that would be likely to cause or contribute to a death or serious injury if the malfunctionreoccurred. Any required filing could result in an investigation of our products and possibly subsequent regulatory action against us if it is found that one ofour products caused the death or serious injury of a patient. Our Business Involves Environmental Risks. Our business involves the controlled use of hazardous materials, chemicals, biologics, and radioactivecompounds. Manufacturing is extremely susceptible to product loss due to radioactive, microbial, or viral contamination; material or equipment failure;vendor or operator error; or due to the very nature of the product's short half-life. Although we believe that our safety procedures for handling and disposingof such materials comply with state and federal standards there will always be the risk of accidental contamination or injury. In addition, radioactive,microbial, or viral contamination may cause the closure of the respective manufacturing facility for an extended period of time. By law, radioactive materialsmay only be disposed of at state-approved facilities. At our leased facility we use commercial disposal contractors. We may incur substantial costs related tothe disposal of these materials. If we were to become liable for an accident, or if we were to suffer an extended facility shutdown, we could incur significantcosts, damages, and penalties that could harm our business. We Rely Upon Key Personnel. Our success will depend, to a great extent, upon the experience, abilities and continued services of our executive officers, salesstaff and key scientific personnel. If we lose the services of several officers, sales personnel, or key scientific personnel, our business could be harmed. Oursuccess also will depend upon our ability to attract and retain other highly qualified scientific, managerial, sales, and manufacturing personnel and theirability to develop and maintain relationships with key individuals in the industry. Competition for these personnel and relationships is intense and wecompete with numerous pharmaceutical and biotechnology companies as well as with universities and non-profit research organizations. We may not be ableto continue to attract and retain qualified personnel. Our Ability To Operate In Foreign Markets Is Uncertain. Our future growth will depend in part on our ability to establish, grow and maintain product sales inforeign markets, particularly in the European Union (EU), New Zealand and Australia. However, we have limited experience in marketing and distributingproducts in other countries. Any foreign operations would subject us to additional risks and uncertainties, including our customers' ability to obtainreimbursement for procedures using our products in foreign markets; the burden of complying with complex and changing foreign regulatory requirements;time-sensitive delivery requirements due to the short half-life of our product; language barriers and other difficulties in providing long-distance customerservice; potentially increase time to collect accounts receivable; significant currency fluctuations, which could cause third-party distributors to reduce thenumber of products they purchase from us because the cost of our products to them could fluctuate relative to the price they can charge their customers;reduced protection of intellectual property rights in some foreign countries; and the possibility that contractual provisions governed by foreign laws wouldbe interpreted 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 with JSCIsotope. 35Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 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 Requirements If We Are Unable To Successfully Address The Material Weakness In Our Internal Controls, Our Ability To Report Our Financial Results On A Timely AndAccurate Basis May Be Adversely Affected. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Ifwe cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be harmed. We have in the past discovered, and mayin the future discover, areas of our internal controls that need improvement. In its assessment of the effectiveness in internal control over financial reportingas of June 30, 2013, the Company determined that there was a single deficiency that constituted a material weakness. The Company is assessing additionalsteps that may be taken in fiscal year 2014 to improve internal controls. We cannot be certain that these measures will ensure that we implement and maintainadequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficultiesencountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls couldalso cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Our Reporting Obligations As A Public Company Are Costly. Operating a public company involves substantial costs to comply with reporting obligationsunder federal securities laws that have continued to increase as provisions of the Sarbanes Oxley Act of 2002 have been implemented. 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 Equity Securities.We cannot predict the size of future issuances or sales of our common stock or other equity securities for future acquisitions or capital raising activities, or theeffect, if any, that such issuances or sales may have on the market price of our common stock. The issuance and sale of substantial amounts of common stockor other equity securities or announcement that such issuances and sales may occur, could adversely affect the market price of our common stock. 36Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Reduced Stock Price May Adversely Affect Our Liquidity. Our common stock has been trading at less than $1.00 per share for most of 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, 2013, we had 34,618,517 outstanding shares of common stock. Any decline inthe price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock and may impair ourability 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 outstanding as of September 26, 2013 were converted or exercised into shares of common stock, including the warrants and preferredstock issued in the most recent offering in September 2013, there would be approximately an additional 13,098,388 shares of common stock outstanding as aresult. The issuance of these shares will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.Our warrants issued in September 2013 to purchase 5,648,738 shares of our common stock to institutional investors with an exercise price of $0.72 per share(subject to possible reduction via Company shareholder approval to $0.535 per share) do not expire until August 29, 2015. Until these warrants are fullyexercised or expire, it may depress the price of our common stock to below the warrants' exercise price. Failure to Comply with NYSE MKT Listing Standards And Any Resulting Delisting Could Adversely Affect The Market For Our Common Stock. Our commonstock is presently listed on the NYSE MKT. The NYSE MKT will consider delisting a company's securities if, among other things, the company fails tomaintain minimum stockholder's equity or the company has sustained losses which are so substantial in relation to its overall operations or its existingfinancial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the NYSE MKT, as to whether such issuerwill 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 our listing on theNYSE MKT indefinitely. We fell below the minimum stockholders equity requirement for the quarter ended June 30, 2013, but raised additional capital inSeptember 2013 with net proceeds of approximately $3.3 million. We may need to raise additional capital sooner than anticipated to meet listing standards ifthe warrants sold in September 2013 are not exercised. In the event that our common stock is delisted from the NYSE MKT, trading, if any, in the commonstock would be conducted in the over-the-counter market. As a result, our shareholders would likely find it more difficult to dispose of, or to obtain accuratequotations as to the 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, 2013. Shareholders must be prepared to rely onsales of their common stock after price appreciation to earn an investment return, which may never occur. Any determination to pay dividends in the futurewill be made at the discretion of our Board of Directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictionsimposed by applicable laws and other factors that our Board deems relevant. 37Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Certain Provisions of Minnesota Law and Our Charter Documents Have an Anti-Takeover Effect. There exist certain mechanisms under Minnesota law andour charter documents that may delay, defer or prevent a change of control. Anti-takeover provisions of our articles of incorporation, bylaws and Minnesotalaw could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then-current market price of our commonstock. For example, while we have no present plans to issue any preferred stock, our Board of Directors, without further shareholder approval, may issueshares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the votingpower of the common shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our Board of Directors thatcould have the effect of delaying, deterring or preventing a change in control. Further, as a Minnesota corporation, we are subject to provisions of theMinnesota Business Corporation Act, or MBCA, regarding "business combinations," which can deter attempted takeovers in certain situations. Pursuant tothe terms of a shareholder rights plan adopted in February 2007, each outstanding share of common stock has one attached right. The rights will causesubstantial dilution of the ownership of a person or group that attempts to acquire the Company on terms not approved by the Board of Directors and mayhave the effect of deterring hostile takeover attempts. The effect of these anti-takeover provisions may be to deter business combination transactions notapproved by our Board of Directors, including acquisitions that may offer a premium over the market price to some or all shareholders. We may, in the future,consider adopting additional anti-takeover measures. The authority of our Board to issue undesignated preferred or other capital stock and the anti-takeoverprovisions of the MBCA, as well as other current and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or preventtakeover attempts and other changes in control of the Company not approved by our Board of Directors. ITEM 1B – UNRESOLVED STAFF COMMENTS As a smaller reporting company, the Company is not required to provide Item 1B disclosure in this Annual Report. ITEM 2 – PROPERTIES The Company's executive offices are located at 350 Hills Street, Suite 106, Richland, WA 99354, (509) 375-1202, where IsoRay currently leasesapproximately 15,300 square feet of office and laboratory space for approximately $22,566 per month plus monthly janitorial expenses of approximately$400 from Energy Northwest, the owner of the Applied Process Engineering Laboratory (the APEL facility). The Company is not affiliated with this lessor.The monthly rent is subject to annual increases based on the Consumer Price Index. The current lease was entered into in May 2013, expires on April 30,2016. The lease modification and renewal entered into in May 2013 added one additional three-year renewal option. The Company's management believes that all facilities occupied by the Company are adequate for present requirements, and that the Company's currentequipment is in good condition and is suitable for the operations involved. ITEM 3 – LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings as of the date of this Report. ITEM 4 – MINE SAFETY DISCLOSURES Not applicable PART II ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES The 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: 192,998,329 shares of common stock, par value of $0.001 per share; and 7,001,671 shares of preferred stock, par value of$0.001 per share. As of September 23, 2013, we had 38,419,502 outstanding shares of Common Stock, 59,065 outstanding shares of Series B Preferred Stockand 1,670 outstanding units of Series D Convertible Preferred Stock. On April 19, 2007, our common stock began trading on the American Stock Exchange (now the NYSE MKT) under the symbol "ISR." Even though ourcommon stock is listed on the NYSE MKT there is still limited trading activity in our securities. 38Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 sets forth, for the fiscal quarters indicated, the high and low sales prices for our common stock as reported on the NYSE MKT. Year ended June 30, 2013 High Low First quarter $1.47 $0.72 Second quarter 0.87 0.38 Third quarter 0.82 0.47 Fourth quarter 0.71 0.48 Year ended June 30, 2012 High Low First quarter $1.29 $0.90 Second quarter 0.99 0.65 Third quarter 0.73 0.48 Fourth quarter 1.28 0.39 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 December21, 2012, the Board of Directors declared a dividend on the Series B Preferred Stock of all outstanding and cumulative dividends through December 31,2012. The total Series B accrued dividends of $10,632 were paid as of December 31, 2012. At June 30, 2013, there were 59,065 Series B preferred sharesoutstanding and cumulative dividends in arrears were $5,316. There are no Series A or Series C shares of Preferred Stock outstanding as of the date of thisReport. As of September 23, 2013, we had approximately 290 shareholders of record, exclusive of shares held in street name. The closing price of our common stockwas $0.58 on September 23, 2013 Equity Compensation Plans On 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 to directorsof 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 MKT) on the date of the grant, and with varying vesting periods as determined by theBoard. As of June 30, 2013, 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 2,305,072 $1.83 1,388,046 Total 2,305,072 $1.83 1,388,046 39Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 of Unregistered Securities All sales of unregistered securities during the 2013 fiscal year were previously reported. Use of Proceeds from Registered Securities On 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 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. The SeriesA and Series C warrants were amended and restated via an Amendment Agreement dated December 27, 2010, and the Series C warrants were further amendedand 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 onNovember 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 Series C or D warrants), and also received warrants to purchase 3% of the common stock sold in the offering and 3% of the SeriesA, B and C warrants exercised at any time, which warrants issued to LifeTech shall not be exercisable for six months following the closing, shall have a fiveyear term, 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 was 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. TheCompany recorded fair value adjustments to the Series A warrant liability through the exercise of the warrants on March 24, 2011. The Company expensedthe unamortized deferred financing cost of $16,044 as financing expense in the Consolidated Statement of Operations. The Series A warrant liability wasreclassified to equity at the fair value reported on March 24, 2011 of $119,000 during the three months ended March 31, 2011 as the warrant holder exercisedthe warrants during this period. The Series B warrants expired without being exercised and the fair value of the warrant liability for Series B was reclassified to equity was $152,000. The Series C 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 Cwarrants. The fair value of the warrant liability for Series C that was reclassified to equity was $1,119,000. The Company expensed the unamortized deferredfinancing cost of $142,809 as financing expense in the Consolidated Statement of Operations. On September 12, 2012, the holder of the remaining Series C warrants exercised warrants for 2,666 shares of common stock at an exercise price of $0.6715 fora total of $1,791. On November 26, 2012, the holder of the final Series C warrants exercised the remaining warrants for 100 shares of common stock at anexercise price of $0.3497 for a total of $34.92. 40Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. On October 13, 2011, the Company entered into an Underwriting Agreement with WestPark Capital, Inc. as managing underwriter for a best efforts all ornothing underwritten registered offering of 2,500,000 shares of the Company’s common stock, par value $0.001 per share, at an offering price to the public of$0.92 per share. With every five shares of common stock purchased, the purchaser received a warrant to purchase one share of common stock with an exerciseprice of $1.058 with a five year term for a total of 500,003 warrants issued in the initial transaction. Under the terms of the Underwriting Agreement, theCompany also granted the underwriters a 45 day option to sell up to an additional 1,027,173 shares of Common Stock (with warrants to purchase up to anadditional 205,435 shares of common stock) to cover over-allotments, if any, at the offering price. There were 317,988 shares of common stock sold from theover-allotment and 63,598 warrants issued as part of the sale of the over-allotment shares. None of the warrants from either the initial sale of shares ofcommon stock or from those sold as part of the over-allotment sale of shares of common stock have been exercised. The gross proceeds to the Company fromthe sale of the initial 2.5 million shares of common stock were $2,300,000 and there were net proceeds to the Company of $2,013,363. Gross proceeds fromthe over-allotment sale of 317,988 shares of common stock were $292,549 and net proceeds were $261,123. These shares and warrants were issued pursuantto the Registration Statement and a prospectus supplement filed on October 13, 2011. On July 13, 2012, the Company entered into a securities purchase agreement with certain institutional investors, with Ladenburg Thalmann & Co. Inc. actingas placement agent, for a registered direct offering to sell 3,626,943 shares of the Company’s common stock, par value $0.001 per share, with an aggregatepurchase price of $3.5 million at a price per share of $0.965. The offering yielded $3,291,977 in cash after expenses. The shares were issued pursuant to theRegistration Statement, as supplemented by the Form S-3 registration statement filed on July 16, 2012 (Reg. No. 333-182678), and a prospectus supplementfiled on July 17, 2012. There was no material change in the use of proceeds from our public offerings as described in our final prospectuses for these offerings filed with the SECpursuant to Rule 424 (b). Through June 30, 2013 we had begun to use the net proceeds consistent with the use of proceeds from our public offerings asdescribed in our final prospectuses for these offerings filed with the SEC pursuant to Rule 424 (b) and as further described in the table below, and invested theremaining 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 Proceeds from sales of common stock, pursuant to registered public offering, net 2,274,486 Proceeds from sales of common stock, pursuant to exercise of Series C warrants, net 834,797 Proceeds from sales of common stock, pursuant to registered public offering, net 3,291,977 Proceeds from sales of common stock, pursuant to exercise of Series C warrants, net 1,825 Total proceeds from public offerings through June 30, 2013 $9,348,023 Proceeds used in the year ended June 30, 2013: Indirect payment to directors and officers for database development $13,960 Direct payments of compensation to directors 135,000 Direct payments of salaries to officers 705,843 Working capital 2,211,783 Total proceeds used in the year ended June 30, 2013 $3,066,586 ITEM 6 – SELECTED FINANCIAL DATA As a smaller reporting company, the Company is not required to provide Item 6 disclosure in this Annual Report. 41Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies and Estimates Management'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. 42Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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, 2013, 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 Receivable Accounts 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 accounts receivable.Payments received subsequent to the time that an account is written off are considered bad debt recoveries. Inventory Inventory is reported at the lower of cost or market. Cost of raw materials is determined using the weighted average method. Cost of work in process andfinished goods is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. Fixed Assets Fixed 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. 43Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 years Leasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated useful life of the asset. Management of the Company periodically reviews the net carrying value of all of its equipment on an asset by asset basis. These reviews consider the netrealizable value of each asset to determine whether an impairment of value has occurred, and if there is a need for any asset impairment write-down. Although management has made its best estimate of the factors that affect the carrying value based on current conditions, it is reasonably possible thatchanges could occur which could adversely affect management's estimate of net cash flows expected to be generated from its assets, and necessitate assetimpairment write-downs. Deferred Financing Costs Financing 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. 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 proportionate basiswith the aggregate amount of the total offering. Amortization of deferred financing costs, totaling $0 and $61,511 for the years ended June 30, 2013 and2012, respectively, is included in financing and interest expense on the consolidated statements of operations. Deferred financing costs were fully amortizedduring the year ended June 30, 2012. Licenses Amortization 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 $11,721 for the years ended June 30, 2013 and 2012, respectively. Based on the licenses recorded at June 30,2013, 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 2014, $0 for all years thereafter. Other Assets Other 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 other assets.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 $31,302 and $15,731 for the years ended June 30, 2013 and 2012 respectively. Based on the patents and other intangibleassets recorded in other assets at June 30, 2013, and assuming no subsequent impairment of the underlying assets, the annual amortization expense for eachfiscal year ending June 30, 2013 is expected to be as follows: $19,021 for each year 2014 through 2017, $15,333 for 2018 and $123,759 thereafter. 44Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Obligation The 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, 2013 and 2012, the asset retirement obligations changed as follows: 2013 2012 Beginning balance $724,298 $662,181 Accretion of discount 67,944 62,117 Ending balance $792,242 $724,298 Because the Company does not expect to incur any expenses related to its asset retirement obligations in fiscal year 2014, the entire balance as of June 30,2013 is classified as a noncurrent liability. Financial Instruments The 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, 2013 and 2012. Revenue Recognition The 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, 2013 and 2012 was derived primarily from sales of the Proxcelan Cs-131 brachytherapy seed, which is used in thetreatment of cancer. The Company also had sales from the Gliasite Radiation Therapy System, which is used in the treatment of brain cancer, in the fiscal yearended June 30, 2013. 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. 45Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Allowances The 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 forward withthe procedure, discovery that a patient's condition is beyond treatment during surgery and other criteria as determined acceptable by management. Stock-Based Compensation The 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 Costs Research and development costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations as incurred.The cost of equipment used in research and development activities which has alternative uses is capitalized as part of fixed assets and not treated as anexpense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as research and developmentexpense in the year recognized. Research and Development Reimbursement Research and development reimbursement recorded during the year ended June 30, 2012 is a reimbursement from the German distributor of the GliaSiteRadiation Therapy System in support of the product development. Research and development reimbursement recorded during the year ended June 30, 2011is the amount of cost recoverable as part of the grants related to the Qualified Therapeutic Discovery Project received by the Company in October 2010. Thegrants allowed for "Qualified Investments" to be recovered at 50% of the amounts expended up to the specified limits by tax year and are still subject toexamination by the Service. Legal Contingencies In 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 that ifit relocates its current production facilities then certain decommissioning expenses will be incurred and has recorded an asset retirement obligation for theseexpenses. 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. 46Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Taxes Income 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 Medical, andits predecessors are subject to examination of their income tax filings in the United States and state jurisdictions for the 2011 through 2013 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 Share Basic 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, 2013 and 2012 were as follows: 2013 2012 Preferred stock 59,065 59,065 Common stock warrants 1,957,033 1,959,799 Common stock options 2,305,072 2,381,306 Total potential dilutive securities 4,321,170 4,400,170 Subsequent Events Effective 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 at thedate 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 eventsif required to keep the financial statements from being misleading. The guidance in this Statement is very similar to current guidance provided in accountingliterature and, therefore, will not result in significant changes in practice. Subsequent events have been evaluated through the date our financial statementswere issued—the filing time and date of our 2013 Annual Report on Form 10-K. Use of Estimates The 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 Operations Financial Presentation The following sets forth a discussion and analysis of the Company's financial condition and results of operations for the two years ended June 30, 2013 and2012. 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 29 of this Annual Report on Form 10-K. 47Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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, 2013 compared to year ended June 30, 2012 Product sales. Prostate Brachytherapy.Revenue generated from treatment with prostate brachytherapy decreased from 86% of total revenue in the fiscal year ended June 30, 2012 to 82% of totalrevenue in the fiscal year ended June 30, 2013. The overall decrease in revenue generated by prostate brachytherapy is consistent with revenue decreasesexperienced by this segment of the industry as a whole. Management believes that the overall market for prostate brachytherapy has continued to receiveincreased pressure from other treatment options with higher reimbursement rates such as Intensity–Modulated Radiation Therapy (IMRT) and robotic-assisted surgery. Although combination treatments incorporating brachytherapy with other modalities in the prostate and treatment of other body sites withbrachytherapy have increased, these increases are insufficient to offset the overall decrease in use of prostate brachtherapy. Other Brachytherapy including Brain and Lung. The strategy implemented by management in the prior year in diversifying the number of body sites being actively treated with the Proxcelan Cs-131brachytherapy seed has continued to partially mitigate the lost revenue from the prostate brachytherapy segment. The timeline of developing and bringingnew products from concept to revenue production in the pharmaceutical/medical device segment is lengthy and is typically measured in years. Theprobability of any new cancer treatment product reaching the stage at which it produces revenue is very low. Company management has been investing in development of alternative uses for the Company’s brachytherapy seed that management believes have theability to generate revenue in the near-term to offset development costs. New treatments such as those being initiated by the Company can be expected toexperience a staged entry to market in which primary adopters demonstrate the suitability of a treatment, after which wider adoption is possible. The productsbeing implemented by the Company are very dependent on first adopters as a source of revenue, and there is initially a steep growth in revenue that willreach a plateau due to capacity until the mainstream adoption occurs, when and if there is favorable publication of the experiences and treatment outcomes ofthe first adopters. However, to date the Company has only experienced nominal sales to first adopters. In the fiscal year ended June 30, 2013, there were overeight hundred fifty cases treated with the Company’s Cs-131 brachytherapy seeds, with approximately 14% of the cases being non-prostate applications.Management strategy includes soliciting the use of other applications for the Company's brachytherapy seeds at major medical institutions that are morelikely to publish their outcomes and that are training the next generation of decision makers. Company management intends to actively pursue alternativeuses for the Company’s brachytherapy seeds in treatments consistent with the FDA clearance granted permitting the Company to utilize other FDA clearedapplication methods as a means of administering the treatments. During the year ended June 30, 2013, the revenue from other brachytherapy treatments increased an additional 9% over the year ended June 30, 2012. Themost significant contributors to the growth in revenue from other brachytherapy treatments is the 134% growth in the treatment of brain cancers and the167% growth in the treatment of head and neck cancers. Overall, other brachytherapy treatments increased by approximately 10% during the year whichpartially offset the continued reduction in revenue from prostate brachytherapy treatment. GliaSite Radiation Therapy System. The Company made the first sales of its FDA cleared and CE marked GliaSite Radiation Therapy System (GliaSite RTS) during the three months endedDecember 31, 2011. The Company sold additional catheters and an initial delivery of the Iotrex liquid isotope to the distributor in Germany during the fiscalyear ended June 30, 2012. During the fiscal year ended June 30, 2013, revenue from the GliaSite RTS increased by approximately 6% or $9,000 compared tothe fiscal year ended June 30, 2012. All product sales are generated by the brachytherapy seeds and the related methods of application except for the revenuegenerated by the sales of GliaSite RTS which come from sale of the liquid isotope, catheter trays and access trays. The conversion of prospects to new GliaSite RTS customers has been a longer process than originally anticipated by the Company. The Company hasexperienced lengthy timelines in the internal processes of the medical facilities in reviewing and approving the use of the product at the request of theirphysician(s). These longer than anticipated internal processes are compounded by uncertain timelines and delays in receiving the approval for the requestedmodification of each facility's nuclear materials license, which is required to begin using GliaSite RTS and is dependent on external government regulators. 48Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Product sales (Prostate) $3,730,129 $4,342,897 $(612,768) (14)%Product sales (Other1) 795,104 728,191 66,913 9%Total product sales $4,525,233 $5,071,088 $(545,855) (11)% 1 - Other sales include brachytherapy seed treatment of brain cancer, lung cancer, head and neck cancer, colorectal cancer, gynecological cancer, ocularcancer and other body site cancers that have been treated previously with the Company’s Cs-131 brachytherapy seeds as well as the sale of GliaSiteRTS and its related components for use. Cost of product sales. Cost of product sales overall have remained substantially unchanged during the fiscal year ended June 30, 2013 compared to the fiscal year ended June 30,2012. Cost of product sales remained unchanged primarily as the result of production labor and benefits that are no longer being utilized on research anddevelopment projects which is reflected in the overall reduction in payroll expense in research and development. The additional payroll expense representedan increase in cost of approximately 3%. Additionally, the Company has minimum purchase obligations with isotope suppliers which remains in cost ofproduct sales as the result of the short half-life of Cesium-131. This excess isotope, which decays rapidly, and the required minimum staffing to meetcustomer demands allows for a significant portion of each additional sale to contribute to an increased gross margin assuming sales continue to increase. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Cost of product sales $4,375,057 $4,367,884 $7,173 0% Gross margin. Gross profit for the fiscal year ended June 30, 2013 decreased substantially when compared to the fiscal year ended June 30, 2012. The change in gross profitwas primarily as a result of the previously discussed reduction in sales in the prostate market as the cost of product sales was substantially unchanged duringthe fiscal year ended June 30, 2013 when compared to June 30, 2012. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Gross margin $150,176 $703,204 $(553,028) (79)% Research and development expenses. Research and development costs were decreased by three key operating factors for the fiscal year ended June 30, 2013 as compared to June 30, 2012. The firstkey operating factor was other organ research expense which decreased as development related to isotope development projects and brain applicationdevelopment projects was completed, which was partially offset by the initiation of additional research surrounding our GliaSite RTS product. The secondkey operating factor that decreased was payroll, benefits and share-based compensation as there was a decreased need for personnel as projects came to an endthereby decreasing the wage, benefit and overhead expenses related to those personnel. The third key operating factor was protocol expense which increasedas the Company entered into additional protocols in combined therapy and lung. The Company continued to invest in protocols in support of products thathave been developed and sales have begun in support of gaining general acceptance in the market. During the fiscal year ended June 30, 2013, the Companyaccrued protocol costs in accordance with its agreements with participating facilities. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Other organ research $24,337 $79,356 $(55,019) (69)%Protocol expense 106,362 69,223 37,139 54%Payroll 266,060 438,453 (172,393) (39)%Other expense 230,348 193,547 36,801 19%Total R&D expense $627,107 $780,579 $(153,472) (20)% 49Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Research and development reimbursement. Research and development reimbursement costs were reduced for the fiscal year ended June 30, 2013 as compared to the fiscal year ended June 30, 2012.This reduction was the result of a reimbursement of developmental expenses that were recorded in the amount of $50,000 during the fiscal year ended June30, 2012 that did not recur during the fiscal year ended June 30, 2013. This reimbursement amount represented the amount of cost sharing that wasnegotiated with the future distributor of the GliaSite RTS received from the German based distributor in support of the development of the product. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Research and development reimbursement $- $(50,000) $50,000 (100)% Sales and marketing expenses. Sales and marketing expenses increased during the fiscal year ended June 30, 2013 when compared to the fiscal year ended June 30, 2012 primarily as aresult of additional sales staff, the additional travel associated with establishing new facilities as customers, and the addition of the new GliaSite RTSproducts which required additional travel expense during its introduction to the market. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Payroll $843,337 $783,047 $60,290 8%Travel expense 274,003 252,974 21,029 8%Other expense 178,809 179,559 (750) 0%Total sales & marketing expense $1,296,149 $1,215,580 $80,569 7% General and administrative expenses. General and administrative expenses were substantially unchanged during the fiscal year ended June 30, 2013 when compared to the fiscal year ended June30, 2012. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Legal expense $153,663 $173,209 $(19,546) (11)%Payroll benefits and related taxes 1,080,134 1,046,321 33,813 3%Share-based compensation 32,328 85,198 (52,870) (62)%Other expense 1,028,048 1,050,287 (22,239) (2)%Total sales & marketing expense $2,294,173 $2,355,015 $(60,842) (3)% Operating loss. Operating loss for the year ended June 30, 2013 compared to the year ended June 30, 2012 increased as a result of decreased revenue generated from the salesof brachytherapy seeds for the treatment of prostate cancer; which was not offset by a sufficient increase in product sales from other seed brachytherapy andsales of GliaSite RTS; coupled with cost of product sales which failed to decrease commensurate with the decrease in revenues even with a decrease inresearch and development expense. The changes in sales and marketing expense and general and administrative expense were immaterial to the change inoperating loss. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Operating loss $(4,067,253) $(3,597,970) $(469,283) 13% Change in fair value of warrant liability. During the years ended June 30, 2013 and June 30, 2012, there were changes in the fair value of the warrant derivative liabilities established upon issuance ofthe warrants during October 2011 and December 2011 to the purchasers and underwriters in the Company’s registered public offering. Per ASC 820, thewarrant derivative liability requires periodic evaluation for changes in fair value. As required at June 30, 2013 and June 30, 2012, the Company evaluated thefair value of the warrant derivative liability using the Black-Scholes option pricing model on which the original warrant derivative liability was based andapplied updated inputs as of those dates. The resulting change in fair value was recorded as of June 30, 2013 and June 30, 2012, respectively. 50Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Change in fair value of warrant derivative liability $210,000 $170,000 $40,000 24% Financing and interest expense. Financing and interest expense decreased for the year ended June 30, 2013 compared to the year ended June 30, 2012 as theresult of a decrease in the deferred cost of financing. Financing expense included interest expense and the amortization of deferred equity financing costs related to equity transactions. Description June 30, 2013 June 30, 2012 Variance ($) Variance (%) Deferred financing expense - (61,511) 61,511 (100)%Other income / (expense) (7) (171) 164 96%Total interest and financing expense $(7) $(61,682) $61,675 (100)% 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 2013, the Company used existing cash reserves and cash received through sales of common stock ofapproximately $3 million and in 2012 of approximately $2.5 million to fund its operations and capital expenditures. Cash flows from operating activities Cash used by operating activities is the net loss adjusted for non-cash items and changes in operating assets and liabilities. The increase in net cash used in operating activities for the year ended June 30, 2013 when compared to the year ended June 30, 2012 is primarily the resultof the increased net loss that is primarily the result of decreased revenues. Management has continued to maintain prior reductions of expenses that consumedcash in operating activities through a combination of cost reductions and operational efficiencies that were previously identified and implemented inoperations. The remaining increase in cash used by operating activities is the net of an increase from the changes in operating assets and liabilities partiallyreduced by the decrease in non-cash operating expenses. Key operating factor Fiscal year Fiscal year Description ended 06-30-13 ended 06-30-12 Variance ($) Variance (%) Net loss $(3,856,596) $(3,488,905) $(367,691) 11%Non-cash items 731,738 983,534 (251,796) (26)%Non-cash changes in operating assets and liabilities 68,591 57,596 10,995 19%Net cash used by operating activities $(3,056,267) $(2,447,775) $(608,492) 25% Cash flows from investing activities Cash used by investing activities during the year ended June 30, 2013 was primarily related to the capitalization of costs related to other assets and in theyear ended June 30, 2012 was primarily that required to bring the GliaSite RTS to market. 51Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Key operating factor Fiscal year Fiscal year Description ended 06-30-13 ended 06-30-12 Variance ($) Variance (%) Purchases of fixed assets $(6,576) $(55,057) $48,481 (88)%Additions to licenses and other assets (6,118) (40,240) 34,122 (85)%Change in restricted cash (122) (218) 96 (44)%Net cash used by investing activities $(12,816) $(95,515) $82,699 (87)% Cash flows from financing activities Cash provided by financing activities in the year ended June 30, 2013 and June 30, 2012 was the result of sales of common stock in a registered directoffering and through warrant exercises and option exercises. Cash used during the fiscal years ended June 30, 2013 and June 30, 2012 was the result ofdividend payments to the preferred shareholders. Key operating factor Fiscal year Fiscal year Description ended 06-30-13 ended 06-30-12 Variance ($) Variance (%) Preferred dividend payments $(10,632) $(10,632) $- 0%Proceeds from sale of common stock 3,306,931 3,114,379 192,552 6%Net cash provided by financing activities $3,296,299 $3,103,747 $192,552 6% Projected 2014 Liquidity and Capital Resources Balances at: 09-17-13 06-30-13 06-30-12 Cash and cash equivalents $5,514,119 $2,899,927 $2,672,711 Short-term investments - - - The Company’s monthly required cash operating expenditures increased during the fiscal year ended June 30, 2013 when compared to the fiscal year endedJune 30, 2012. Net cash used by operating activities increased by the net effect of the increased net loss when adjusted for the increase in cash used by non-cash expenses and for the increase in cash used by operating assets and liabilities. Key operating factor Fiscal year Fiscal year Description ended 06-30-13 ended 06-30-12 Variance ($) Variance (%) Net loss $(3,856,596) $(3,488,905) $(367,691) 11%Increase in non-cash expenses 731,738 983,534 (251,796) (26)%Increase in operating assets and liabilities 68,591 57,596 10,995 19%Net cash used by operating activities $(3,056,267) $(2,447,775) $(608,492) 25% Number of months to calculate 12 12 Average monthly cash required for operating expense $(255,000) $(204,000) $(51,000) 25% During fiscal year 2014, the Company intends to continue its existing protocol studies and to begin new protocol studies on lung and inter-cranial cancertreatments using Cesium-131 brachytherapy seeds and the GliaSite RTS. The Company believes that approximately $180,000 in expense will be incurredduring fiscal year 2014 related to protocol expenses relating to lung cancer, inter-cranial cancer and both dual therapy and mono therapy prostate cancerprotocols. Based on the foregoing assumptions, management believes cash and cash equivalents on hand at June 30, 2013 should be sufficient to meet our anticipatedcash requirements for operations and capital expenditure requirements through at least the next twelve months. 52Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 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 for Cs-131 and continuing to maintain the Company's focus on cost control. Additionally, management plans to increase revenue through expanding the sale of the FDA cleared and ISO 13845:2003 certified GliaSite® RTS to currentcustomers, adding new customers in the United States through the Company’s direct sales force, through international sales with the existing distributionagreements which cover Germany, Austria, Switzerland, Italy, Luxembourg, Greece, Australia and New Zealand and the addition of other distributionchannels to European Union countries covered by the ISO certifications. 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 continued to shrink, which has not allowed breakeven to be reached during the past three fiscalyears and these sales continued to decline during the year ended June 30, 2013. Sales of other applications and of the GliaSite RTS have been nominal andhistorically have not been a substantial contributor to total revenue. As management has focused on expanding into head and neck, colorectal, lung and brain applications and experienced growth in sales for non-prostate seedapplications in excess of 10% comparing fiscal year 2013 to fiscal year 2012, management believes the Company may need to continue to raise additionalcapital after fiscal year 2014 to maintain compliance with NYSE MKT listing standards as this entry into new markets may take longer to generate revenues. On July 16, 2012, the Company entered into a Securities Purchase Agreement with Ladenberg Thalmann & Co., Inc. as placement agent for the sale of $3.5million of shares of common stock at a per share price of $0.965. On July 19, 2012, the Company received net proceeds of $3.296 million after offering costsof $204,000. These shares were issued pursuant to the Company’s Form S-3 shelf registration statement filed in 2009 and a prospectus supplement filed onJuly 17, 2012. Series C warrant exercises in September and November of 2012 resulted in proceeds of less than $ 2,000. There was no material change in the use of proceeds from our public offerings as described in our final prospectuses for these offerings filed with the SECpursuant to Rule 424 (b). Through June 30, 2013 we had begun to use the net proceeds from our public offerings as described in our final prospectuses forthese offerings filed with the SEC pursuant to Rule 424 (b) and as further described in the table below, and invested the remaining net proceeds in cash andcash equivalents. 53Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 offering expenses in any of our offerings were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning tenpercent or more 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 (FY 2011) $2,219,306 Proceed from sales of common stock, pursuant to registered public offering, net (FY 2012) 2,274,486 Proceeds from sales of common stock, pursuant to exercise of Series C warrants, net 834,797 Proceeds from sales of common stock, pursuant to registered public offering, net (FY 2013) 3,291,977 Proceeds from sales of common stock, pursuant to exercise of Series C warrants, net 1,825 Total proceeds from public offerings through June 30, 2013 $8,622,391 Offering description Period Net proceeds Remaining net proceeds Registered direct offering Oct / Dec 2011 $2,274,486 $- Registered direct offering July 2012 3,291,977 2,898,102 Total proceeds from registered public offerings $5,566,463 $2,898,102 Proceeds used in the year ended June 30, 2013: Indirect payments to directors and officers for database development $13,960 Direct payments of salaries to directors and officers 840,843 Working capital 2,211,783 Total proceeds used in the year ended June 30, 2013 $3,066,586 On August 29, 2013, the Company entered into an agreement to sell 3,800,985 common units, each consisting of 1 share of the Company’s common stockand a warrant to purchase 0.816 shares of common stock (the Common Units), and 1,670 preferred units, each consisting of 1 share of Series D ConvertiblePreferred Stock and a warrant to purchase 1,525.23 shares of common stock (the Preferred Units) on a firm commitment underwritten basis. The CommonUnits were sold at an initial per unit purchase price of $0.535 and the Preferred Units were sold at an initial per unit purchase price of $1,000. The warrants areall exercisable at $0.72 per share and have a twenty-four month term, with the exercise price and term subject to reduction to $0.535 per share and aneighteen month term if shareholder approval is obtained. Each share of the Series D Convertible Preferred Stock is convertible into 1,869.15 shares ofcommon stock at any time at the option of the holder, subject to adjustment, provided that the holder will be prohibited from converting Series D ConvertiblePreferred Stock into shares of the Company’s common stock if, as a result of such conversion, the holder, together with affiliates, would own more than 9.99%of the total shares of the Company’s common stock then issued and outstanding. The offering yielded approximately $3,287,520 in cash after expenses. As a result of this recent capital raise, management does not anticipate needing to raise financing during fiscal 2014. If financing is obtained, it may bedilutive to shareholders. Of course, needed funding may not be available to us on acceptable terms, or at all. If the Company is unable to raise neededadditional funds, it may have to discontinue or significantly curtail operations. Other Commitments and Contingencies In April 2013, Medical exercised the second of two options to renew the original lease that was entered into on May 2, 2007 with Energy Northwest, theowner of the Applied Process Engineering Laboratory (the APEL lease), for an additional 3 years with a new lease expiration date of April 30, 2016. TheCompany agreed to modification number 14 which became effective on May 1, 2013. The lease modification provided for a contractually permitted rentincrease based on a CPI index which was 1.9%. The modification also provided the Company with an additional (third) three year option to extend theirtenancy beyond the current expiration date of April 30, 2016. The rent contained in lease modification number 14 beginning on May 1, 2013 is $22,566. 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, 2014 270,796 2015 270,796 2016 270,796 2017 270,796 2018 270,796 2019 225,663 $1,579,643 54Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company is subject to various local, state, and federal environmental regulations and laws due to the isotopes used to produce the Company's products.As part of normal operations, amounts are expended to ensure that the Company is in compliance with these laws and regulations. While there have been noreportable incidents or compliance issues, the Company believes that if it relocates its current production facilities then certain decommissioning expenseswill be incurred. An asset retirement obligation was established in the first quarter of fiscal year 2008 for the Company's obligations at its new productionfacility. This asset retirement obligation will be for obligations to remove any residual radioactive materials and to remove all leasehold improvements. 