##### 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 June 30, 2008
 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
    
    39-1914727(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)1240 Deming Way, Madison, Wisconsin
    
    53717(Address of principal executive offices)
    
    (Zip Code)
 (608) 824-2800
 þ o
  o þ o o
 Yes o No þ




---



##### 



TomoTherapy Incorporated
Index
 PagePart I  FINANCIAL INFORMATIONItem 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 INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EXHIBIT
INDEX
    
    
    36Exhibit 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 amounts)
 (unaudited)June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCash and equivalents
    
    $
    60,581
    
    
    $
    191,780Short-term investments
    
    
    98,905
    
    
    
    Receivables, net
    
    
    44,563
    
    
    
    44,596Inventories
    
    
    75,135
    
    
    
    53,171Deferred tax assets
    
    
    9,155
    
    
    
    3,433Prepaid expenses and other current assets
    
    
    4,608
    
    
    
    1,622Total current assets
    
    
    292,947
    
    
    
    294,602Property and equipment, net
    
    
    21,938
    
    
    
    19,894Deferred tax assets
    
    
    6,456
    
    
    
    6,027Other non-current assets, net
    
    
    9,709
    
    
    
    6,642TOTAL ASSETS
    
    $
    331,050
    
    
    $
    327,165LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable
    
    $
    16,410
    
    
    $
    17,655Accrued expenses
    
    
    16,894
    
    
    
    21,699Accrued warranty
    
    
    7,325
    
    
    
    7,973Deferred revenue
    
    
    23,321
    
    
    
    15,517Customer deposits
    
    
    25,364
    
    
    
    20,309Total current liabilities
    
    
    89,314
    
    
    
    83,153Other non-current liabilities
    
    
    5,502
    
    
    
    5,318Total liabilities
    
    
    94,816
    
    
    
    88,471COMMITMENTS
AND CONTINGENCIES (Note D)
    
    
    
    
    
    
    Noncontrolling interests
    
    
    (1,485
    )
    
    
    SHAREHOLDERS EQUITYPreferred stock, $1 par value, 10,000,000 shares authorized at June 30, 2008 and December 31, 2007; no shares
issued and outstanding at June 30, 2008 and December 31, 2007, respectively
    
    
    
    
    
    
    Common stock, $.01 par value, 200,000,000 shares authorized at June 30, 2008 and December 31, 2007;
50,201,846 and 49,740,577 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively
    
    
    617
    
    
    
    497Additional paid-in capital
    
    
    663,176
    
    
    
    651,725Treasury stock, 1,632 shares at cost
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    (36
    )
    
    
    (523
    )Accumulated deficit
    
    
    (426,038
    )
    
    
    (413,005
    )Total shareholders equity
    
    
    237,719
    
    
    
    238,694TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    331,050
    
    
    $
    327,165
   3




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    52,021
    
    
    $
    43,715
    
    
    $
    90,921
    
    
    $
    94,878Cost of revenue
    
    
    39,496
    
    
    
    29,191
    
    
    
    70,178
    
    
    
    58,543Gross profit
    
    
    12,525
    
    
    
    14,524
    
    
    
    20,743
    
    
    
    36,335Operating expenses:Research and development
    
    
    10,044
    
    
    
    7,692
    
    
    
    19,569
    
    
    
    14,847Selling, general and administrative
    
    
    13,635
    
    
    
    9,093
    
    
    
    24,303
    
    
    
    17,718Total operating expenses
    
    
    23,679
    
    
    
    16,785
    
    
    
    43,872
    
    
    
    32,565Income (loss) from operations
    
    
    (11,154
    )
    
    
    (2,261
    )
    
    
    (23,129
    )
    
    
    3,770Other income (expense):Interest income
    
    
    1,090
    
    
    
    1,265
    
    
    
    2,864
    
    
    
    1,397Interest expense
    
    
    (6
    )
    
    
    (36
    )
    
    
    (17
    )
    
    
    (74
    )Other income (expense), net
    
    
    (82
    )
    
    
    (158
    )
    
