##### 



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 March 31, 2007
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 of other jurisdiction of incorporation or organization)
    
    39-1914727
(I.R.S. Employer Identification No.)
 
   o þ
  o o þ
 o þ




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##### 



PagePart I  Financial Information
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II  Other Information
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 3. Defaults Upon Senior Securities
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    49Item 5. Other Information
    
    
    49Item 6. Exhibits
    
    
    49SignaturesIndex to Exhibits
 2




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##### 



PART I    FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 (unaudited)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    2,644
    
    
    $
    20,137Accounts receivable
    
    
    39,414
    
    
    
    19,050Inventories
    
    
    51,925
    
    
    
    40,026Deferred tax assets
    
    
    3,968
    
    
    
    5,982Prepaid expenses and other current assets
    
    
    1,912
    
    
    
    1,014Total current assets
    
    
    99,863
    
    
    
    86,209Property and equipment, net
    
    
    16,542
    
    
    
    15,469Test systems, net
    
    
    4,809
    
    
    
    5,349Intangible assets, net
    
    
    464
    
    
    
    472Deferred tax assets
    
    
    2,037
    
    
    
    1,815Total assets
    
    $
    123,715
    
    
    $
    109,314LIABILITIES, TEMPORARY EQUITY AND SHAREHOLDERS DEFICITAccounts payable
    
    $
    17,911
    
    
    $
    13,960Customer deposits
    
    
    19,619
    
    
    
    23,103Deferred revenue
    
    
    28,775
    
    
    
    20,204Accrued expenses
    
    
    10,539
    
    
    
    12,667Accrued warranties
    
    
    6,011
    
    
    
    5,307Convertible preferred stock warrant liability
    
    
    127
    
    
    
    3,522Total current liabilities
    
    
    82,982
    
    
    
    78,763Other non-current liabilities
    
    
    2,096
    
    
    
    2,005Total liabilities
    
    
    85,078
    
    
    
    80,768COMMITMENTS AND CONTINGENCIES (Note D) 
TEMPORARY EQUITYRedeemable convertible preferred stock, $1 par value, 25,686,898 shares authorized;
25,676,856 and 25,221,239 shares issued and outstanding at March 31, 2007 and December 31, 2006,
respectively; liquidation amount: $53,277 and $52,587 at March 31, 2007 and December 31, 2006
    
    
    351,587
    
    
    
    212,663SHAREHOLDERS DEFICITCommon stock, $.01 par value, 47,689,147 shares authorized at March 31, 2007 and December 31,
2006;
11,181,467 and 9,264,291 shares issued and outstanding at March 31, 2007 and December 31, 2006
    
    
    112
    
    
    
    93Additional paid-in capital
    
    
    4,121
    
    
    
    1,771Treasury stock, 1,632 shares at cost
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    (36
    )
    
    
    Accumulated deficit
    
    
    (317,147
    )
    
    
    (185,981
    )Total shareholders deficit
    
    
    (312,950
    )
    
    
    (184,117
    )TOTAL LIABILITIES, TEMPORARY EQUITY AND SHAREHOLDERS
DEFICIT
    
    $
    123,715
    
    
    $
    109,314
  3




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (unaudited)
 Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Revenue
    
    $
    51,163
    
    
    $
    27,462Cost of revenue
    
    
    29,352
    
    
    
    19,320Gross profit
    
    
    21,811
    
    
    
    8,142Operating expenses:Research and development
    
    
    7,155
    
    
    
    3,457Selling, general and administrative
    
    
    8,625
    
    
    
    3,984Total operating expenses
    
    
    15,780
    
    
    
    7,441Income from operations
    
    
    6,031
    
    
    
    701Other income (expense), net
    
    
    101
    
    
    
    (95
    )Income before income tax and cumulative effect of change in accounting principle
    
    
    6,132
    
    
    
    606Income tax expense
    
    
    2,246
    
    
    
    Income before cumulative effect of change in accounting principle
    
    
    3,886
    
    
    
