##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 001-33452
 TomoTherapy Incorporated
  Wisconsin
(State or other jurisdiction of incorporation or organization)
    
    39-1914727
(I.R.S. Employer Identification No.)1240 Deming Way, Madison, Wisconsin
(Address of principal executive offices)
    
    53717
(Zip Code)
 (608) 824-2800
 Not Applicable
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



TomoTherapy Incorporated and Subsidiaries
Index
 PagePart I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Condensed Consolidated Statements of Equity
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part II. OTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURES
    
    
    26EXHIBIT INDEX
    
    
    27Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)
(unaudited)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCash and cash equivalents (CPAC balances of $2,499 and $1,590)
    
    $
    110,424
    
    
    $
    76,108Short-term investments
    
    
    29,612
    
    
    
    78,225Receivables, net of allowances of $1,216 and $737
    
    
    34,047
    
    
    
    33,559Inventories, net
    
    
    53,014
    
    
    
    47,669Prepaid expenses and other current assets (CPAC balances of $312 and $494)
    
    
    3,352
    
    
    
    3,633Total current assets
    
    
    230,449
    
    
    
    239,194Property and equipment, net (CPAC balances of $2,008 and $555)
    
    
    21,305
    
    
    
    18,628Other non-current assets, net (CPAC balances of $109 and $30)
    
    
    11,168
    
    
    
    12,429TOTAL ASSETS
    
    $
    262,922
    
    
    $
    270,251LIABILITIES AND EQUITYAccounts payable (CPAC balances of $450 and $24)
    
    $
    14,095
    
    
    $
    6,269Accrued expenses (CPAC balances of $326 and $20)
    
    
    24,056
    
    
    
    19,588Accrued warranty
    
    
    4,115
    
    
    
    4,173Deferred revenue
    
    
    30,877
    
    
    
    34,145Customer deposits
    
    
    14,801
    
    
    
    13,266Total current liabilities
    
    
    87,944
    
    
    
    77,441Other non-current liabilities (CPAC balances of $18 and $18)
    
    
    3,213
    
    
    
    5,475TOTAL LIABILITIES
    
    
    91,157
    
    
    
    82,916Preferred stock: authorized 10,000,000 shares of $1 par value; no shares issued and outstanding
    
    
    
    
    
    
    Common stock: authorized 200,000,000 shares of $0.01 par value; 55,961,847 and 53,980,728 shares issued; 55,829,706 and 53,938,955 shares outstanding
    
    
    528
    
    
    
    515Additional paid-in capital
    
    
    674,182
    
    
    
    667,177Treasury stock, at cost: 132,141 and 41,773 shares
    
    
    (447
    )
    
    
    (137
    )Accumulated other comprehensive loss
    
    
    (904
    )
    
    
    (268
    )Accumulated deficit
    
    
    (507,400
    )
    
    
    (483,863
    )Total shareholders equity
    
    
    165,959
    
    
    
    183,424Noncontrolling interests
    
    
    5,806
    
    
    
    3,911TOTAL EQUITY
    
    
    171,765
    
    
    
    187,335TOTAL LIABILITIES AND EQUITY
    
    $
    262,922
    
    
    $
    270,251
   3




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Product
    
    $
    29,759
    
    
    $
    24,252
    
    
    $
    93,230
    
    
    $
    75,937Service and other
    
    
    13,823
    
    
    
    10,126
    
    
    
    40,062
    
    
    
    30,144Total revenue
    
    
    43,582
    
    
    
    34,378
    
    
    
    133,292
    
    
    
    106,081Cost of revenue:Product
    
    
    16,233
    
    
    
    13,782
    
    
    
    46,372
    
    
    
    39,779Service and other
    
    
    20,339
    
    
    
    17,038
    
    
    
    54,848
    
    
    
    51,690Total cost of revenue
    
    
    36,572
    
    
    
    30,820
    
    
    
    101,220
    
    
    
    91,469Gross profit
    
    
    7,010
    
    
    
    3,558
    
    
    
    32,072
    
    
    
    14,612Operating expenses:Research and development
    
    
    8,228
    
    
    
    7,218
    
    
    
    24,728
    
    
    
    20,086Selling, general and administrative
    
    
    14,390
    
    
    
    12,470
    
    
    