    
    (156
    )
    
    
    (151
    )Total other income
    
    
    1,002
    
    
    
    1,071
    
    
    
    2,691
    
    
    
    1,172Income (loss) before income tax and noncontrolling interests
    
    
    (10,152
    )
    
    
    (1,190
    )
    
    
    (20,438
    )
    
    
    4,942Income tax expense (benefit)
    
    
    (1,806
    )
    
    
    (537
    )
    
    
    (5,920
    )
    
    
    1,709Income (loss) before noncontrolling interests
    
    
    (8,346
    )
    
    
    (653
    )
    
    
    (14,518
    )
    
    
    3,233Noncontrolling interests
    
    
    (1,485
    )
    
    
    
    
    
    
    (1,485
    )
    
    
    Net income (loss)
    
    
    (6,861
    )
    
    
    (653
    )
    
    
    (13,033
    )
    
    
    3,233Accretion of redeemable convertible preferred stock
    
    
    
    
    
    
    (102,634
    )
    
    
    
    
    
    
    (237,582
    )Net loss attributable to common shareholders
    
    $
    (6,861
    )
    
    $
    (103,287
    )
    
    $
    (13,033
    )
    
    $
    (234,349
    )Net loss per share attributable to common shareholdersBasic and diluted
    
    $
    (0.14
    )
    
    $
    (3.15
    )
    
    $
    (0.26
    )
    
    $
    (10.71
    )Weighted average common shares outstanding used in computing net loss per
share attributable to common shareholdersBasic and diluted
    
    
    50,173
    
    
    
    32,819
    
    
    
    50,098
    
    
    
    21,872
   4




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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (unaudited)
 Six months ended June 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (13,033
    )
    
    $
    3,233Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    4,128
    
    
    
    2,940Noncash charge for stock compensation
    
    
    1,681
    
    
    
    1,611Deferred income tax provision (benefit)
    
    
    (6,036
    )
    
    
    1,343Noncontrolling interests
    
    
    (1,485
    )
    
    
    Other noncash items
    
    
    487
    
    
    
    788Changes in operating assets and liabilities:Receivables
    
    
    4,435
    
    
    
    (14,062
    )Inventories
    
    
    (21,158
    )
    
    
    (16,089
    )Prepaid expenses and other current assets
    
    
    (2,977
    )
    
    
    (589
    )Accounts payable
    
    
    (6,285
    )
    
    
    84Accrued expenses
    
    
    (4,927
    )
    
    
    1,004Accrued warranty
    
    
    (648
    )
    
    
    241Deferred revenue
    
    
    7,529
    
    
    
    5,061Customer deposits
    
    
    5,055
    
    
    
    1,417Other non-current liabilities
    
    
    112
    
    
    
    Net cash used in operating activities
    
    
    (33,122
    )
    
    
    (13,018
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (4,416
    )
    
    
    (3,847
    )Purchases of test systems
    
    
    (2,331
    )
    
    
    (1,471
    )Purchases of short-term investments
    
    
    (99,203
    )
    
    
    Other investing activities
    
    
    (448
    )
    
    
    (23
    )Net cash used in investing activities
    
    
    (106,398
    )
    
    
    (5,341
    )Cash flows from financing activities:Payments on notes payable
    
    
    (35
    )
    
    
    (48
    )Proceeds from initial public offering, net of issuance costs
    
    
    
    
    
    
    185,404Proceeds from issuance of subsidiarys common stock
    
    
    6,500
    
    
    
    Proceeds from exercises of stock options and warrants
    
    
    1,184
    
    
    
    2,287Net cash provided by financing activities
    
    
    7,649
    
    
    
    187,643Effect of exchange rate changes on cash
    
    
    672
    
    
    
    (102
    )Increase (decrease) in cash and cash equivalents
    
    
    (131,199
    )
    
    
    169,182Cash and cash equivalents at beginning of period
    
    
    191,780
    
    
    