    606Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (2,140
    )Net income (loss)
    
    
    3,886
    
    
    
    (1,534
    )Accretion of redeemable convertible preferred stock
    
    
    (134,948
    )
    
    
    (9,060
    )Net loss attributable to common shareholders
    
    $
    (131,062
    )
    
    $
    (10,594
    )Net loss per share attributable to common shareholdersBasic and diluted
    
    $
    (12.13
    )
    
    $
    (1.22
    )Weighted average common shares outstanding used in computing net loss per share
attributable to common shareholders:Basic and diluted
    
    
    10,804
    
    
    
    8,657
  4




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Cash flows from operating activities:Net income (loss)
    
    $
    3,886
    
    
    $
    (1,534
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    1,471
    
    
    
    568Noncash charge for stock compensation
    
    
    810
    
    
    
    4Change in carrying value of convertible preferred stock warrants
    
    
    58
    
    
    
    2,133Loss on disposal of property and equipment
    
    
    4
    
    
    
    12Deferred income tax provision
    
    
    1,792
    
    
    
    Deferred rent
    
    
    107
    
    
    
    33Changes in operating assets and liabilities:Accounts receivable
    
    
    (20,364
    )
    
    
    (10,207
    )Inventories
    
    
    (11,899
    )
    
    
    (2,417
    )Prepaid expenses and other current assets
    
    
    (898
    )
    
    
    (71
    )Accounts payable
    
    
    3,951
    
    
    
    1,899Customer deposits
    
    
    (3,484
    )
    
    
    (7,627
    )Deferred revenue
    
    
    8,571
    
    
    
    17,329Accrued expenses
    
    
    (2,136
    )
    
    
    (634
    )Accrued warranties
    
    
    704
    
    
    
    412Net cash used in operating activities
    
    
    (17,427
    )
    
    
    (100
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (1,929
    )
    
    
    (1,396
    )Cost of test systems
    
    
    (66
    )
    
    
    Payments for intangible assets
    
    
    (5
    )
    
    
    (39
    )Net cash used in investing activities
    
    
    (2,000
    )
    
    
    (1,435
    )Cash flows from financing activities:Proceeds from notes payable
    
    
    
    
    
    
    400Payments on notes payable
    
    
    (8
    )
    
    
    Proceeds from the issuance of preferred stock, net of issuance costs
    
    
    
    
    
    
    8Proceeds from exercise of warrants
    
    
    523
    
    
    
    Proceeds from exercise of stock options
    
    
    1,455
    
    
    
    36Net cash provided by financing activities
    
    
    1,970
    
    
    
    444Effect of exchange rate changes on cash
    
    
    (36
    )
    
    
    Decrease in cash and cash equivalents
    
    
    (17,493
    )
    
    
    (1,091
    )Cash and cash equivalents at beginning of period
    
    
    20,137
    
    
    
    30,396Cash and cash equivalents at end of period
    
    $
    2,644
    
    
    $
    29,305
  5




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   NOTE A  BASIS OF PRESENTATION
    NOTE B  SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
  Initial Public Offering
   Use of Estimates
  6




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Principles of Consolidation
  Cash and Cash Equivalents
   Fair Value of Financial Instruments
  Foreign Currency
  Inventories
   March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    35,710
    
    
    $
    30,091Work-in-process
    
    
    8,529
    
    
    
    4,762Finished goods
    
    
    7,686
    
    
    
    5,173$
    51,925
    
    
    $
    40,026
 7




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Property and Equipment
  March 31,
    
    
    December 31,2007
    
    
    2006Furniture and equipment
    
    $
    5,847
    
    
    $
    5,166Computer equipment
    
    
    4,424
    
    
    
    3,706Computer software
    
    
    4,628
    
    
    
    1,522Leasehold improvements
    
    
    7,316
    
    
    
    6,744In process
    
    
    50
    
    
    
    3,20222,265
    
    
    
    20,340Less: Accumulated depreciation and amortization
    
    
    (5,723
    )
    