    37,334
    
    
    
    34,347Total operating expenses
    
    
    22,618
    
    
    
    19,688
    
    
    
    62,062
    
    
    
    54,433Loss from operations
    
    
    (15,608
    )
    
    
    (16,130
    )
    
    
    (29,990
    )
    
    
    (39,821
    )Other income (expense):Interest income
    
    
    342
    
    
    
    617
    
    
    
    1,289
    
    
    
    2,009Interest expense
    
    
    (4
    )
    
    
    (18
    )
    
    
    (27
    )
    
    
    (47
    )Other income (expense), net
    
    
    1,539
    
    
    
    105
    
    
    
    513
    
    
    
    (258
    )Total other income (expense)
    
    
    1,877
    
    
    
    704
    
    
    
    1,775
    
    
    
    1,704Loss before income taxes
    
    
    (13,731
    )
    
    
    (15,426
    )
    
    
    (28,215
    )
    
    
    (38,117
    )Income tax expense (benefit)
    
    
    47
    
    
    
    256
    
    
    
    13
    
    
    
    (162
    )Net loss
    
    
    (13,778
    )
    
    
    (15,682
    )
    
    
    (28,228
    )
    
    
    (37,955
    )Noncontrolling interests
    
    
    1,842
    
    
    
    1,802
    
    
    
    4,691
    
    
    
    3,953Net loss attributable to shareholders
    
    $
    (11,936
    )
    
    $
    (13,880
    )
    
    $
    (23,537
    )
    
    $
    (34,002
    )Weighted-average common shares outstanding -
basic and diluted
    
    
    51,934
    
    
    
    50,748
    
    
    
    51,739
    
    
    
    50,645Net loss per common share  basic and diluted
    
    $
    (0.23
    )
    
    $
    (0.27
    )
    
    $
    (0.45
    )
    
    $
    (0.67
    )
   4




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(unaudited)
 Nine Months Ended September 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (28,228
    )
    
    $
    (37,955
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    7,552
    
    
    
    8,147Share-based compensation
    
    
    5,940
    
    
    
    4,406Deferred income tax benefit
    
    
    (45
    )
    
    
    (360
    )Other noncash items
    
    
    (8
    )
    
    
    167Changes in operating assets and liabilities:Receivables, net
    
    
    2
    
    
    
    19,849Inventories, net
    
    
    (6,313
    )
    
    
    2,234Prepaid expenses and other current assets
    
    
    (2,111
    )
    
    
    (1,252
    )Accounts payable
    
    
    7,818
    
    
    
    51Accrued expenses
    
    
    3,200
    
    
    
    (576
    )Accrued warranty
    
    
    (58
    )
    
    
    (3,634
    )Deferred revenue
    
    
    (4,758
    )
    
    
    1,308Customer deposits
    
    
    1,535
    
    
    
    (1,700
    )Net cash used in operating activities
    
    
    (15,474
    )
    
    
    (9,315
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,619
    )
    
    
    (1,685
    )Purchases of short-term investments
    
    
    
    
    
    
    (7,499
    )Proceeds from sales and maturities of short-term investments
    
    
    47,750
    
    
    
    17,376Other investing activities
    
    
    (850
    )
    
    
    (3,130
    )Net cash provided by investing activities
    
    
    43,281
    
    
    
    5,062Cash flows from financing activities:Payments on notes payable
    
    
    (102
    )
    
    
    (101
    )Repurchases of common stock
    
    
    (310
    )
    
    
    (123
    )Proceeds from exercises of stock options and warrants
    
    
    1,078
    
    
    
    130Proceeds from issuance of CPAC common stock
    
    
    6,586
    
    
    
    6,863Net cash provided by financing activities
    
    
    7,252
    
    
    
    6,769Effect of exchange rate changes on cash and cash equivalents
    
    
    (743
    )
    
    
    44Increase in cash and cash equivalents
    
    
    34,316
    
    
    
    2,560Cash and cash equivalents at beginning of period
    
    
    76,108
    
    
    
    65,967Cash and cash equivalents at end of period
    
    $
    110,424
    
    
    $
    68,527
   5




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(unaudited)
 Shareholders EquityAccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-in
    
    
    Treasury
    
    
    Comprehensive
    
    
    Accumulated
    
    
    NoncontrollingStock
    
    
    Capital
    
    
    Stock
    
    
    Income (Loss)
    