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 products. 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 grant funds, these grant funds are subjectto recapture if the associated costs are determined by the Service to not meet the definition of a "Qualified Investment" during an examination. The Company has no off-balance sheet arrangements. Inflation Management 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 Standards The Company reviewed all Accounting Standards Update issued from the beginning of calendar year 2011 through ASU 2013-10 and determined that theonly ASU for which the effective date for the Company was prior to June 30, 2013 was ASU 2012-03. All others ASU’s that have not been previously adoptedwere determined to not be applicable to the Company as of June 30, 2013. Effective August 2012, the Company adopted ASU 2012-03 "Technical Amendments and Corrections to SEC Sections". This Accounting Standards Updateaddresses amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 114, technical amendments pursuant to SEC Release No. 33-9250,and corrections related to FASB Accounting Standards Update 2010-22. The Company's accounting policies and amounts presented in the financialstatements were not impacted by this change. ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, the Company is not required to provide Item 7A disclosure in this Annual Report. ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The required accompanying financial statements begin on page F-1 of this document. 55Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements or reportable events with DeCoria, Maichel & Teague, P.S. ITEM 9A – CONTROLS AND PROCEDURES Disclosure Controls and Procedures Under 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, 2013. Based on that evaluation, our principalexecutive officer and our principal financial officer concluded that the design and operation of our disclosure controls and procedures were effective. Thedesign of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, management believes that oursystem of disclosure controls and procedures is designed to provide a reasonable level of assurance that the objectives of the system will be met. Management's Report on Internal Control over Financial Reporting Our 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, 2013, the Companydetermined that there was a single deficiency that constituted a material weakness. §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. As a result of the significant deficiency which itself constitutes a material weakness, management concluded that our internal control over financial reportingwas not effective as of June 30, 2013. The Company is in the process of developing and implementing a remediation plan to address the material weakness as described above. 56Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During fiscal year 2013, the Company took the following actions to improve internal control over financial reporting: §In April 2013, the Company hired a staff accountant with a BA in Business Administration, Accounting Major to allow for further segregation ofthe Controller from daily transactional processing and to support the senior accountant as her role in the financial reporting of the Company hasexpanded.§The Company continued to enhance staff knowledge through continued training and periodic reviews. In light of the aforementioned material weakness, management conducted a thorough review of all significant or non-routine transactions and adjustments forthe year ended June 30, 2013. 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, 2013 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 Reporting There 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 Controls Our 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 control system,misstatements due to error or fraud may occur and not be detected. ITEM 9B – OTHER INFORMATION There 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, 2013 that have not beenalready disclosed on a Form 8-K filed with the SEC. PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Each 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. 57Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Board Committees The Board has established an Audit Committee consisting of Thomas LaVoy (Chairman), Robert Kauffman, and Albert Smith; a Compensation Committeeconsisting of Albert Smith (Chairman) and Robert Kauffman; and a Nominating Committee consisting of Robert Kauffman (Chairman), Thomas LaVoy, andAlbert Smith. No other committees have been formed. Audit Committee The 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 MKTstandards. 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 Directors The executive officers and directors serving the Company as of June 30, 2013 were as follows: Name Age Position Held Term*Dwight Babcock 65 Chairman, Chief Executive Officer AnnualBrien Ragle 44 Controller, Principal Financial and Accounting Officer Robert Kauffman 73 Vice-Chairman AnnualThomas LaVoy 53 Director AnnualAlbert Smith 69 Director AnnualFredric Swindler# 66 Vice-President, Regulatory and Quality Affairs William Cavanagh III 47 Vice President, Research and Development * For directors only# Mr. Swindler transitioned to part-time employment in September 2013, as part of retirement planning, and serves as Vice President as of the date of thisReport. Dwight Babcock – Mr. Babcock was appointed CEO of the Company on February 18, 2009. He was previously appointed Chairman and Interim CEO of theCompany on February 26, 2008 and has served as a Director of the Company since 2006. Mr. Babcock has served as Chairman and Chief Executive Officer ofApex Data Systems, Inc., an information technology company, since 1975. Apex Data Systems automates the administration and claims adjudication needs ofinsurance companies both nationally and internationally. Mr. Babcock was formerly President and CEO of Babcock Insurance Corporation (BIC) from 1974until 1985. BIC was a nationally recognized third party administrator operating within 35 states. Mr. Babcock has knowledge and experience in the equityarena and has participated in various activities within the venture capital, private and institutional capital markets. Mr. Babcock studied marketing andeconomics at the University of Arizona where he currently serves on the University of Arizona Astronomy Board. Mr. Babcock brings over 35 years of CEO-level experience to his service on the Company's Board. 58Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Brien Ragle – Mr. Ragle has over 15 years of finance and accounting experience, including SEC reporting, financial reporting, cost, project, and managementaccounting in addition to performing operational analysis. Mr. Ragle became IsoRay's Controller – Principal Financial and Accounting Officer in October2009. Mr. Ragle was IsoRay’s Cost Accounting Manager from January 2007 until October 2009. Before joining IsoRay in January 2007 as Cost AccountingManager, Mr. Ragle was employed by BNG America, LLC, a wholly-owned subsidiary of Energy Solutions, LLC (ES) from 2005 to 2006 as ProjectAccounting Manager for all projects located in the Western United States and from 2000 to 2004 as a Business Unit Controller by SCM Consultants, Inc, awholly-owned subsidiary of Tetra Tech, Inc (TTEK). Mr. Ragle holds Bachelor of Arts degrees in Business Administration, with an emphasis in accounting,and in Hospitality Management from Washington State University. Mr. Ragle is a Certified Public Accountant in the State of Washington and designated as aChartered Global Management Accountant by the American Institute of Certified Public Accountants. Mr. Ragle filed for personal bankruptcy under Chapter13 of the U.S. Bankruptcy Code on January 26, 2011. 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. LaVoywas a Certified Public Accountant with the firm of KPMG Peat Marwick from 1980 to 1983. Mr. LaVoy has a Bachelor of Science degree in Accounting fromSt. Cloud University, Minnesota, and is a Certified Public Accountant. Mr. LaVoy brings over 25 years of CFO experience for progressively growingcompanies 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 also 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, serving as Vice President, Regulatory and Quality Affairs until September 6, 2013,when he began serving as Vice President on a part-time basis as a part of his transition to retirement. Mr. Swindler has over 40 years experience inmanufacturing and regulatory compliance. Mr. Swindler also served as Secretary for IsoRay, Inc., from June 11, 2008 through September 6, 2013. Mr.Swindler served as VP, Quality Assurance and Regulatory Affairs for Medisystems Corporation, a manufacturer and distributor of medical devices, from 1994until joining the Company. During his tenure at Medisystems Corporation, Mr. Swindler developed a quality system to accommodate vertically integratedmanufacturing, developed regulatory strategies, policies and procedures, and submitted nine pre-market notifications (510(k)) to the FDA. Prior to this, Mr.Swindler held various positions with Marquest Medical Products from 1989 to 1994, Sherwood Medical Products from 1978 to 1989, Oak ParkPharmaceuticals in 1978, and Mead Johnson & Company from 1969 to 1978. Mr. Swindler holds a Bachelor of Science degree in Biomedical Engineeringfrom Rose-Hulman Institute of Technology and a Masters of Business Administration from the University of Evansville. 59Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. William Cavanagh III – Mr. Cavanagh joined IsoRay Medical in January 2010 and serves as Vice President, Research and Development. Immediately prior tojoining IsoRay Medical, Mr. Cavanagh was engaged in the research and development of dendritic cell therapies for cancer and infectious diseases. He servedas Chief Scientific Officer for Sangretech Biomedical, LLC for the six years prior to joining IsoRay Medical. At Sangretech, he oversaw the design andimplementation of a novel cancer therapy. Mr. Cavanagh began his extensive career in cancer treatment technologies in the early 1990s, when he helpedlead research and development of a therapy involving the insertion of radioactive sources directly into the prostate for the treatment of prostate cancer(prostate brachytherapy). He has designed several cancer treatment-related studies, is listed as an author on 34 peer-reviewed publications, and is the listedinventor on a U.S. patent application detailing a novel treatment for cancer. Mr. Cavanagh has also served as Director of the Haakon Ragde Foundation forAdvanced Cancer Studies in Seattle, Washington, where he led the research foundation in the selection of viable research projects directed at treatingadvanced cancers. Mr. Cavanagh holds a B.S. in Biology from the University of Portland (Oregon) and completed two years of medical school beforebeginning his career in research management. 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 any ofthe 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 Employees A 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 a briefdescription of the experience of our significant employee during the past five years. Name Age Position Held & TenureLane Bray 85 Chief Chemist Lane Bray – Mr. Bray is known nationally and internationally as a technical expert in separations, recovery, and purification of isotopes and is a notedauthority in the use of cesium and strontium ion exchange for Department of Energy's West Valley and Hanford nuclear waste cleanup efforts. In 2000,Mr. Bray received the 'Radiation Science and Technology' award from the American Nuclear Society. Mr. Bray has authored or co-authored over 110 researchpublications, 12 articles for nine technical books, and holds 28 U.S. and foreign patents. Mr. Bray patented the USDOE/PNNL process for purifying medicalgrade Yttrium-90 that was successfully commercialized in 1999. Mr. Bray also invented and patented the proprietary isotope separation and purificationprocess that is assigned to IsoRay. Mr. Bray was elected 'Tri-Citian of the Year' in 1988, nominated for 'Engineer of the Year' by the American Nuclear Societyin 1995, and was elected 'Chemist of the Year for 1997' by the American Chemical Society, Eastern Washington Section. Mr. Bray retired from the PacificNorthwest National Laboratory in 1998. Since retiring in 1998, Mr. Bray worked part time for PNNL on special projects until devoting all of his efforts toIsoRay 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 Chemistryfrom Lake Forest College. Section 16(a) Beneficial Ownership Reporting Compliance Section 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 Commission underSection 16(a) of the Exchange Act require those persons to furnish us with copies of all reports filed with the Commission pursuant to Section 16(a). Theinformation in this section is based solely upon a review of Forms 3, Forms 4, and Forms 5 received by us. 60Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 believe that IsoRay's executive officers, directors and 10% shareholders timely complied with their filing requirements during the year ended June 30,2013, except as follows – Brien Ragle (one Form 4). This Form 4 was filed late. Code of Ethics We 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 Exhibit 14.1to our Form 10-KSB for the period ended June 30, 2005, and the Code of Ethics for Chief Executive Officer and Senior Financial Officers was previously filedas 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 our websiteat http://www.isoray.com/corporate_governance. Each of these policies comprises written standards that are reasonably designed to deter wrongdoing and topromote the behavior described in Item 406 of Regulation S-K promulgated by the Securities and Exchange Commission. Nominating Procedures There 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 COMPENSATION The 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 and employees are set orrecommended to the Board by the Compensation Committee, 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 2013 284,394 - - - - - - 284,394 Chairman and CEO 2012 276,212 - - 42,078 - - - 318,290 Frederic Swindler 2013 167,908 - - - - - - 167,908 VP–QA / RA 2012 163,077 - - 5,680 - - - 168,757 William Cavanagh 2013 154,327 - - - - - - 154,327 VP – R&D 2012 154,039 - - 15,148 - - - 169,187 Robert Bilella 2013 97,200 63,275 - - - - - 160,475 NE Area Sales Director 2012 97,200 85,270 - - - - - 182,470 §Amounts represent the ASC 718, Compensation – Stock Compensation valuation for the fiscal years ended June 30, 2013 and 2012, 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. 61Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Outstanding Equity Awards at Fiscal Year-End Option awards Equity Incentive planawards: 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 50,000(1) - - 0.98 06/27/2022 Fred Swindler 10,000(3) - - 4.40 03/02/2017Vice-President, Regulatory and Quality Affairs 10,000(4) - - 4.14 06/01/2017 10,000(5) - - 0.65 07/01/2018 50,000(6) - - 0.26 06/01/2019 20,000(7) - - 1.43 06/30/2020 13,333(8) 6,667(8) - 0.99 06/07/2021 2,500(10) 5,000(10) - 0.98 06/27/2022 William Cavanagh 30,000(9) - - 0.84 01/08/2020Vice-President, Research and Development 35,000(7) - - 1.43 06/30/2020 23,333(8) 11,667(8) - 0.99 06/07/2021 6,666(10) 13,334(10) - 0.98 06/27/2022 Robert Bilella 84,236(2) - - 4.15 06/23/2015NE Area Sales Director 18,000(6) - - 0.26 06/01/2019 5,000(7) - - 1.43 06/30/2020 5,000(8) - - 0.99 06/07/2021 1)Represents options issued to Mr. Babcock which were all immediately vested and exercisable. The grant dates are 10 years prior to theexpiration date in 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, all of which were exercisable as of July 1, 2011.6)Represents a June 1, 2009 grant, all of which were exercisable as of June 1, 2012.7)Represents a June 30, 2010 grant, all of which were exercisable as of June 30, 2013.8)Represents a June 7, 2011 grant, one-third of which became exercisable on June 30, 2012, one-third of which became exercisable on June 30,2013, and the final third will become exercisable on June 30, 2014.9)Represents a January 8, 2010 grant, all of which were exercisable as of January 8, 2013.10)Represents a June 27, 2012 grant, one-third of which became exercisable on June 27, 2013, one-third of which will become exercisable on June27, 2014, and the final third will become exercisable on June 27, 2015. 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 participantsto their individual accounts through payroll withholding. Additionally, the 401(k) plan provides for the Company to make contributions to the 401(k)plan in amounts at the discretion of management. The Company has not made any contributions to the 401(k) plan and does not maintain any otherretirement plans for its executives or employees. 62Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 61,000 - - - - - 61,000 Thomas LaVoy 49,000 - - - - - 49,000 Albert Smith 25,000 - - - - - 25,000 During fiscal year 2013, each non-employee director received cash compensation of $2,000 per month. In addition, each non-employee director received$1,000 per Board meeting attended in person or $500 per Board meeting attended via telephone and $500 per committee meeting attended. Mr. Kauffmanreceived an additional $3,000 per month for serving as Vice-Chairman, and Mr. LaVoy received an additional $2,000 per month for serving as AuditCommittee Chairman. Each non-employee director had stock options to purchase shares of the Company's common stock outstanding as of June 30, 2013 asfollows - Mr. Kauffman and Mr. LaVoy each had stock options to purchase 150,000 shares of common stock and Mr. Smith had stock options to purchase175,000 shares of common stock. Compensation Committee Interlocks and Insider Participation As a smaller reporting company, the Company is not required to provide this disclosure. Compensation Committee Report As a smaller reporting company, the Company is not required to provide this disclosure. ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following tables set forth certain information regarding the beneficial ownership of the Company's common stock and preferred stock as of September 27,2013 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 a group.As of September 27, 2013, the Company had 38,419,502 shares of common stock, 59,065 shares of Series B preferred stock outstanding and 1,670 shares ofSeries D convertible preferred stock. Except as otherwise 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 Convertible Common Shares Common Stock Stock Preferred Percent of Name of Beneficial Owner Owned Options (1) Warrants (1) Stock (1) Class (2) Dwight Babcock (3) 259,068 750,000 12,500 - 2.61%Brien Ragle - 40,333 - - 0.10%Robert Kauffman 113,802 150,000 - - 0.68%Thomas LaVoy 83,523 150,000 - - 0.61%Albert Smith 198,101 175,000 - - 0.97%Fredric Swindler - 115,833 - - 0.30%William Cavanagh III - 94,999 - - 0.25%Directors and Executive Officers as a group 654,494 1,476,165 12,500 - 5.28%Sabby Management, LLC (4) 3,800,895 - - 3,121,481(5) 16.66%(6) (1)Only includes those common stock options, common stock warrants and convertible preferred stock that could be exercised or convertedinto common stock within 60 days after September 27, 2013.(2)Percentage ownership is based on 38,419,502 shares of Common Stock outstanding on September 27, 2013. Shares of Common Stocksubject to convertible preferred stock, stock options or warrants which are currently convertible or exercisable or will become convertibleor exercisable within 60 days after September 27, 2013 are deemed outstanding for computing the percentage ownership of the person orgroup holding such convertible preferred stock, options or warrants, but are not deemed outstanding for computing the percentageownership of any other person or group.(3)Mr. Babcock's common shares owned include 2,695 shares owned by his spouse.(4)Sabby Management, LLC, with an address of 10 Mountainview Road, Suite 205, Upper Saddle River, New Jersey 07458, is the beneficialowner of these shares and warrants, held of record by Sabby Healthcare Volatility Master Fund, Ltd. and Sabby Volatility Warrant MasterFund, Ltd., based on the information contained in the Schedule 13G filed on September 3, 2013.(5)Represents the shares of common stock to be received upon conversion of the Series D Convertible Preferred Stock, which wereconvertible as of September 27, 2013, held by the beneficial owner.(6)This beneficial owner may not convert the preferred stock into shares of the Company’s common stock if, as a result of the conversion,the owner, together with affiliates, would own more than 9.99% of the total shares of the Company’s common stock then issued andoutstanding. 63Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Series B Preferred Stock Share Ownership Series B 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 Series B Preferred Stock outstanding on September 27, 2013.(2)The address of Ms. Sidibe is 229 Lasiandra Ct, Richland, WA 99352.(3)The address of the William and Karen Thompson Trust is 285 Dondero Way, San Jose, CA 95119.(4)The address of Jamie Granger is 53709 South Nine Canyon Road, Kennewick, WA 99337.(5)The address of the Hostetler Living Trust is 9257 NE 175th Street, Bothell, WA 98011.(6)The address of Leslie Fernandez is 2615 Scottsdale Place, Richland, WA 99352. No officers or directors beneficially own shares of any class of Preferred Stock. ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Patent and Know-How Royalty License Agreement Effective 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 MKT, 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 MKT 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 MKT 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. 64Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company paid or accrued the following fees in each of the prior two fiscal years to its principal accountant, DeCoria, Maichel & Teague, P.S.: Year ended Year ended June 30, June 30, 2013 2012 1. Audit fees $60,372 $61,750 2. Audit-related fees 2,733 - 3. Tax fees 8,250 11,500 4. All other fees 3,750 2,275 Totals $75,105 $75,525 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 cost of attendance at the annual shareholder meeting. Tax fees include fees for the preparation of our federal andstate income tax returns. All other fees are related to consulting costs related to the review of documents related to equity offerings that occurred in the yearsended June 30, 2013 and 2012, respectively. 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 and all omitted exhibits are intentionally omitted)Exhibit # Description 2.1 Merger Agreement dated as of May 27, 2005, by and among Century Park Pictures Corporation, Century Park Transitory Subsidiary,Inc., certain shareholders and IsoRay Medical, Inc. incorporated by reference to the Form 8-K filed on August 3, 2005.2.2 Certificate of Merger, filed with the Delaware Secretary of State on July 28, 2005 incorporated by reference to the Form 8-K filed onAugust 3, 2005.3.1 Articles of Incorporation and By-Laws are incorporated by reference to the Company's Registration Statement of September 15,1983.3.2 Certificate of Designation of Rights, Preferences and Privileges of Series A and B Convertible Preferred Stock, filed with theMinnesota Secretary 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. 65Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 3.4 Certificate of Designation of Rights, Preferences and Privileges of Series C Junior Participating Preferred Stock, incorporated byreference to the Company's Registration Statement on Form 8-A filed February 7, 2007.3.5 Amended and Restated By-Laws of the Company dated as of January 8, 2008, incorporated by reference to the Form 8-K filed onJanuary 14, 2008.3.6 Certificate of Designation and Preferences, Rights and Limitations of Series D Convertible Preferred Stock dated August 29, 2013 ofIsoRay, Inc., incorporated by reference to the Form 8-K filed on August 29, 2013.4.8 Amended and Restated 2005 Employee Stock Option Plan incorporated by reference to the Form S-8 filed on August 19, 2005.4.11 Form of IsoRay, Inc. Common Stock Purchase Warrant, incorporated by reference to the Form SB-2/A1 filed on March 24, 2006. 4.14 Form of IsoRay, Inc. Common Stock Purchase Warrant, dated August 9, 2006, incorporated by reference to the Form 8-K filed onAugust 18, 2006.4.16 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, 2006.4.19 Rights Agreement, dated as of February 1, 2007, between the Computershare Trust Company N.A., as Rights Agent, incorporated byreference to the Company's Registration Statement on Form 8-A filed on February 7, 2007.4.23 Form of Series D Warrant to Purchase Common Stock, incorporated by reference to the Form 8-K filed on November 22, 2010.4.26 Form of Common Stock Purchase Warrant, incorporated by reference to the Form 8-K filed on October 13, 2011.4.28 Form of Indenture (Subordinated Debt Securities) of IsoRay, Inc., incorporated by reference to the Form S-3/A filed on May 28,2013.4.29 Form of Indenture (Senior Debt Securities) of IsoRay, Inc., incorporated by reference to the Form S-3/A filed on May 28, 2013.4.30 Specimen of Series D Convertible Preferred Stock Certificate of IsoRay, Inc., incorporated by reference to the Form 8-K filed onAugust 29, 2013.4.31 Form of Common Stock Greenshoe Warrant of IsoRay, Inc., incorporated by reference to the Form 8-K filed on August 29, 2013.10.2 Universal License Agreement, dated November 26, 1997 between Donald C. Lawrence and William J. Stokes of Pacific ManagementAssociates Corporation, incorporated by reference to the Form SB-2 filed on November 10, 2005.10.3 Royalty Agreement of Invention and Patent Application, dated July 12, 1999 between Lane A. Bray and IsoRay LLC, incorporatedby reference to the Form SB-2 filed on November 10, 2005.10.5 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, 2005.10.10 Registry of Radioactive Sealed Sources and Devices Safety Evaluation of Sealed Source, dated September 17, 2004, incorporated byreference to the Form SB-2/A2 filed on April 27, 2006.10.18 State of Washington Radioactive Materials License dated October 6, 2005, incorporated by reference to the Form SB-2 filed onNovember 10, 2005.10.22 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 for redacted portions).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. 66Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 10.33 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, 2006.10.35 Form of Officer and Director Indemnification Agreement, incorporated by reference to the Form SB-2 Post Effective Amendment No.2 filed on October 13, 2006.10.39 Form of Common Stock Purchase Warrant dated March 21, 2007, incorporated by reference to the Form 8-K filed on March 23,2007.10.59 License Agreement, dated effective June 14, 2010, by and between IsoRay Medical, Inc. and Hologic Inc., incorporated by referenceto the Form 8-K filed on June 23, 2010 (confidential treatment requested for redacted portions).10.63 Form of Securities Purchase 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, 2010.10.65 Amendment Agreement dated as of December 27, 2010, by and among IsoRay, Inc. and the investor that is a signatory thereto,incorporated by reference to the Form 8-K filed on December 28, 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/A filed on August 19, 2011 (confidential treatment requested for redacted portions).10.68 International Distribution Agreement, dated October 31, 2011, by and between IsoRay Medical, Inc. and Karlheinz Goehl-Medizintechnik Gohl, incorporated by reference to the Form 8-K filed on November 3, 2011 (confidential treatment requested forredacted portions).10.69 Contract No. 77/2011, dated November 24, 2011, by and between IsoRay, Inc. and UralDial LLC, incorporated by reference to theForm 8-K filed on December 8, 2011 (confidential treatment requested for redacted portions).10.70 Securities Purchase Agreement, dated July 13, 2012, by and between IsoRay, Inc. and certain Purchasers, incorporated by referenceto the 8-K filed on July 16, 2012.10.72 Contract, dated January 9, 2013, by and between IsoRay Medical, Inc. and The Open Joint Stock Company ‹‹Isotope›› (confidentialtreatment requested for redacted portions), incorporated herein by reference to the 8-K/A filed on March 21, 2013. 10.73 Employment Agreement dated September 6, 2013, by and among Fredric Swindler, IsoRay Medical, Inc. and IsoRay, Inc.incorporated by reference to the Form 8-K filed on September 12, 2013. 10.74* Letter Agreement, dated August 27, 2013, between IsoRay Medical, Inc. and Karlheinz Goehl-Medizintechnik Göhl.14.1 Code of Conduct and Ethics, incorporated by reference to the Form 10-KSB filed on October 11, 2005.14.2 Code of Ethics for Chief Executive Officer & Senior Financial Officers, incorporated by reference to the Form 10-KSB filed onOctober 11, 2005.21.1* Subsidiaries of the Company.23.1* Consent of DeCoria, Maichel & Teague, P.S.31.1* Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer.31.2* Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.32.1** Section 1350 Certifications.101.INS*** XBRL Instance Document.101.SCH*** XBRL Taxonomy Extension Schema Document.101.CAL*** XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF*** XBRL Taxonomy Extension Definition Linkbase Document.101.LAB*** Taxonomy Extension Label Linkbase Document.101.PRE*** XBRL Taxonomy Extension Presentation Linkbase Document. 67Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. * Filed herewith.** Furnished herewith.*** Furnished herewith. Users of this data to be submitted electronically are advised pursuant to Rule 406T of Regulation S-T that this interactivedata file will not be deemed filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, willnot be deemed filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise will not be subject to liability under thesesections. Reports on Form 8-K On May 15, 2013, the Company filed a Current Report on Form 8-K announcing its financial results for the quarter ended March 31, 2013. On August 29, 2013, the Company filed a Current Report on Form 8-K announcing its entry into an Amended and Restated Underwriting Agreement withMaxim Group LLC providing for the sale of 3,800,985 common units and 1,670 preferred units, each consisting of shares and warrants. This Report alsoannounced the designation of the Series D Convertible Preferred Stock. On August 30, 2013, the Company filed a Current Report on Form 8-K announcing the renewal through August 31, 2014 of its subsidiary's InternationalDistribution Agreement with Karlheinz Goehl-Medizintechnik Gohl. On September 12, 2013, the Company filed a Current Report on Form 8-K announcing its and its subsidiary's entry into an Employment Agreement withFredric Swindler. 68Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc.Index to Financial Statements Page Report of Independent Registered Public Accounting FirmF-2 Financial Statements: Consolidated Balance Sheets as of June 30, 2013 and 2012F-3Consolidated Statements of Operations for the years ended June 30, 2013 and 2012F-4Consolidated Statement of Changes in Shareholders' Equity for the years ended June 30, 2013 and 2012F-5Consolidated Statements of Cash Flows for the years ended June 30, 2013 and 2012F-6Notes to Consolidated Financial StatementsF-7 F-1Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Firm Board of Directors and ShareholdersIsoRay, Inc.Richland, Washington We have audited the accompanying consolidated balance sheets of IsoRay, Inc. and Subsidiaries ("the Company") (see Note 1) as of June 30, 2013 and 2012,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, 2013 and 2012, 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 25, 2013 F-2Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. IsoRay, Inc and SubsidiariesConsolidated Balance Sheets June 30, June 30, 2013 2012 Assets Current assets: Cash and cash equivalents $2,899,927 $2,672,711 Accounts receivable, net of allowance for doubtful accounts of $52,598 and $57,604, respectively 923,780 865,056 Inventory 405,571 444,345 Other receivables 11,502 9,925 Prepaid expenses and other current assets 202,880 144,116 Total current assets 4,443,660 4,136,153 Fixed assets, net of depreciation and amortization 1,684,282 2,416,853 Restricted cash 181,149 181,027 Inventory, non-current 469,758 469,758 Other assets, net of accumulated amortization 276,507 301,691 Total assets $7,055,356 $7,505,482 Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued expenses $432,566 $389,105 Accrued protocol expense 25,305 - Accrued radioactive waste disposal 100,000 52,000 Accrued payroll and related taxes 127,419 119,881 Accrued vacation 107,578 88,006 Total current liabilities 792,868 648,992 Warrant derivative liability 104,000 314,000 Asset retirement obligation 792,242 724,298 Total liabilities 1,689,110 1,687,290 Commitments and contingencies (Note 16) 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: 1,000,0000 shares allocated; no shares issued and outstanding - - Common stock, $.001 par value; 193,000,000 shares authorized; 34,618,517 and 30,950,108 shares issued andoutstanding 34,618 30,950 Treasury stock, at cost 13,200 shares (8,390) (8,390)Additional paid-in capital 57,431,293 54,030,311 Accumulated deficit (52,091,334) (48,234,738) Total shareholders' equity 5,366,246 5,818,192 Total liabilities and shareholders' equity $7,055,356 $7,505,482 The accompanying notes are an integral part of these consolidated financial statements. F-3Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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, June 30, 2013 2012 Product sales $4,525,233 $5,071,088 Cost of product sales 4,375,057 4,367,884 Gross profit 150,176 703,204 Operating expenses: Research and development expenses 627,107 780,579 Research and development reimbursement - (50,000)Sales and marketing expenses 1,296,149 1,215,580 General and administrative expenses 2,294,173 2,355,015 Total operating expenses 4,217,429 4,301,174 Operating loss (4,067,253) (3,597,970) Non-operating income (expense): Interest income 664 747 Change in fair value of warrant liability 210,000 170,000 Financing and interest expense (7) (61,682) Non-operating income (expense), net 