    
    (4,871
    )Property and equipment, net
    
    $
    16,542
    
    
    $
    15,469
  Furniture and equipment
    
    5 to 10 yearsComputer equipment and software
    
    3 to 7 yearsLeasehold improvements
    
    Lesser of useful life or the remaining
lease term
  Test Systems
   March 31,
    
    
    December 31,2007
    
    
    2006Test systems at cost
    
    $
    7,276
    
    
    $
    7,210Less: Accumulated amortization
    
    
    (2,467
    )
    
    
    (1,861
    )Test systems, net
    
    $
    4,809
    
    
    $
    5,349
  Warranty Cost
  8




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   March 31,
    
    
    March 31,2007
    
    
    2006Balance, beginning of the period
    
    $
    5,307
    
    
    $
    2,923Charged to cost of revenue
    
    
    2,625
    
    
    
    1,750Adjustments related to change in estimate
    
    
    175
    
    
    
    Actual product warranty expenditures
    
    
    (2,096
    )
    
    
    (1,163
    )Balance, end of period
    
    $
    6,011
    
    
    $
    3,510
 Stock Split
  Revenue Recognition
 Revenue
Recognition Revenue Arrangements with
Multiple Deliverables.
 
    
    Persuasive evidence of an arrangement exists.The Company requires evidence of a
purchase order with a customer specifying the terms and conditions of the product or
services to be delivered, typically in the form of a signed quotation or purchase order
from the customer.
    
    Title and risk of loss have been transferred to the customer.During the installation
phase, each System is fully tested to confirm that it functions within operating
specifications. Upon completion of the test procedures, the customer signs the acceptance
test procedures document, or ATP, acknowledging acceptance of the system. Revenue for the
sale of systems is recognized upon receipt of the signed ATP.
    
    The sales price is fixed or determinable.All contract terms are fixed in the signed
quotation or purchase order received from the customer. The contracts do not contain rights
of cancellation, return, exchanges or refunds.
    
    Collection is reasonably assured.Due to the fact that the Companys sales are to
hospitals and cancer treatment centers with significant resources, the Company considers
accounts receivable to be fully collectible. In addition, the Companys contracts generally
require staged payments as follows: 10% to 30% down payment, 60% to 70% due upon shipment
and 10% to 20% due upon final acceptance by the customer.
  Three Months Ended March 31,2007
    
    
    2006Product sales
    
    $
    48,466
    
    
    $
    26,239Service and other revenue
    
    
    2,697
    
    
    
    1,223Total revenue
    
    $
    51,163
    
    
    $
    27,462
 9




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  Three Months Ended March 31,2007
    
    
    2006Cost of revenue
    
    $
    115
    
    
    $
    Research and development
    
    
    182
    
    
    
    Selling, general and administrative
    
    
    513
    
    
    
    4Income tax benefit
    
    
    (131
    )
    
    
    Net decrease in net income
    
    $
    679
    
    
    $
    4
 Net Income (Loss) Per Share of Common Stock
  Three Months Ended March 31,2007
    
    
    2006Net income (loss) per common share:Basic and diluted:Income before cumulative effect of change in
accounting principle
    
    $
    0.36
    
    
    $
    0.07Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.25
    )Net income
    
    $
    0.36
    
    
    $
    (0.18
    )Net loss attributable to common shareholders
    
    $
    (12.13
    )
    
    $
    (1.22
    )Weighted average common shares outstanding used in:Basic and diluted
    
    
    10,804
    
    
    
    8,657
   Three Months Ended March 31,2007
    
    
    2006Preferred stock (as if converted)
    
    
    2,568
    
    
    
    25,221Contingent common shares
    
    
    1,289
    
    
    
    1,289Stock options and warrants
    
    
    7,240
    
    
    
    7,80411,097
    
    
    
    34,314
 10




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Three Months Ended March 31,2007
    
    2006HistoricalNumerator:Net loss attributable to common shareholders
    
    $
    (131,062
    )
    