    
    Deficit
    
    
    Interests
    
    
    Total EquityBalance at December 31, 2008
    
    $
    506
    
    
    $
    659,379
    
    
    $
    
    
    
    $
    202
    
    
    $
    (446,493
    )
    
    $
    2,155
    
    
    $
    215,749Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,002
    )
    
    
    (3,953
    )
    
    
    (37,955
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    108Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,847
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,863
    
    
    
    6,863Exercise of common stock warrants
    
    
    4
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (123
    )Share-based compensation expense
    
    
    
    
    
    
    4,406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,406Balance at September 30, 2009
    
    $
    510
    
    
    $
    663,911
    
    
    $
    (123
    )
    
    $
    310
    
    
    $
    (480,495
    )
    
    $
    5,065
    
    
    $
    189,178Balance at December 31, 2009
    
    $
    515
    
    
    $
    667,177
    
    
    $
    (137
    )
    
    $
    (268
    )
    
    $
    (483,863
    )
    
    $
    3,911
    
    
    $
    187,335Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,537
    )
    
    
    (4,691
    )
    
    
    (28,228
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (636
    )
    
    
    
    
    
    
    
    
    
    
    (636
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,864
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,586
    
    
    
    6,586Issuance of restricted stock
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    4
    
    
    
    1,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,078Repurchases of common stock
    
    
    (1
    )
    
    
    1
    
    
    
    (310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (310
    )Share-based compensation expense
    
    
    
    
    
    
    5,940
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,940Balance at September 30, 2010
    
    $
    528
    
    
    $
    674,182
    
    
    $
    (447
    )
    
    $
    (904
    )
    
    $
    (507,400
    )
    
    $
    5,806
    
    
    $
    171,765
   6




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE A  BACKGROUND AND BASIS OF PRESENTATION
 Organization
  Principles of Consolidation
  Basis of Presentation
  Use of Estimates
  Fair Value of Financial Instruments
  NOTE B  RECENT ACCOUNTING PRONOUNCEMENTS
   7




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NOTE C  SUPPLEMENTAL FINANCIAL INFORMATION
 Short-term Investments
  September 30, 2010Cost basis
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Fair valueU.S. government and U.S. governmental
agency securities
    
    $
    20,101
    
    
    $
    543
    
    
    $
    
    
    
    $
    20,644Corporate bonds
    
    
    8,794
    
    
    
    174
    
    
    
    
    
    
    
    8,968$
    28,895
    
    
    $
    717
    
    
    $
    
    
    
    $
    29,612
 December 31, 2009Cost basis
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Fair valueU.S. government and U.S. governmental
agency securities
    
    $
    60,531
    
    
    $
    1,043
    
    
    $
    
    
    
    $
    61,574Corporate bonds
    
    
    16,334
    
    
    
    317
    
    
    
    
    
    
    
    16,651$
    76,865
    
    
    $
    1,360
    
    
    $
    
    
    
    $
    78,225
  September 30, 2010
    
    
    December 31, 2009Cost basis
    
    
    Fair value
    
    
    Cost basis
    
    
    Fair valueDue in one year or less
    
    $
    17,718
    
    
    $
    18,041
    
    
    $
    48,345
    
    
    $
    48,809Due after one year through five years
    
    
    11,177
    
    
    
    11,571
    
    
    
    28,520
    
    
    
    29,416$
    28,895
    
    
    $
    29,612
    
    
    $
    76,865
    
    
    $
    78,225
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities, quoted prices in markets that are
not active, or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
    
    Level 3  Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
   8




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Inventories, net
  September 30,
    
    
    December 31,2010
    
    
    2009Raw materials
    
    $
    41,023
    
    
    $
    40,091Work-in-process
    
    
    5,516
    
    
    
    1,847Finished goods
    
    
    6,475
    
    
    
    5,731$
    53,014
    
    
    $
    47,669
 Accrued Warranty
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Balance, beginning of period
    
    $
    3,776
    
    
    $
    4,907
    
    
    $
    4,173
    
    
    $
    7,431Charged to cost of revenue
    
    
    1,430
    
    
    
    1,772
    
    
    
    4,640
    
    
    