210,657 109,065 Net loss (3,856,596) (3,488,905)Preferred stock dividends (10,632) (10,632) Net loss applicable to common shareholders $(3,867,228) $(3,499,537) Basic and diluted loss per share $(0.11) $(0.12) Weighted average shares used in computing net loss per share: Basic and diluted 34,423,420 28,621,831 The accompanying notes are an integral part of these consolidated financial statements. F-4Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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, 2011 59,065 $59 26,443,118 $26,443 13,200 $(8,390) $51,180,237 $(44,745,833) $6,452,516 Issuance of common stock andstock purchase warrantspursuant to registered publicoffering, net 2,817,988 2,818 2,271,668 2,274,486 Initial deferral of financingexpense 61,511 61,511 Initial fair value of derivativeliability (484,000) (484,000)Issuance of common stockpursuant to exercise ofwarrants, net 1,669,402 1,669 833,128 834,797 Issuance of common stockpursuant to exercise ofoptions 19,600 20 5,076 5,096 Payment of dividend topreferred shareholders (10,632) (10,632)Share-based compensation 173,323 173,323 Net loss (3,488,905) (3,488,905) Balances at June 30, 2012 59,065 59 30,950,108 30,950 13,200 (8,390) $54,030,311 (48,234,738) 5,818,192 Issuance of common stockpursuant to a registered publicoffering, net 3,626,943 3,627 3,288,350 3,291,977 Issuance of common stockpursuant to exercise ofwarrants, net 2,766 3 1,822 1,825 Issuance of common stockpursuant to exercise ofoptions 38,700 38 13,091 13,129 Payment of dividend topreferred shareholders (10,632) (10,632)Share-based compensation 108,351 108,351 Net loss (3,856,596) (3,856,596) Balances at June 30, 2013 59,065 $59 34,618,517 $34,618 13,200 $(8,390) $57,431,293 $(52,091,334) $5,366,246 The accompanying notes are an integral part of these consolidated financial statements. F-5Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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, June 30, 2013 2012 Cash flows from operating activities: Net loss $(3,856,596) $(3,488,905)Adjustments to reconcile net loss to net cash used by operating activities: Allowance for doubtful accounts (5,006) (6,263)Depreciation and amortization of fixed assets 739,147 847,115 Amortization of deferred financing expense and other assets 31,302 77,242 Change in fair value of warrant liabilities (210,000) (170,000)Accretion of asset retirement obligation 67,944 62,117 Share-based compensation 108,351 173,323 Changes in operating assets and liabilities: Accounts receivable (53,718) (65,958)Inventory 38,774 (164,254)Other receivables (1,577) 415,976 Prepaid expenses, other current assets and other assets (58,764) (2,962)Accounts payable and accrued expenses 43,461 16,846 Accrued protocol expense 25,305 (98,159)Accrued radioactive waste disposal 48,000 (56,060)Accrued payroll and related taxes 7,538 (5,133)Accrued vacation 19,572 17,300 Net cash used by operating activities (3,056,267) (2,447,775) Cash flows from investing activities: Purchases of fixed assets (6,576) (55,057)Additions to licenses and other assets (6,118) (40,240)Change in restricted cash (122) (218)Net cash used by investing activities (12,816) (95,515) Cash flows from financing activities: Preferred dividends paid (10,632) (10,632)Proceeds from sales of common stock, pursuant to registered public offering, net 3,291,977 2,274,486 Proceeds from sales of common stock, pursuant to exercise of warrants, net 1,825 834,797 Proceeds from sales of common stock, pursuant to exercise of options 13,129 5,096 Net cash provided by financing activities 3,296,299 3,103,747 Net increase in cash and cash equivalents 227,216 560,457 Cash and cash equivalents, beginning of year 2,672,711 2,112,254 Cash and cash equivalents, end of year $2,899,927 $2,672,711 Supplemental disclosures of cash flow information: Cash paid for interest $7 $171 Non-cash investing and financing activities: Initial deferral of financing expense $- $61,511 Initial fair value of warrant liabilities - 484,000 The accompanying notes are an integral part of these consolidated financial statements. F-6Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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, 2013 and 2012 1.Organization Century Park Pictures Corporation (Century) was organized under Minnesota law in 1983. Century had no operations during the period from September 30,1999 through June 30, 2005. On July 28, 2005, IsoRay Medical, Inc. (Medical) became a wholly-owned subsidiary of Century pursuant to a merger. Century changed its name to IsoRay,Inc. (IsoRay or the Company). In the merger, the Medical stockholders received approximately 82% of the then outstanding securities of the Company. Medical, a Delaware corporation, was incorporated effective June 15, 2004 to develop, manufacture and sell isotope-based medical products and devices forthe treatment of cancer and other malignant diseases. Medical is headquartered in Richland, Washington. 2.Summary of Significant Accounting Policies Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (collectively the Company).All significant intercompany accounts and transactions have been eliminated. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Accounts Receivable Accounts receivable are stated at the amount that management of the Company expects to collect from outstanding balances. Management provides forprobable uncollectible amounts through an allowance for doubtful accounts. Additions to the allowance for doubtful accounts are based on management'sjudgment, considering historical experience with write-offs, collections and current credit conditions. Balances which remain outstanding after managementhas used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to the applicable accountsreceivable. Payments received subsequent to the time that an account is written off are treated as bad debt recoveries. Inventory Inventory 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, arewritten off to cost of product sales at the time it is determined that the product is no longer useable. F-7Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 Assets Fixed assets are capitalized and carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense as incurred. Whenassets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized inoperations. Depreciation is computed using the straight-line method over the following estimated useful lives:Production equipment3 to 7 yearsOffice equipment2 to 5 yearsFurniture and fixtures2 to 5 years Leasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated useful life of the asset. Management of the Company periodically reviews the net carrying value of all of its equipment on an asset by asset basis. These reviews consider the netrealizable value of each asset to determine whether there is an impairment in value which has occurred, and 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. Other Assets Other assets, which include deferred charges, patents and licenses, are stated at cost, less accumulated amortization. Amortization of patents is computedusing the straight-line method over the estimated economic useful lives of the assets. Licenses include costs related to licenses related to the use oftechnology or operational licenses. These licenses are recorded at stated cost, less accumulated amortization. Amortization of licenses is computed using thestraight-line method over the estimated economic useful lives of the assets. The Company periodically reviews the carrying values of licenses and evaluatesthe recorded basis for any impairment. Any impairment is recognized when the expected future operating cash flows to be derived from the licenses are lessthan their carrying value. The Company periodically reviews the carrying values of patents and any related impairments are recognized when the expectedfuture operating cash flows to be derived from such assets are less than their carrying value. Asset Retirement Obligation The estimated 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 incurredand an equivalent 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 to propertyand equipment and recognizes accretion expense in connection with the discounted liability over the estimated remaining useful life of the leased assets. Financial Instruments At June 30, 2013 and 2012, the carrying value of financial instruments such as accounts receivable, approximated fair value based on the short-termmaturities of these instruments. F-8Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 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. Fair Value Measurement ASC 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 active markets foridentical instruments; Level 2 – inputs other than Level 1inputs that are observable; and Level 3 – unobservable inputs developed using estimates andassumptions determined by the Company. At June 30, 2013 and 2012, there were no assets or liabilities measured at fair-value on a recurring basis which were measured using Level 1 or Level 3 inputs.The Company had one liability, the warrant derivative liability that was measured at fair value on a recurring basis using Level 2 inputs during the yearsended June 30, 2013 and 2012. Certain assets and liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured atfair-value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).The Company had no assets or liabilities measured at fair value on a nonrecurring basis during the years ended June 30, 2013 or 2012. Warrant Derivative Liabilities For the warrant derivative liabilities which are measured at fair value on a recurring basis, the Company uses the Black-Scholes valuation model. Revenue Recognition The Company recognizes revenue related to product sales when (i) persuasive evidence of an arrangement exists, (ii) shipment has occurred, (iii) the fee isfixed or determinable, and (iv) collectability is reasonably assured. The Company recognizes revenue once the product has been shipped to the customer. Prepayments, if any, received from customers prior to the time thatproducts are shipped are recorded as deferred revenue. In these cases, when the related products are shipped, the amount recorded as deferred revenue is thenrecognized as revenue. The Company accrues for sales returns and other allowances at the time of shipment. Shipping and Handling Costs Shipping costs include charges associated with delivery of goods from the Company's facilities to its customers and are reflected in cost of product sales.Shipping costs paid to the Company by its customers are classified as product sales. Share-Based Compensation The 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. F-9Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Research and Development Costs Research and development costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations as incurred.The cost of equipment used in research and development activities which has alternative uses is capitalized as part of fixed assets and not treated as anexpense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as research and developmentexpense in the year recognized. Research and Development Reimbursement Research and development reimbursement includes cost sharing arrangements for product research and development. Research and developmentreimbursements were $0 and $50,000 for the years ended June 30, 2013 and 2012, respectively. Advertising and Marketing Costs Advertising costs are expensed as incurred except for the cost of tradeshows and related marketing materials which are deferred until the tradeshow occurs.Advertising and marketing costs expensed (including tradeshows) were $86,705 and $57,410 for the years ended June 30, 2013 and 2012, respectively.Marketing costs of $10,590 and $8,675 were included in prepaid expenses at June 30, 2013 and 2012, respectively. Legal Contingencies The Company records contingent liabilities resulting from asserted and unasserted claims against it, when it is probable that a liability has been incurred andthe amount of the loss is reasonably estimable. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about thepotential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, the Company does notbelieve any probable legal proceedings or claims will have a material adverse effect on its financial position or results of operations. However, if actual orestimated probable future losses exceed the Company's recorded liability for such claims, it would record additional charges as other expense during theperiod in which the actual loss or change in estimate occurred. Income Taxes Income 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 Medical, andits predecessors are subject to examination of their income tax filings in the United States and state jurisdictions for the 2011 through 2013 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 Share Basic earnings per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common sharesoutstanding, and does not include the impact of any potentially dilutive common stock equivalents, including preferred stock, common stock warrants oroptions that are potentially convertible into common stock as those would be antidilutive due to the Company's net loss position. F-10Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Securities that could be dilutive in the future as of June 30, 2013 and 2012 are as follows: 2013 2012 Preferred stock 59,065 59,065 Common stock warrants 1,957,033 1,959,799 Common stock options 2,305,072 2,381,306 Total potential dilutive securities 4,321,170 4,400,170 Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management ofthe Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes including theallowance for doubtful accounts receivable; net realizable value of the enriched barium inventory; the estimated useful lives used in calculating depreciationand amortization on the Company's fixed assets, patents, trademarks and other assets; estimated amount and fair value of the asset retirement obligationrelated to the Company's production facilities; inputs used in the calculation of expense related to share-based compensation including volatility, estimatedlives and forfeiture rates of options granted; and the inputs to the Black-Scholes calculation to estimate the fair value of the derivative warrant liability andthe related gain or loss. Accordingly, actual results could differ from those estimates and affect the amounts reported in the financial statements. 3.Inventory Inventory consisted of the following at June 30, 2013 and 2012: 2013 2012 Raw materials $167,671 $261,835 Work in process 195,323 114,124 Finished goods 42,577 68,386 Total inventory $405,571 $444,345 In June 2007, the Company purchased $469,758 of enriched barium that will be used in future production of its isotope. The enriched barium is held at anoff-site storage location in Richland, Washington and is classified as inventory, non-current at both June 30, 2013 and 2012. 4.Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following at June 30, 2013 and 2012: 2013 2012 Prepaid insurance $48,421 $23,798 Prepaid rent 22,419 23,367 Other prepaid expenses 105,347 70,258 Other current assets 26,693 26,693 $202,880 $144,116 F-11Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 5.Other Receivables Other receivables consisted of receivables that are not the result of revenue creating activities of the Company. The other receivable recorded as of June 30,2013 was primarily comprised of employee advances and refunds due to the Company in the amount of $11,502 as compared to $9,925 recorded as of June30, 2012. The other receivable long term recorded as of June 30, 2013 was also primarily comprised of long term employee advances due to the Company inthe amount of $2,938 as compared to $9,988 recorded as of June 30, 2012. 6.Fixed Assets Fixed assets consisted of the following at June 30, 2013 and 2012: 2013 2012 Production equipment $3,133,305 $3,133,305 Office equipment 195,877 189,301 Furniture and fixtures 148,265 148,265 Leasehold improvements 4,129,977 4,129,977 7,607,424 7,600,848 Less accumulated depreciation (5,923,142) (5,183,995) $1,684,282 $2,416,853 Depreciation expense related to fixed assets totaled $739,147 and $847,115 for 2013 and 2012, respectively. 7.Restricted Cash The Washington Department of Health requires the Company to provide collateral for the decommissioning of its facility. To satisfy this requirement, theCompany funded two certificates of deposits (CDs) totaling $172,500 in separate banks. The CDs both have original maturities of three months but aretermed restricted cash and classified as a long-term asset as the Company does not anticipate decommissioning the facility until the end of the current leaseplus the one remaining three-year lease option period. The end date of the current lease including the one remaining three-year renewal option is April 2019.Interest earned on the CDs is rolled-over at the maturity of each CD and becomes part of the restricted cash balance. Interest earned and added to restrictedcash during the fiscal years ended June 30, 2013 and 2012 was $122 and $218, respectively. These funds will be used to settle a portion of the Company'sremaining asset retirement obligations (see Note 9). 