    $
    (10,594
    )Denominator:Weighted-average shares of common stock outstanding
    
    
    10,804
    
    
    
    8,657Net loss attributable to common shareholders per share 
basic and diluted
    
    $
    (12.13
    )
    
    $
    (1.22
    )Pro formaNumerator:Net loss
    
    $
    (131,062
    )
    
    $
    (10,594
    )Pro forma adjustment to add back preferred stock accretion
    
    
    134,948
    
    
    
    9,060Pro forma net income (loss)
    
    $
    3,886
    
    
    $
    (1,534
    )Denominator for pro forma basic net income (loss) per share:Weighted-average shares of common stock outstanding
    
    
    10,804
    
    
    
    8,657Pro forma adjustments to reflect assumed conversion of
preferred stock (as if converted)
    
    
    25,498
    
    
    
    25,221Pro forma adjustment to reflect assumed conversion of
contingent common shares (as if converted)
    
    
    1,289
    
    
    
    1,289Shares used to compute pro forma basic net income (loss) per
common share
    
    
    37,591
    
    
    
    35,167Pro forma basic net income (loss) per share
    
    $
    0.10
    
    
    $
    (0.04
    )Denominator for pro forma diluted net income (loss) per share:Weighted-average shares of common stock
outstanding
    
    
    10,804
    
    
    
    8,657Pro forma adjustments to reflect assumed conversion of
preferred stock (as if converted)
    
    
    25,498
    
    
    
    25,221Pro forma adjustment to reflect assumed conversion of
contingent common shares (as if converted)
    
    
    1,289
    
    
    
    1,289Pro forma adjustments to reflect assumed exercise of
warrants and stock options using treasury stock method
    
    
    4,577
    
    
    
    Shares used to compute pro forma diluted net income per share
    
    
    42,168
    
    
    
    35,167Pro forma diluted net income (loss) per share
    
    $
    0.09
    
    
    $
    (0.04
    )Pro forma outstanding anti-dilutive securities not
included in diluted earnings per share calculationStock options and warrants
    
    
    
    
    
    
    7,804
 11




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Segment Information
 Disclosures About Segments of an Enterprise and Related Information,
  Three Months Ended March 31,2007
    
    
    2006North America
    
    $
    25,465
    
    
    $
    13,595Europe
    
    
    22,569
    
    
    
    3,225Asia
    
    
    3,129
    
    
    
    10,642Total revenue
    
    $
    51,163
    
    
    $
    27,462
 Change in Accounting Principle
 Issuers Accounting under FASB
Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares
That Are Redeemable
  Recent Accounting Pronouncements
 , Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements (SFAS. 157
 12




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    The Fair Value Option for Financial Assets and
Financial Liabilities
 NOTE C  INCOME TAXES
   Accounting for Uncertainty in
Income Taxes Accounting for Contingencies Accounting for Income Taxes
    13




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   NOTE D  COMMITMENTS AND CONTINGENCIES
    NOTE E  TEMPORARY EQUITY AND SHAREHOLDERS EQUITY (DEFICIT)
 Redeemable Convertible Preferred Stock
 Valuation of Privately-Held-Company Equity
Securities Issued as Compensation.
 Warrants
   14




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Contingent Common Shares
 Application of
Issue No 98-5 to Certain Convertible Instruments.
 NOTE F  STOCK OPTIONS
  15




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Options OutstandingWeightedAverageShares
    
    
    
    
    
    
    Weighted
    
    
    RemainingAvailable
    
    
    Number of
    
    
    Average Exercise
    
    
    Contractual(In thousands, except per share amounts)
    
    for Grant
    
    
    Shares
    
    
    Price
    
    
    Term (in years)Balance at December 31, 2006
    
    
    2,293,273
    
    
    
    9,155,928
    
    
    $
    3.30Authorized
    
    
    
    
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    $
    Cancelled or expired
    
    
    10,574
    
    
    
    (10,574
    )
    
    $
    4.63Exercised
    
    
    