    5,313Charged to selling, general and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282Adjustments related to change in estimate
    
    
    
    
    
    
    (960
    )
    
    
    (940
    )
    
    
    (2,933
    )Actual product warranty expenditures
    
    
    (1,091
    )
    
    
    (1,922
    )
    
    
    (3,758
    )
    
    
    (6,296
    )Balance, end of period
    
    $
    4,115
    
    
    $
    3,797
    
    
    $
    4,115
    
    
    $
    3,797
 Deferred Revenue
    Other Comprehensive Income (Loss)
  NOTE D  NET LOSS PER COMMON SHARE
   9




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Stock options
    
    
    4,528
    
    
    
    5,667
    
    
    
    4,528
    
    
    
    5,667Restricted stock
    
    
    3,058
    
    
    
    2,606
    
    
    
    3,058
    
    
    
    1,5177,586
    
    
    
    8,273
    
    
    
    7,586
    
    
    
    7,184
 NOTE E  SEGMENT INFORMATION
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Americas (1)
    
    $
    16,627
    
    
    $
    24,567
    
    
    $
    56,283
    
    
    $
    68,171Europe and Middle East
    
    
    15,607
    
    
    
    1,670
    
    
    
    51,171
    
    
    
    20,258Asia-Pacific
    
    
    11,348
    
    
    
    8,141
    
    
    
    25,838
    
    
    
    17,652$
    43,582
    
    
    $
    34,378
    
    
    $
    133,292
    
    
    $
    106,081
 (1)
    
    Americas region contains revenue from the United States of $16.2 million and $24.3
million for the three months ended September 30, 2010 and 2009, respectively. For the nine
months ended September 30, 2010 and 2009, Americas region contains revenue from the United
States of $55.1 million and $65.0 million, respectively. NOTE F  INCOME TAXES
   NOTE G  COMMITMENTS AND CONTINGENCIES
   10




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##### Table of Contents



Securities Litigation
 et al.
    Stockholder Derivative Actions
     11




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Reserve for Contingency
  Operating Leases
   NOTE H  STOCK INCENTIVE PLANS
    Incentive Stock Options
    
    
    Restricted StockWeighted-Shares
    
    
    Number of
    
    
    Weighted-
    
    
    
    
    
    
    AverageAvailable
    
    
    Options
    
    
    Average
    
    
    Number of
    
    
    Fair Valuefor Grant
    
    
    Outstanding
    
    
    Exercise Price
    
    
    Shares
    
    
    at Grant DateBalance at December 31, 2009
    
    
    3,667
    
    
    
    5,347
    
    
    $
    5.02
    
    
    
    2,488
    
    
    $
    5.01Granted
    
    
    (1,744
    )
    
    
    
    
    
    
    
    
    
    
    1,744
    
    
    
    3.17Exercised or vested
    
    
    
    
    
    
    (386
    )
    
    
    2.80
    
    
    
    (1,025
    )
    
    
    5.18Cancelled
    
    
    185
    
    
    
    (433
    )
    
    
    6.46
    
    
    
    (149
    )
    
    
    4.88Balance at September 30, 2010
    
    
    2,108
    
    
    
    4,528
    
    
    $
    5.07
    
    
    
    3,058
    
    
    $
    3.91Exercisable at September 30, 2010
    
    
    
    
    
    
    3,929
    
    
    $
    4.73
   12




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##### Table of Contents



NOTE I  INVESTMENT IN COMPACT PARTICLE ACCELERATION CORPORATION
    NOTE J  RESTRUCTURING
  Balance at December 31, 2009
    
    $
    998Additions
    
    
    Payments
    
    
    (995
    )Balance at September 30, 2010
    
    $
    3
   13




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read together with our unaudited condensed consolidated
financial statements and the notes to those financial statements, which are included in this
report. This report may contain or incorporate by reference forward-looking statements made
pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended
(the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). These statements reflect managements expectations, estimates and assumptions,
based on information available at the time of the statement or, with respect to any document
incorporated by reference, available at the time that such document was prepared. Forward-looking
statements include, but are not limited to, statements regarding future events, plans, goals,
objectives, prospects and expectations. Forward-looking statements are often, but not always, made
through the use of words such as believe, anticipate, should, intend, plan, will,
likely, expect, estimate, project and similar expressions. Forward-looking statements are
not guarantees of future performance and involve risks, uncertainties, and other factors,
including, but not limited to, those discussed below under Factors Affecting Our Financial
Performance and those in the section entitled Risk Factors under Part II, Item 1A. of this
Quarterly Report on Form 10-Q, which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied
by those statements. We undertake no obligation to, and expressly disclaim any such obligation to,
update or revise any forward-looking statements to reflect changed assumptions, the occurrence of
anticipated or unanticipated events or changes to future results over time or otherwise, except as
required by law.
 Overview
     Factors Affecting Our Financial Performance
  Incoming orders
   14