8.Other Assets Other assets, net of accumulated amortization, consisted of the following at June 30, 2013 and 2012: 2013 2012 Deferred charges $61,331 $98,435 Patents and trademarks, net of accumulated amortization of $90,824 and $71,244 215,176 203,256 $276,507 $301,691 Amortization of patents and trademarks was $19,581 and $15,731 for the years ended June 30, 2013 and 2012, respectively. Future amortization is expectedto be as follows: F-12Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FY 2014 $19,021 FY 2015 19,021 FY 2016 19,021 FY 2017 19,021 FY 2018 15,333 Thereafter 123,759 $215,176 9.Asset Retirement Obligation 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 facility using Level 3 fair value inputs. During the years ended June 30, 2013 and 2012, the asset retirement obligations changed as follows: 2013 2012 Beginning balance $724,298 $662,181 Accretion of discount 67,944 62,117 Ending balance $792,242 $724,298 Because the Company does not expect to incur any expenses related to its asset retirement obligations in fiscal year 2014, the entire balance as of June 30,2013 is classified as a noncurrent liability. 10.Share-Based Compensation The following table presents the share-based compensation expense recognized during the years ended June 30, 2013 and 2012: 2013 2012 Cost of product sales $38,729 $47,463 Research and development 30,350 30,480 Sales and marketing expenses 6,943 10,182 General and administrative expenses 32,329 85,198 Total share-based compensation $108,351 $173,323 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, 2013, totalunrecognized compensation cost related to stock-based options and awards was $62,354 and the weighted-average period over which it is expected to berecognized is approximately 0.73 years. The Company currently provides share-based compensation under three equity incentive plans approved by the Board of Directors: the Amended andRestated 2005 Stock Option Plan (the Option Plan), the Amended and Restated 2005 Employee Stock Option Plan (the Employee Plan), and the 2006Director Stock Option Plan (the Director Plan). The Option Plan allows the Board of Directors to grant options to purchase up to 1,800,000 shares of commonstock to directors, officers, key employees and service providers of the Company. The Employee Plan allows the Board of Directors to grant options topurchase up to 2,000,000 shares of common stock to officers and key employees of the Company. The Director Plan allows the Board of Directors to grantoptions to purchase up to 1,000,000 shares of common stock to directors of the Company. Options granted under all of the plans have a ten year maximumterm, an exercise price equal to at least the fair market value of the Company's common stock on the date of the grant, and varying vesting periods asdetermined by the Board. For stock options with graded vesting terms, the Company recognizes compensation cost on a straight-line basis over the requisiteservice period for the entire award. F-13Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A summary of stock option information within the Company's share-based compensation plans as of June 30, 2013 is as follows: Shares Price (a) Life (b) Value (c) Outstanding at June 30, 2013 2,305,072 $1.83 4.93 $115,302 Vested and expected to vest at June 30, 2013 2,215,260 $1.87 4.86 $105,157 Vested and exercisable at June 30, 2013 2,030,064 $1.94 4.49 $115,302 (a) Weighted average exercise price per share. (b) Weighted average remaining contractual life. (c) Aggregate intrinsic value The aggregate intrinsic value of options exercised during the years ended June 30, 2013 and 2012 was $16,246 and $13,764, respectively. The Company'scurrent policy is to issue new shares to satisfy option exercises. The weighted average fair value of stock option awards granted and the key assumptions used in the Black-Scholes valuation model to calculate the fairvalue are as follows for the year ended June 30, 2012: Year ended June 30, 2012 Weighted average fair value of options granted $0.80 Key assumptions used in determining fair value: Weighted average risk-free interest rate 0.71%Weighted average life of the option (in years) 4.77 Weighted average historical stock price volatility 132.47%Expected dividend yield 0.00% The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and arefully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility.Although the Company is using the Black-Scholes option valuation model, management believes that because changes in the subjective input assumptionscan materially affect the fair value estimate, this valuation model does not necessarily provide a reliable single measure of the fair value 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 of grant. The expected option lives,volatility, and forfeiture assumptions are based on historical data of the Company. F-14Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A summary of the Company's stock option activity and related information for the years ended June 30, 2013 and 2012 is as follows: 2013 2012 Shares Price (a) Shares Price (a) Beginning balance outstanding 2,381,306 $1.82 2,423,806 $1.78 Granted (b) - - 110,000 0.80 Expired (37,534) 2.58 (132,900) 0.68 Exercised (38,700) 0.34 (19,600) 0.26 Ending balance outstanding 2,305,072 $1.83 2,381,306 $1.82 Exercisable at end of year 2,030,064 $1.94 2,102,964 $1.92 (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. 11.Shareholders' Equity The authorized capital structure of the Company consists of $.001 par value preferred stock and $.001 par value common stock. Preferred Stock The 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 A Series 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, 2013 and 2012, there were noSeries A preferred shares outstanding. Series B Series 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. F-15Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 December 21, 2012, the Board of Directors declared a dividend on the Series B Preferred Stock of all outstanding and cumulative dividends throughDecember 31, 2012. The total dividends of $10,632 were paid as of December 31, 2012. At June 30, 2013, there were 59,065 Series B preferred sharesoutstanding and cumulative dividends in arrears were $5,316 and upon any liquidation, dissolution, or winding up of the Company, whether voluntary orinvoluntary, the assets of the Company legally available for distribution, if any, shall be distributed ratably first, to the holders of the Series A PreferredStock, second, to the holders of the Series B Preferred Stock and third, to the holders of the Common Stock. Series C Series 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 preferred stockwas created upon adoption of the Company's share rights plan in 2007. Upon liquidation of the Company, the Company's assets are first distributed ratably tothe Series A preferred shareholders, then the Series B preferred shareholders, then the Series C preferred shareholders. At June 30, 2013 and 2012, there wereno Series C preferred shares outstanding. 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, 2013 and 2012. Common Stock Offerings On October 13, 2011, the Company entered into an Underwriting Agreement with WestPark Capital, Inc. as managing underwriter for a best efforts all ornothing underwritten registered offering of 2,500,000 shares of the Company’s common stock, par value $0.001 per share, at an offering price to the public of$0.92 per share. With every five shares of common stock purchased, the purchaser received a warrant to purchase one share of common stock with an exerciseprice of $1.058 with a five year term for a total of 500,003 warrants issued in the initial transaction. Under the terms of the Underwriting Agreement, theCompany also granted the underwriters a 45 day option to sell up to an additional 1,027,173 shares of Common Stock (with warrants to purchase up to anadditional 205,435 shares of common stock) to cover over-allotments, if any, at the offering price. There were 317,988 shares of common stock sold from theover-allotment and 63,598 warrants issued as part of the sale of the over-allotment shares. None of the warrants from either the initial sale of shares ofcommon stock or from those sold as part of the over-allotment sale of shares of common stock have been exercised. The gross proceeds and net proceeds tothe Company from the sale of the initial 2.5 million shares of common stock and from the over-allotment sale of 317,988 shares of common stock were asdescribed in the table below. October 19, 2011 December 7, 2011 Registered offering Over-allotment Total Gross cash proceeds $2,300,000 $292,549 $2,592,549 Underwriting costs 1 (140,087) (15,696) (155,783)Legal costs (100,050) (14,230) (114,280)Other costs (46,500) (1,500) (48,000)Net cash proceeds $2,013,363 $261,123 2,274,486 1 – Underwriting costs include commissions paid directly to the underwriter and underwriting fees. On July 13, 2012, the Company entered into a securities purchase agreement with certain institutional investors, with Ladenburg Thalmann & Co. Inc. actingas placement agent, for a registered direct offering to sell 3,626,943 shares of the Company’s common stock, par value $0.001 per share, with an aggregatepurchase price of $3.5 million at a price per share of $0.965. The offering yielded $3,291,977 in cash after expenses. F-16Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Based on the guidance contained in ASC 815 “Derivatives and Hedging”, management has concluded that the warrants issued in the October 13, 2011underwritten registered offering of 2,500,000 shares of common stock should be classified as a derivative liability and has recorded a liability at fair value.The Company determined the fair value of the warrants using the Black-Scholes fair value model. The Company determined the fair value of the warrants onthe date of the offering to be as disclosed in the tables below. The Company has recognized a change in the change in fair value as described in the tablebelow: Fiscal year ended June 30, 2013 Change in fair value $210,000 The inputs to the Black-Scholes fair value model are listed in the table below: Issue Date Type Quantity Initial Fair Value 10/19/2011 Purchaser Warrants 500,003 $343,000 10/19/2011 Underwriter Warrants 150,000 103,000 12/07/2011 Purchaser Warrants 63,598 38,000 Total 713,601 $484,000 Transaction Stock Exercise Est. Expected Risk-Free Date Description Quantity1 Price Price Term Volatility Rate Valuation 10/19/2011 Registered offering 650,003 $0.900 $1.058 3 141.07% 0.460% $446,000 12/31/2011 Fair Value Adjust. 650,003 0.660 1.058 3 129.98 0.360 (156,000)03/31/2012 Fair Value Adjust. 650,003 0.480 1.058 2.48 85.20 0.510 (194,445)06/30/2012 Fair Value Adjust. 650,003 1.010 1.058 2.30 78.04 0.345 190,445 09/30/2012 Fair Value Adjust. 650,033 0.720 1.049 2.05 85.02 0.278 (118,000)12/31/2012 Fair Value Adjust. 650,003 0.780 1.049 1.81 100.96 0.220 50,000 03/31/2013 Fair Value Adjust 650,003 0.540 1.049 1.57 108.29 0.213 (99,000)06/30/2013 Fair Value Adjust 650,003 0.480 1.049 1.31 116.10 0.290 (25,000)Fair value of warrant liability from registered direct offering: $94,000 Transaction Stock Exercise Est. Expected Risk-Free Date Description Quantity1 Price Price Term Volatility Rate Valuation 12/07/2011 Over-allotment 63,598 $0.820 $1.058 3 133.00% 0.360% $38,000 12/31/2011 Fair Value Adjust. 63,598 0.660 1.058 3 129.98 0.360 (10,000)03/31/2012 Fair Value Adjust. 63,598 0.480 1.058 2.48 85.20 0.510 (18,650)06/30/2012 Fair Value Adjust. 63,598 1.010 1.058 2.44 77.16 0.345 18,650 09/30/2012 Fair Value Adjust. 63,598 0.720 1.049 2.19 84.53 0.278 (11,000)12/31/2012 Fair Value Adjust. 63,598 0.78 1.049 1.941 98.25 0.220 5,000 03/31/2013 Fair Value Adjust. 63,598 0.54 1.049 1.70 106.39 0.213 (10,000)06/30/2013 Fair Value Adjust. 63,598 0.48 1.049 1.45 112.70 0.290 (2,000)Fair value of warrant liability from over-allotment offering: $10,000 Total fair value of warrant liability at June 30, 2013: $104,000 1 Quantity of warrants either issued or outstanding as of the date of valuation. Warrants to Purchase Common Stock At various times during the year ended June 30, 2013, the warrant holder exercised Series C warrants and received shares of common stock in exchange at thetime of the exercise. F-17Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Warrants exercised Gross proceeds September 2012 2,666 $1,790 November 2012 100 35 Total 2,766 $1,825 At various times during the year ended June 30, 2012, the warrant holder exercised Series C warrants and received shares of common stock in exchange at thetime of the exercise. Warrants exercised Gross proceeds July 2011 50,000 $40,244 May 2012 1,579,402 773,032 June 2012 40,000 21,521 Total 1,669,402 $834,797 The warrants activity is summarized as follows for the years ended June 30, 2013 and 2012: 2013 2012 Warrants Price (a) Warrants Price (a) Beginning balance outstanding 1,959,799 $1.38 3,819,185 $3.69 Cancelled/expired - - (2,092,324) 5.89 Warrants exercised (2,766) 0.66 (1,669,402) 0.50 Granted - - 1,902,340 1.36 Ending balance outstanding 1,957,033 $1.38 1,959,799 $1.38 (a)Weighted average exercise price per share. The following table summarizes additional information about the Company’s common warrants outstanding as of June 30, 2013: Number of Warrants Range of Exercise Prices Expiration Date 6,000 $1.180 June 2015 25,000 2.000 July 2015 1,207,832 1.560 November 2015 650,003 1.058 October 2016 63,198 1.058 December 2016 5,000 0.980 June 2017 1,957,033 12.Income Taxes The Company did not record an income tax provision or benefit for the years ending June 30, 2013 and 2012. The significant deferred tax components using a 35% federal income tax rate for the years ended June 30, 2013 and 2012 are as follows: 2013 2012 Fixed assets $408,223 $328,524 Share based compensation 279,089 241,166 Reserves 18,409 20,161 Other accruals 24,627 30,145 Asset retirement obligation 277,285 253,504 Net operating loss carry forwards 14,791,279 13,667,918 Total deferred tax assets 15,798,912 14,541,418 Valuation allowance (15,798,912) (14,541,418)Net deferred tax asset $- $- F-18Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 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 both June 30, 2013 and 2012. The Company has federal net operating loss carry forwards of approximately $42.3 million at June 30, 2013 and approximately $39.1 million at June 30,2012, that can be used to offset future regular taxable income. These net operating loss carry forwards expire at various times through the years 2025 to 2032. The Company's statutory rate reconciliation is as follows: 2013 2012 Expected income tax benefit based on statutory rate of 35% $(1,349,809) $(1,221,117)Meals and entertainment 17,966 17,999 Non-deductible penalties 849 614 Warrant liability 73,500 59,500 Increase in valuation allowance 1,257,494 1,143,004 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. Management has determined that the Company, its subsidiary Medical, and its predecessors are subject to examination of their income tax filings in theUnited States and state jurisdictions for the 2011 through 2013 tax years. In the event that the Company is assessed penalties and/or interest, penalties will becharged to other operating expense and interest will be charged to interest expense. 13.401(k) and Profit Sharing Plan The 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. 14.Foreign Isotope Supply In January 2013, the Company completed negotiations on a contract to purchase Cs-131 from The Open Joint Stock Company ‹‹Isotope››, from Russia. Underthe contract, the Company will purchase Cs-131 from The Open Joint Stock Company ‹‹Isotope››, rather than from UralDial. The contract provides for thesupply of Cs-131 from a single reactor at the Institute of Nuclear Materials. The contract will expire on June 30, 2014. In June 2013, the Company negotiated a contract with E&H Scientific, LLC to provide logistical support in the packaging, export and import support for thesupply of Cs-131 being shipped from Russia. The contract will expire on June 30, 2014. F-19Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 15.Distribution Agreements On October 31, 2011, the Company entered into a distribution agreement with Karlheinz Goehl-Medizintechnik Goehl (Distributor) located in Germany. Theagreement appoints the Distributor as the exclusive distributor of the GliaSite Radiation Therapy System within the defined territory of Germany, Austria,Switzerland, Italy, and Luxembourg. The agreement terminates on August 30, 2013 unless terminated earlier as provided for within the agreement and may beextended by mutual agreement of the Company and the Distributor. The terms of the agreement make the Distributor the importer of record and liable for anyvalue added taxes for the shipments into the European Union. The Distributor paid $50,000 towards the costs of returning the GliaSite RTS to market in theEuropean Union. Prior to the expiration of the agreement on August 30, 2013, the parties agreed to extend the term of the agreement until August 31, 2014. In May 2013, the Company entered into an exclusive distribution agreement with IASIS Medical for the sale of IsoRay’s complete product line in Greece.The terms of the agreement make the Distributor the importer of record and liable for any value added taxes for the shipments into the European Union andthe distributor is responsible for achieving regulatory clearance. The agreement terminates on May 1, 2015 unless terminated earlier as provided for withinthe agreement and may be extended by mutual agreement of the parties. In June 2013, the Company entered into an exclusive distribution agreement with Aurora BioScience for the sale of IsoRay’s complete product line in NewZealand and Australia. The terms of the agreement make the Distributor the importer of record and liable for any value added taxes for the shipments into theNew Zealand or Australia and the distributor is responsible for achieving regulatory clearance. The agreement terminates on June 1, 2015 unless terminatedearlier as provided for within the agreement and may be extended by mutual agreement of the parties. 