    
    
    
    (1,915,522
    )
    
    $
    0.76Balance at March 31, 2007
    
    
    2,303,847
    
    
    
    7,229,832
    
    
    $
    3.97
    
    
    
    7.08Exercisable at March 31, 2007
    
    
    
    
    
    
    2,069,687
    
    
    $
    2.20
    
    
    
    7.13
   Ended March 31,2006Employee Stock Option PlansExpected term (in years)
    
    
    4.25Risk-free interest rate
    
    
    4.4
    %Expected volatility
    
    
    65.0
    %Expected dividend
    
    
    Weighted average fair value at grant date
    
    $
    4.99
 NOTE G  RELATED PARTY TRANSACTIONS
  16




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    NOTE H STOCK SPLIT
  17




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##### 



Item 2.
Managements Discussion and Analysis of Financial Condition and
Results of Operations
 The following discussion and analysis of our financial condition as of March 31, 2007 and
results of operations for the three and nine months ended March 31, 2007 and 2006 should be read
together with our financial statements and related notes included elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not limited to those set
forth under Risk Factors and elsewhere in this report. We urge you not to place undue reliance on
these forward-looking statements, which speak only as of the date of this report. All
forward-looking statements included in this report are based on information available to us on the
date of this report, and we assume no obligation to update any forward-looking statements contained
in this report.
  Forward-looking Statements
  Overview
    18




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##### 



Financial Operations
 Revenue
   
    
    there is persuasive evidence that an arrangement exists;
    
    the title and risk of loss have been transferred to the customer, as evidenced by the
customers signature on our acceptance test procedure document;
    
    the sales price is fixed or determinable; and
    
    collection is reasonably assured.
   Customer concentration.
 Geographic breakdown.
 Three Months Ended March 31,2007
    
    
    2006North America
    
    
    50
    %
    
    
    50
    %Europe
    
    
    44
    %
    
    
    12
    %Asia (excluding Japan)
    
    
    6
    %
    
    
    28
    %Japan
    
    
    
    
    
    
    10
    %Total
    
    
    100
    %
    
    
    100
    %
 Backlog
  19




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##### 



Cost of revenue
    Research and development expenses
   Selling, general and administrative expenses
   Other income (expense), net
  20




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##### 



Key Factors Affecting our Performance
  Extended sales cycle and fluctuations.
 Customer mix and gross margins.
 
    
    Sales outside of the United States accounted for approximately 50% of our revenue for
the three months ended March 31, 2007 and 2006. Increased sales of the Hi Art system
outside of the United States have tended to impact our gross margins favorably due to
higher average selling prices in these markets. We intend to continue to expand our
international selling efforts although we cannot be certain that favorable pricing trends
will continue.
    
    The majority of our sales to date have been to university research centers, hospitals
and cancer treatment centers that are early adopters of new technologies and that tend to
replace equipment regularly in order to upgrade their treatment capabilities. Our sales
strategy includes increasing sales to community hospitals and smaller treatment centers,
which have traditionally been slower in their adoption of new technologies primarily due to
cost-based purchasing decisions. Our efforts to penetrate this market may require us to
lower the price of the Hi Art system. Similarly, we may be required to lower the price of
the Hi Art system in order to sell to national chains or large volume purchasers.
    
    Our ability to demonstrate the clinical benefits of the Hi Art system compared to
competing systems is likely to be a factor in our ability to maintain the selling price of
the Hi Art system. We may need to demonstrate increased clinical benefits and offer
additional features in order to compete favorably with our competitors in the medium to
long term.
 Component supply and cost.
 21




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Operating expenses.
 22




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##### 



Results of Operations
  Three Months Ended March 31,2007
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    57.4
    %
    