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##### Table of Contents



Backlog
   Revenue
 Product revenue.
   
    
    On average, the System is shipped to our customer within 12 months after we receive the
order. However, individual orders may take longer than 12 months to ship. Timing of
deliveries can be affected by factors outside of our control, such as construction delays
at customer project sites and customer credit issues. For direct and non-certified
distributor sales, we recognize revenue upon end customer acceptance of the System, which
usually occurs three to four weeks after its delivery. For certified distributor sales, we
recognize revenue upon title transfer of the System to the certified distributor. Each
System installation represents a significant percentage of our revenue for the period in
which it occurs.
    
    Our geographic mix of customers may impact our average selling prices. We intend to
continue to expand our international selling efforts, although we cannot be certain that
favorable pricing trends will continue. As of September 30, 2010, we did not have a
hedging program in place to offset foreign exchange risk and, therefore, cannot be certain
of how foreign currency exchange rates will impact our financial results in the future.
    
    Our ability to demonstrate the clinical benefits of the System compared to competing
systems is a factor in our ability to increase market demand for the System. To compete
effectively, we may need to offer additional features that could require substantial
additional resources to develop.
    
    Our focus on sales to group purchasing organizations (GPOs) and multi-center customers
may result in us lowering selling prices, as these customers tend to negotiate quantity
discounts. Orders from these customers may remain in backlog longer than those from
customers who place single unit orders, as units sold to multi-center customers tend to
install sequentially over a longer period of time.
  15




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##### Table of Contents




    
    The System is a major capital equipment item that represents a significant purchase
for most of our customers. While we believe macroeconomic conditions are improving, our
customers remain cautious and, as a result, may choose to delay some of their capital
spending or may not have or be able to obtain the funds necessary to purchase equipment
such as the System. These factors may have a material adverse effect on our incoming
orders and subsequent revenue recognition.
  Service revenue.
  Cost of revenue
   
    
    Service and support expenses.We have a number of individual service contracts that
produce negative gross profit margins for which we have recorded a reserve for the related
estimated future losses. We anticipate the number of contracts producing negative margins
will decline as we further our efforts to reduce the overall average direct service costs
per installed System. We expect to continue to improve service contract margins by
leveraging our service infrastructure costs over a larger installed base, implementing
remote diagnostic functionalities, outsourcing certain tasks when cost-effective and
feasible, introducing component design changes aimed at reducing costs, increasing
longevity and improving serviceability of our components, increasing the price for some of
our older annual service contracts, and training our personnel to improve their
problem-solving capabilities. Additionally, we expect to invest $3 to $4 million in our
Fast Track program during the fourth quarter of 2010. This program targets selected
older systems in the field for upgrades of certain technology. While it will have a
negative impact in the fourth quarter of 2010, this program is expected to reduce the cost
to service the targeted systems in future periods. We believe that achieving success in
these initiatives should also lead to reduced warranty costs and improved System
performance.
    
    Component supply and cost.Our cost of revenue continues to be impacted by high
component costs and high replacement rates. We continue efforts to develop alternate
components and implement enhancements to increase the performance of components used in the
System. We are also seeking to identify lower-priced components of comparable or improved
performance and quality, as well as making engineering improvements to the System in order
to reduce costs. We believe that achieving these goals should result in reduced
manufacturing, warranty and service support costs in the long term.
  Research and development expenses
   16




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##### Table of Contents



Selling, general and administrative expenses
   Other income (expense)
  Interest income
  Income tax expense (benefit)
   Noncontrolling interests
   17




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##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Product
    
    
    68.3
    %
    
    
    70.5
    %
    
    
    69.9
    %
    
    
    71.6
    %Service and other
    
    
    31.7
    
    
    