16.Commitments and Contingencies Royalty Agreement for Invention and Patent Application A shareholder of the Company previously assigned his rights, title and interest in an invention to IsoRay Products LLC (a predecessor company) in exchangefor a royalty equal to 1% of the Gross Profit, as defined, from the sale of "seeds" incorporating the technology. The patent and associated royalty obligationswere transferred to the Company in connection with the merger transaction. The Company must also pay a royalty of 2% of Gross Sales, as defined, for any sub-assignments of the aforesaid patented process to any third parties. Theroyalty agreement will remain in force until the expiration of the patents on the assigned technology, unless earlier terminated in accordance with the termsof the underlying agreement. During fiscal years 2013 and 2012, the Company recorded royalty expenses of $14,168 and $19,497, respectively. Patent and Know-How Royalty License Agreement The Company is the holder of an exclusive license to use certain "know-how" developed by one of the founders of a predecessor to the Company andlicensed to the Company by the Lawrence Family Trust, a Company shareholder. The terms of this license agreement require the payment of a royalty basedon the Net Factory Sales Price, as defined in the agreement, of licensed product sales. Because the licensor's patent application was ultimately abandoned,only a 1% "know-how" royalty based on Net Factory Sales Price, as defined in the agreement, remains applicable. To date, management believes that therehave been no product sales incorporating the "know-how" and therefore no royalty is due pursuant to the terms of the agreement. Management believes thatthe possibility of a negative outcome in this matter is remote. The licensor of the "know-how" has disputed management's contention that it is not using this "know-how". On September 25, 2007 and again on 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. F-20Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Operating Lease Agreements The Company leases office and laboratory space and production and office equipment under non-cancelable operating leases. The lease agreements requiremonthly lease payments and expire on various dates through April 2019 (including renewal dates). The Company agreed to a modification which becameeffective on May 1, 2013. The lease modification included a contractually permitted rent increase which is based on a CPI index which was 1.9% andprovided the Company with an additional three year option to extend their tenancy beyond the current expiration date of April 30, 2016, to April 30, 2019.The Company's significant lease is described below. Future minimum lease payments including the one three year option to extend remaining under operating leases are as follows: Year ending June 30, Amount 2014 $270,796 2015 270,796 2016 270,796 2017 270,796 2018 270,796 2019 225,663 $1,579,643 Rental expense amounted to $284,097 and $290,670 for the years ended June 30, 2013 and 2012, respectively. Qualified Therapeutic Discovery Project Grant The Company received three grants during the fiscal year ended June 30, 2011 under the Internal Revenue Service administered Qualified TherapeuticDiscovery Project (“QTDP”). These grants are subject to examination by the Service. Management believes that the Company complied with the guidanceprovided by the service for "Qualified Investments" includible in the QTDP. The QTDP guidance provided broad language allowing the Service the ability todisallow costs. The total amount of the grants is included in the research and development reimbursement section of the Consolidated Statement ofOperations in the amount of $0 and $0 for the years ended June 30, 2013 and 2012, respectively. The amount of $515,853 from the Qualified TherapeuticDiscovery Project received through the Internal Revenue Service during the fiscal year ended June 30, 2011 which was included in the Research anddevelopment reimbursement section of the Consolidated Statement of Operations for the fiscal year ended June 30, 2011 continues to be subject toexamination by the Internal Revenue Service. Royalty Agreements for Licensed Intellectual Property related to the GliaSite Radiation Therapy System The Company is required to pay a royalty to Dr. Reddy’s Laboratory Ltd for the exclusive use of its intellectual property in the field of treating brain cancerrelated to the production of Iotrex, which is a component of the GliaSite Radiation Therapy System. The term of the royalty agreement is from the date of firstsale until the expiration of the last patent. The agreement provides for certain minimum payments based on calendar year periods and a rate of 2.75% of netsales as defined in the agreement. The initial royalty year began on January 1, 2012. Royalty Period Minimum Royalty Calendar Year 2013 $10,000 Calendar Year 2014 20,000 Calendar Year 2015 25,000 Calendar Year 2016 and beyond 30,000 F-21Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During 2013 and 2012, the Company recorded a royalty expense of $5,440. During 2012, the Company recorded the initial royalty expense under theagreement of $1,694 for the first six months of the initial calendar year minimum royalty period. The Company is required to pay a royalty to Hologic, Inc. for the exclusive worldwide use of intellectual property associated with the GliaSite RadiationTherapy System in the field of intracavity radiation therapy of the brain exclusive of the radioisotope. The term of the royalty agreement is from the effectivedate of the agreement (January 1, 2012) and continues thereafter unless terminated earlier as defined in the agreement. The agreement provides for a royaltypayment based on a rate of 5% of net sales as defined in the agreement. During the fiscal years ended June 30, 2013 and 2012, respectively, the Company recorded aggregate royalty expenses of $2,394 and $3,370 related to thelicensed intellectual property utilized in the manufacture and sale of the GliaSite Radiation Therapy System. 17.Concentrations of Credit and Other Risks The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, 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, 2013, all cash balances are insured by the FDIC. The Company's accounts receivable are the result of sales on credit to our customers. The Company had two customers whose unpaid sales on credit weregreater than 10% of the outstanding accounts receivable balance for the year ended June 30, 2013 and three customers whose unpaid sales on credit weregreater than 10% of the outstanding accounts receivable balance for the year ended June 30, 2012. These customers’ outstanding accounts receivablebalances represented a combined 8.7% and 9.1% of the Company's total revenues for the years ended June 30, 2013 and 2012, respectively. These samecustomers accounted for a combined 40.4% and 50.1% of the Company's net accounts receivable balance at June 30, 2013 and 2012, respectively. The Company routinely assesses the financial strength of its customers and provides an allowance for doubtful accounts as necessary. Inventories Most components used in the Company's product are purchased from outside sources. Certain components are purchased from single suppliers. The failure ofany such supplier to meet its commitment on schedule could have a material adverse effect on the Company's business, operating results and financialcondition. If a sole-source supplier or a supplier of Cs-131 or irradiated barium were to go out of business or otherwise become unable to meet its supplycommitments, the process of locating and qualifying alternate sources could require up to several months, during which time the Company's productioncould be delayed. Such delays could have a material adverse effect on the Company's business, operating results and financial condition. Virtually all of the components used in the production of the GliaSite RTS are from single sources. We do not have formal written agreements with thosesuppliers. Any interruption or delay in the supply of these components could harm our business as the cost and/or time required meet the regulatoryrequirements of the Food and Drug Administration for the United States and our notified body for our CE mark (the British Standards Institute) in theEuropean Union may be prohibitive. F-22Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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.Related Party Transaction During the fiscal years ended June 30, 2013 and June 30, 2012, the Company engaged the services of APEX Data Systems, Inc., owned by Dwight Babcock,Chairman and Chief Executive Officer, to build and maintain a web interfaced data collection application to aggregate patient data in a controlledenvironment. The Company incurred $18,270 in costs related to the development of a mono-therapy registry and a combo-therapy registry, which arerecorded as fixed assets as of June 30, 2012. The Company incurred maintenance costs related to the registries in the amount of $1,960, website modificationsand maintenance in the amount of $13,000 and implementation support for a CRM system in the amount of $1,000 for the fiscal year 2013. The Companyincurred maintenance costs related to the registries in the amount of $13,080 for the fiscal year 2012. The amount accrued for payment to APEX DataSystems, Inc. was $2,000 and $1,000 at June 30, 2013 and 2012, respectively. 19.Subsequent Event On August 29, 2013, the Company entered into an agreement to sell 3,800,985 common units, each consisting of 1 share of our common stock and a warrantto purchase 0.816 shares of common stock (the “Common Units”), and 1,670 preferred units, each consisting of 1 share of Series D Convertible PreferredStock and a warrant to purchase 1,525.23 shares of common stock (the “Preferred Units”) on a firm commitment underwritten basis. The Common Units weresold at an initial per unit purchase price of $0.535 and the Preferred Units were sold at an initial per unit purchase price of $1,000. The warrants are allexercisable at $0.72 per share and have a twenty-four month term, with the exercise price and term subject to reduction if shareholder approval is obtained.Each share of the Series D Convertible Preferred Stock is convertible into 1,869.15 shares of common stock at any time at the option of the holder, subject toadjustment, provided that the holder will be prohibited from converting Series D Convertible Preferred Stock into shares of the Company's common stock if,as a result of such conversion, the holder, together with affiliates, would own more than 9.99% of the total shares of the Company's common stock then issuedand outstanding. This public offering resulted in gross proceeds of $3.7 million. The offering yielded approximately $3,287,520 in cash after expenses. Gross proceeds from public offering $3,703,527 Underwriter discount (185,176)Legal and accounting expense (176,286)Listing expense (48,500)Other expense (6,045)Net proceeds $3,287,520 F-23Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SIGNATURES Pursuant 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 30, 2013 ISORAY, INC., a Minnesota corporation By /s/ Dwight Babcock Dwight Babcock, Chief Executive Officer and Chairman By/s/ Brien L. Ragle Brien L. Ragle, Controller, Principal Financial and Accounting Officer Pursuant 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 30, 2013 /s/ Dwight Babcock Dwight Babcock, Chief Executive Officer and Chairman /s/ Brien L. Ragle Brien L. Ragle, Controller, Principal Financial and Accounting Officer /s/ Robert Kauffman Robert Kauffman, Director and Vice-Chairman Thomas LaVoy, Director /s/ Albert Smith Albert Smith, Director 69 Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. August 27, 2013 Karlheinz Goehl-Medizintechnik GöhlHermann-Glockner-Str.590763 Fuerth, GermanyAttn: Charly Goehl, CEO Re: Extension of Term of the International Distribution Agreement Dear Mr. Goehl: The purpose of this letter is to confirm the extension of the term contained in Section 4.1 of the International Distribution Agreement entered intobetween IsoRay Medical, Inc., a Delaware corporation (“IsoRay”), and Karlheinz Goehl-Medizintechnik (“Distributor”), dated as of October 31, 2011(collectively, the “Agreement”). Under the Agreement, the Agreement’s term expires on August 31, 2013. IsoRay and Distributor now agree to extend the term to August 31, 2014. Except as set forth herein, all terms and conditions of the Agreement shall remain in full force and effect. Each party hereto hereby expressly ratifiesand affirms all such terms and conditions as of the effective date hereof. IsoRay and Distributor each represent and acknowledge that it has the power and authority to enter into this letter. This letter may be executed inany number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IsoRay Medical, Inc. By/s/ Dwight Babcock Dwight Babcock, CEO The foregoing is accepted and agreed to on and as of the date first shown above, Karlheinz Goehl-Medizintechnik Göhl By/s/ Charly Goehl Charly Goehl, CEO 6464 East Grant Road, Suite 250 – Tucson, AZ 85715Phone: 520-298-1991 ext 109 Cell: 520-240-4840 Fax: 520-296-7948 Dbabcock@isoray.com Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 21 SUBSIDIARIES OF THE REGISTRANT IsoRay Medical, Inc., a Delaware corporation IsoRay International LLC, a Washington limited liability company Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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. 333-188579,333-184868 and 333-171118 on Form S-3 of our report dated September 25, 2013, with respect to the consolidated balance sheets of IsoRay, Inc. andSubsidiaries as of June 30, 2013 and 2012, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the yearsthen ended, which report appears in the Form 10-K filing for IsoRay, Inc. to be filed on or about September 27, 2013. DeCoria, Maichel & Teague, P.S.Spokane, WashingtonSeptember 25, 2013 Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 31.1 CERTIFICATION 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 to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 (as defined inExchange Act Rules 13a 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those 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 under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin 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 about theeffectiveness 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's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe 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's internalcontrol over financial reporting. Date: September 30, 2013/s/Dwight Babcock Dwight Babcock Chief Executive Officer Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 (as defined inExchange Act Rules 13a 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those 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 under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin 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 about theeffectiveness 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's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe 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's internalcontrol over financial reporting.Date: September 30, 2013/s/Brien L. Ragle Brien L. Ragle Principal Financial and Accounting Officer Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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 32 Section 1350 Certifications Pursuant to 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of IsoRay, Inc.,a Minnesota corporation (the Company), hereby certify that: To my knowledge, the Annual Report on Form 10-K of the Company for the annual period ended June 30, 2013 (the Report) fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all materialrespects, the financial condition and results of operations of the Company. Dated: September 30, 2013 /s/Dwight Babcock Dwight Babcock Chief Executive Officer (Principal Executive Officer)Dated: September 30, 2013 /s/Brien L. Ragle Brien l. ragle Controller (Principal Financial and Accounting Officer) Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: IsoRay, Inc., 10-K, September 30, 2013Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except 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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