    
    70.4
    %Gross profit
    
    
    42.6
    %
    
    
    29.6
    %Operating expenses:Research and development
    
    
    13.9
    %
    
    
    12.6
    %Selling, general and administrative
    
    
    16.9
    %
    
    
    14.5
    %Total operating expenses
    
    
    30.8
    %
    
    
    27.1
    %Income from operations
    
    
    11.8
    %
    
    
    2.5
    %Other income (expense), net
    
    
    0.2
    %
    
    
    (0.3
    %)Income before income tax
    
    
    12.0
    %
    
    
    2.2
    %Income tax expense
    
    
    4.4
    %
    
    
    0.0
    %Income before cumulative effect of change in
accounting
principle and accretion of redeemable convertible
preferred stock
    
    
    7.6
    %
    
    
    2.2
    %
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Revenue
   Cost of revenue
  23




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Research and development expenses
  Selling, general and administrative expenses
  Stock-based compensation
  Other income (expense), net
  Income tax expense (benefit)
  24




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Liquidity and Capital Resources
  Cash Flows
 Cash flows from operating activities.
  Cash flows from investing activities.
  Cash flows from financing activities.
 25




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Loans and Available Borrowings
  Contractual Obligations and Commitments
  Payment Due by PeriodLess Than
    
    1-3
    
    3-5
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsOperating lease obligations
    
    $
    19,188
    
    
    $
    1,962
    
    
    $
    4,101
    
    
    $
    4,180
    
    
    $
    8,945Notes payable
    
    
    875
    
    
    
    34
    
    
    
    247
    
    
    
    467
    
    
    
    127Total
    
    $
    20,063
    
    
    $
    1,996
    
    
    $
    4,348
    
    
    $
    4,647
    
    
    $
    9,072
  Operating Capital and Capital Expenditure Requirements
  
    
    revenue generated by sales of the Hi Art system and service plans;
    
    costs associated with our sales and marketing initiatives and manufacturing activities;
    
    the level of investment needed in our service and support infrastructure;
    
    costs of our research and development activities; and
    
    effects of competing technological and market developments.
  26




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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   Recent Accounting Pronouncements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements,
 , Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements (SFAS No. 157)
 27




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The Fair Value Option for Financial Assets and
Financial Liabilities
 
 Item 3.
Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Risk
   Foreign Currency Exchange Rate Risk
  
 Item 4.
Controls and Procedures
  28




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29




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Part II.   OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Risks Related to Our Business
 We depend on sales of the Hi Art system for substantially all of our revenue and if we are unable
to grow or sustain sales of the Hi Art system, we may not generate sufficient revenue to support
our business.
  The long sales cycle and high unit price of the Hi Art system, as well as other factors, may
contribute to substantial fluctuations in our quarterly operating results and stock price and make
it difficult to compare our results of operations to prior periods.
  We face competition from numerous competitors, many of whom have greater resources than we do,
which may make it more difficult for us to achieve significant market penetration.
 30




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Our reliance on single-source suppliers for critical components of the Hi Art system could harm our
ability to meet demand for our products in a timely and cost effective manner.
   31




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Sales of the Hi Art system may be adversely affected if clinicians do not widely adopt IGRT and
adaptive radiotherapy, which is an emerging cancer treatment technique.
  We may be delayed or prevented from implementing our long-term sales strategy if we fail to educate
clinicians and patients about the benefits of the Hi Art system and to implement enhancements to
the system in a timely manner.
   32




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Our ability to increase our profitability depends in part on increasing our gross margins, which we
may not be able to achieve.
  If we are unable to maintain existing research collaboration relationships, enter into new
collaboration arrangements in the future or enter into license agreements with our collaborators
and others, our ability to enhance the Hi Art system may be adversely affected.
    33




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We rely on a third party to perform spare parts shipping and other logistics functions on our
behalf. A failure or disruption at our logistics providers would adversely impact our business.
  If third-party payors do not continue to provide sufficient coverage and reimbursement to
healthcare providers for use of the Hi Art system, sales of the Hi Art system may be adversely
affected.
     We have a limited history of manufacturing the Hi Art system in commercial quantities and may
encounter manufacturing problems or delays that could result in lost revenue.
 34