    29.5
    
    
    
    30.1
    
    
    
    28.4Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Product
    
    
    37.2
    
    
    
    40.1
    
    
    
    34.8
    
    
    
    37.5Service and other
    
    
    46.7
    
    
    
    49.6
    
    
    
    41.1
    
    
    
    48.7Total cost of revenue
    
    
    83.9
    
    
    
    89.7
    
    
    
    75.9
    
    
    
    86.2Gross profit
    
    
    16.1
    
    
    
    10.3
    
    
    
    24.1
    
    
    
    13.8Operating expenses:Research and development
    
    
    18.9
    
    
    
    21.0
    
    
    
    18.6
    
    
    
    18.9Selling, general and administrative
    
    
    33.0
    
    
    
    36.3
    
    
    
    28.0
    
    
    
    32.4Total operating expenses
    
    
    51.9
    
    
    
    57.3
    
    
    
    46.6
    
    
    
    51.3Loss from operations
    
    
    (35.8
    )
    
    
    (46.9
    )
    
    
    (22.5
    )
    
    
    (37.5
    )Other income (expense)
    
    
    4.3
    
    
    
    2.0
    
    
    
    1.3
    
    
    
    1.6Loss before income tax
    
    
    (31.5
    )
    
    
    (44.9
    )
    
    
    (21.2
    )
    
    
    (35.9
    )Income tax expense (benefit)
    
    
    0.1
    
    
    
    0.7
    
    
    
    0.0
    
    
    
    (0.1
    )Net loss
    
    
    (31.6)
    %
    
    
    (45.6
    )%
    
    
    (21.2)
    %
    
    
    (35.8
    )%
 Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
 Revenue
  Three Months Ended September 30,2010
    
    
    2009Product revenue
    
    $
    29,759
    
    
    
    68.3
    %
    
    $
    24,252
    
    
    
    70.5
    %Service and other revenue
    
    
    13,823
    
    
    
    31.7
    
    
    
    10,126
    
    
    
    29.5$
    43,582
    
    
    
    100.0
    %
    
    $
    34,378
    
    
    
    100.0
    %
  Three Months Ended September 30,2010
    
    
    2009Americas (1)
    
    $
    16,627
    
    
    
    38.2
    %
    
    $
    24,567
    
    
    
    71.5
    %Europe and Middle East
    
    
    15,607
    
    
    
    35.8
    
    
    
    1,670
    
    
    
    4.9Asia-Pacific
    
    
    11,348
    
    
    
    26.0
    
    
    
    8,141
    
    
    
    23.7$
    43,582
    
    
    
    100.0
    %
    
    $
    34,378
    
    
    
    100.0
    %
 (1)
    
    Americas region contains revenue from the United States of $16.2 million and $24.3
million for the three months ended September 30, 2010 and 2009, respectively.    18




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##### Table of Contents



Cost of revenue
     Research and development expenses
  Three Months Ended September 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeSystem R&D
    
    $
    6,855
    
    
    $
    5,473
    
    
    $
    1,382
    
    
    
    25.3
    %Proton Project / CPAC R&D
    
    
    1,373
    
    
    
    1,745
    
    
    
    (372
    )
    
    
    (21.3
    )$
    8,228
    
    
    $
    7,218
    
    
    $
    1,010
    
    
    
    14.0
    %
  Selling, general and administrative expenses
  Other income (expense)
  Income tax expense (benefit)
   19




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##### Table of Contents



Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 Revenue
  Nine Months Ended September 30,2010
    
    
    2009Product revenue
    
    $
    93,230
    
    
    
    69.9
    %
    
    $
    75,937
    
    
    
    71.6
    %Service and other revenue
    
    
    40,062
    
    
    
    30.1
    
    
    
    30,144
    
    
    
    28.4$
    133,292
    
    
    
    100.0
    %
    
    $
    106,081
    
    
    
    100.0
    %
  Nine Months Ended September 30,2010
    
    
    2009Americas (1)
    
    $
    56,283
    
    
    
    42.2
    %
    
    $
    68,171
    
    
    
    64.3
    %Europe and Middle East
    
    
    51,171
    
    
    
    38.4
    
    
    
    20,258
    
    
    