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##### 



Our manufacturing operations are conducted at a single location and any disruption at our facility
could increase our expenses.
  We rely on local distributors to market and distribute the Hi Art system in much of the Asian
market.
  35




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Our results may be adversely affected by changes in foreign currency exchange rates.
   Technological breakthroughs in cancer treatment could render the Hi Art system obsolete.
  A significant percentage of our sales are in international markets, and economic, political and
other risks associated with international sales and operations could adversely affect our sales or
make them less predictable.
   
    
    difficulties in enforcing agreements and collecting receivables in a timely manner
through the legal systems of many countries outside North America;
    
    the failure to fulfill foreign regulatory requirements to market the Hi Art system on a
timely basis or at all;
 36




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
    
    availability of, and changes in, reimbursement within prevailing foreign health care
payment systems;
    
    difficulties in managing foreign relationships and operations, including any
relationships that we establish with foreign distributors or sales or marketing agents;
    
    limited protection for intellectual property rights in some countries;
    
    fluctuations in currency exchange rates;
    
    the possibility that foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign
trade;
    
    the possibility of any material shipping delays; and
    
    significant changes in the political, regulatory, safety or economic conditions in a
country or region.
  Product liability suits, whether or not meritorious, could be brought against us due to an alleged
defective component of the Hi Art system or for the misuse of the Hi Art system. These suits could
result in expensive and time-consuming litigation, payment of substantial damages and an increase
in our insurance rates.
  The effectiveness of procedures performed using the Hi Art system are not yet supported by
long-term clinical data and the medical community has not yet developed a large body of
peer-reviewed literature that supports the Hi Art systems safety and efficacy.
  37




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##### 



Our success will depend on our ability to attract and retain qualified personnel.
   If we do not effectively manage our growth, our business may be significantly harmed.
  Many countries require that software user interfaces be translated into their respective local
language. Failure to adhere to each countrys law with respect to the language of the user
interface may cause substantial disruptions in the delivery of new systems and the use of existing
systems.
  38




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We may need to raise additional capital in the future and may be unable to do so on acceptable
terms. This could limit our ability to grow and carry out our business plan.
  We have not yet evaluated our internal controls over financial reporting in compliance with Section
404 of the Sarbanes-Oxley Act.
  Risks Related to Our Intellectual Property
 If we are not able to meet the requirements of our license agreement with the Wisconsin Alumni
Research Foundation, or WARF, we could lose access to the technologies licensed thereunder and be
unable to produce or sell the Hi Art system.
  39




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##### 



If we are not able to adequately protect our intellectual property and proprietary technology our
competitive position, future business prospects and financial performance will be adversely
affected.
  
    
    current or future U.S. or foreign patent applications will be approved in a timely
manner or at all;
    
    our issued patents will protect our intellectual property and not be challenged by third parties;
    
    we will develop patentable intellectual property;
    
    the validity of our patents will be upheld;
    
    the patents of others will not have an adverse effect on our ability to do business; or
    
    others will not independently develop similar or competing products or methods or
design around any patents that may be issued to us.
  Our failure to protect the intellectual property we create would cause our business to suffer.
  We may initiate lawsuits to protect or enforce our patents or other intellectual property rights,
which could be expensive and, if we lose, could cause us to lose some of our intellectual property
rights.
   40




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##### 



We may become subject to costly intellectual property litigation, which could affect our future
business and financial performance.
  We may be subject to claims that our employees have wrongfully used or disclosed alleged trade
secrets of their former employers.
  Risks Related to Regulatory Matters
 Modifications, upgrades and future products related to the Hi Art system or new indications may
require new FDA premarket approvals or 510(k) clearances, and such modifications, or any defects in
design or manufacture may require us to recall or cease marketing the Hi Art system until approvals
or clearances are obtained.
  41




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##### 



42




---



##### 



The Hi Art system is subject to recalls even after receiving FDA clearance or approval, which would
harm our reputation, business and financial results.
  If we or our distributors do not obtain and maintain the necessary regulatory approvals in a
specific country, we will not be able to market and sell the Hi Art system in that country.
  We must manufacture the Hi Art system in accordance with federal and state regulations and we could
be forced to recall our installed systems or terminate production if we fail to comply with these
regulations.
  If we are found to have violated laws protecting the confidentiality of patient health information,
we could be subject to civil or criminal penalties, which could increase our liabilities and harm
our reputation or our business.
  43




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##### 



We are subject to federal and state laws prohibiting kickbacks and false or fraudulent claims,
which, if violated, could subject us to substantial penalties. Additionally, any challenge to or
investigation into our practices under these laws could cause adverse publicity and be costly to
respond to, and thus could harm our business.
   44




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##### 



Risks Related to Our Common Stock
 Our common stock has only recently been publicly traded and we expect that the price of our common
stock will fluctuate substantially.
  
    
    fluctuations in quarterly revenue and net income;
    
    regulatory developments related to the manufacturing, marketing or sale of the Hi Art system;
    
    announcements of technological innovations, new services or service enhancements,
strategic alliances or significant agreements by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    changes in the estimates of our operating results or changes in recommendations by any
securities analyst that elects to follow our common stock;
    
    sales of large blocks of our common stock; and
    
    changes in accounting principles or changes in interpretations of existing principles,
which could affect our financial results.
  Sales of a substantial number of shares of our common stock in the market by our existing
shareholders, or the perception that such sales could occur, could result in a decline in our stock
price.
  Number of Shares/Percentage of TotalOutstanding
    
    Date of Availability for Resale into the Public Market250,875/0.7%
    
    August 9, 200733,070,068/67.5%
    
    November 4,
2007, of which 11,926,613, or 24.3% of our
total outstanding shares, are subject to volume
limitations under Rule 144.3,665,144/9.9%
    
    Later than November 4, 2007.
 45




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##### 



A
subset of our shareholders now own approximately 29.4% of our outstanding common stock and could
limit new shareholders influence on corporate decisions or could delay or prevent a change in
corporate control.
  
    
    delaying, deferring or preventing a change in control of our company;
    
    entrenching our management and/or board;
    
    impeding a merger, consolidation, takeover or other business combination involving our
company; or
    
    discouraging a potential acquiror from making a tender offer or otherwise attempting to
obtain control of our company.
  We do not anticipate paying cash dividends on our common stock in the future.
  Anti-takeover provisions included in our amended and restated articles of incorporation and bylaws
could delay or prevent a change of control of our company, which could adversely impact the value
of our common stock and may prevent or frustrate attempts by our shareholders to replace or remove
our current management.
  
    
    our board of directors is authorized to issue preferred stock in series, with the
designation, powers, preferences and rights of each series to be fixed by our board of
directors;
 46




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##### 




    
    a board of directors divided into three classes serving staggered three-year terms,
such that not all members of the board will be elected at one time;
    
    a requirement that special meetings of shareholders be called only by a majority of our
Board of Directors or our Chief Executive Officer upon demand of the holders of record of
shares representing ten percent or as otherwise required by law;
    
    advance notice requirements for shareholder proposals and nominations; and
    
    our bylaws may be amended by approval of either our shareholders or our board of
directors, except where: (i) our articles of incorporation or the Wisconsin Business
Corporation Law reserve the power exclusively to the shareholders, or (ii) the
shareholders, in adopting, amending or repealing a particular bylaw, provide within the
bylaws that the Board of Directors may not amend, repeal or readopt such bylaw.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Sales
of Unregistered Securities
      47




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##### 



(b) Use
of Proceeds from Public Offering of Common Stock
    48




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##### 



(c) Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit Number
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 49




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##### 



SIGNATURES
   TOMOTHERAPY, INC./s/ Frederick A. RobertsonFrederick A. RobertsonChief Executive Officer TOMOTHERAPY, INC./s/ Stephen C. HathawayStephen C. HathawayChief Financial Officer and Treasurer 50