    19.1Asia-Pacific
    
    
    25,838
    
    
    
    19.4
    
    
    
    17,652
    
    
    
    16.6$
    133,292
    
    
    
    100.0
    %
    
    $
    106,081
    
    
    
    100.0
    %
 (1)
    
    Americas region contains revenue from the United States of $55.1 million and $65.0
million for the periods ended September 30, 2010 and 2009, respectively.   Cost of revenue
      20




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##### Table of Contents



Research and development expenses
  Nine Months Ended September 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeSystem R&D
    
    $
    21,059
    
    
    $
    16,406
    
    
    $
    4,653
    
    
    
    28.4
    %Proton Project / CPAC R&D
    
    
    3,669
    
    
    
    3,680
    
    
    
    (11
    )
    
    
    (0.3
    )$
    24,728
    
    
    $
    20,086
    
    
    $
    4,642
    
    
    
    23.1
    %
  Selling, general and administrative expenses
  Other income (expense)
  Income tax expense (benefit)
  Liquidity and Capital Resources
  Financial Condition
    21




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##### Table of Contents



Loans and Available Borrowings
  Contractual Obligations and Commitments
  Pending Litigation and Reserve for Contingency
  Operating Capital and Capital Expenditure Requirements
  
    
    Revenue generated from sales of the System and service contracts;
    
    The performance of the System operating in the field and corresponding service costs;
    
    The level of investment required by our service and support organization;
    
    The level of investment required for research and development activities;
    
    Costs associated with our manufacturing, sales and marketing and general and
administrative activities; and
    
    Effects of competing technological and market developments.
   22




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##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
   23




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##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  Our ability to increase our profitability depends in part on reducing our warranty and service
costs for the TomoTherapy treatment systems and improving our economies of scale in service
operations, which we may not be able to achieve.
  In April 2008, we invested in the continued development of a new compact proton therapy system
through a separate entity, Compact Particle Acceleration Corporation (CPAC). Our business, results
of operations and financial condition will be adversely affected if CPAC is unable to obtain
additional funding or if CPAC otherwise fails to successfully develop and commercialize this
technology.
   24




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Recent Sales of Unregistered Securities
  (b) Use of Proceeds from Public Offering of Common Stock
    Working capital
    
    $
    74.9Purchases of property and equipment
    
    
    19.6Purchases of test systems
    
    
    5.7Acquisition of Chengdu Twin Peak Accelerator Technology Inc.
    
    
    1.5Repayment of debt
    
    
    0.4Total net proceeds used
    
    $
    102.1
 (c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 6.
    
    Exhibits
 Exhibit Number

    
    Description3.1
    (1)
    
    
    Amended and Restated Articles of Incorporation of the Company3.2
    (1)
    
    
    Amended and Restated Bylaws of the Company10.1
    (2)
    
    
    Amendment to Supply Agreement, dated September 9, 2010, between the Company and Hitachi Medical
Corporation31.1
    *
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    *
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    *
    
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    *
    
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Previously filed as an exhibit to the Companys Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on
November 7, 2008 (File No. 001-33452).(2)
    
    Previously filed as an exhibit to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 10, 2010 (File No. 001-33452).*
    
    Filed herewith.
    
    Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the corresponding
filing and submitted separately to the SEC.  25




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##### Table of Contents



SIGNATURES
  TOMOTHERAPY INCORPORATEDDate: November 9, 2010
    By:
    /s/ Frederick A. RobertsonFrederick A. RobertsonChief Executive Officer and PresidentDate: November 9, 2010
    By:
    /s/ Thomas E. PowellThomas E. PowellChief Financial Officer and Treasurer  26




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number

    
    Description3.1
    (1)
    
    
    Amended and Restated Articles of Incorporation of the Company3.2
    (1)
    
    
    Amended and Restated Bylaws of the Company10.1
    (2)
    
    
    Amendment to Supply Agreement, dated September 9, 2010, between the Company and Hitachi Medical
Corporation31.1
    *
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    *
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    *
    
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    *
    
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Previously filed as an exhibit to the Companys Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on
November 7, 2008 (File No. 001-33452).(2)
    
    Previously filed as an exhibit to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 10, 2010 (File No. 001-33452).*
    
    Filed herewith.
    
    Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the corresponding
filing and submitted separately to the SEC.  27