    20,137Cash and cash equivalents at end of period
    
    $
    60,581
    
    
    $
    189,319
   5




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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE A  DESCRIPTION OF BUSINESS
  NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
 Consolidated Financial Statements
 Basis of Presentation
    Use of Estimates
  Cash and Equivalents
  Investments
   June 30, 2008Unrealized
    
    
    UnrealizedCost basis
    
    
    gains
    
    
    losses
    
    
    Fair ValueU.S. Government and Agency securities
    
    $
    82,726
    
    
    $
    22
    
    
    $
    (234
    )
    
    $
    82,514Corporate bonds
    
    
    16,477
    
    
    
    9
    
    
    
    (95
    )
    
    
    16,391$
    99,203
    
    
    $
    31
    
    
    $
    (329
    )
    
    $
    98,905
  6




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##### Table of Contents



June 30, 2008Cost basis
    
    
    Fair ValueDue in one year or less
    
    $
    35,890
    
    
    $
    35,756Due after one year through five years
    
    
    63,313
    
    
    
    63,149$
    99,203
    
    
    $
    98,905
 Fair Value Measurements Effective Date of FASB Statement No. 157
 
    
    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.
  Allowance for Doubtful Accounts
  Inventories
   7




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June 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    48,892
    
    
    $
    41,405Work-in-process
    
    
    8,569
    
    
    
    8,722Finished goods
    
    
    17,674
    
    
    
    3,044$
    75,135
    
    
    $
    53,171
 Accrued Expenses
  June 30,
    
    
    December 31,2008
    
    
    2007Commissions and payroll-related
    
    $
    5,689
    
    
    $
    6,597Bonuses
    
    
    250
    
    
    
    5,249Other
    
    
    10,955
    
    
    
    9,853$
    16,894
    
    
    $
    21,699
 Warranty Cost
  June 30,
    
    
    June 30,2008
    
    
    2007Balance, beginning of period
    
    $
    7,973
    
    
    $
    5,307Charged to cost of revenue
    
    
    4,850
    
    
    
    4,900Adjustments related to change in estimate
    
    
    710
    
    
    
    175Actual product warranty expenditures
    
    
    (6,208
    )
    
    
    (4,834
    )Balance, end of period
    
    $
    7,325
    
    
    $
    5,548
 Revenue Recognition
     8




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Software Revenue Recognition Software Revenue Recognition with Respect to Certain Agreements.
 Share-Based Compensation
 Share-Based
Payment
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    152
    
    
    $
    154
    
    
    $
    300
    
    
    $
    269Research and development
    
    
    273
    
    
    
    271
    
    
    
    528
    
    
    
    453Selling, general and administrative
    
    
    412
    
    
    
    376
    
    
    
    853
    
    
    
    889Income tax benefit
    
    
    (242
    )
    
    
    (134
    )
    
    
    (384
    )
    
    
    (265
    )$
    595
    
    
    $
    667
    
    
    $
    1,297
    
    
    $
    1,346
  9




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Net Income (Loss) Per Share of Common Stock
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss) per common share:Basic and diluted:Net income (loss)
    
    $
    (0.14
    )
    
    $
    (0.02
    )
    
    $
    (0.26
    )
    
    $
    0.15Net loss attributable to common shareholders
    
    $
    (0.14
    )
    
    $
    (3.15
    )
    
    $
    (0.26
    )
    
    $
    (10.71
    )Weighted average common shares outstanding used in:Basic and diluted
    
    
    50,173
    
    
    
    32,819
    
    
    
    50,098
    
    
    
    21,872
   Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options and warrants
    
    
    6,012
    
    
    
    6,970
    
    
    
    6,012
    
    
    
    6,970
  10




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Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007HistoricalNumerator:Net loss attributable to common shareholders
    
    $
    (6,861
    )
    
    $
    (103,287
    )
    
    $
    (13,033
    )
    
    $
    (234,349
    )Denominator:Weighted-average shares of common stock outstanding
    
    
    50,173
    
    
    
    32,819
    
    
    
    50,098
    
    
    
    21,872Net loss
attributable to common shareholders per share  basic and
diluted
    
    $
    (0.14
    )
    
    $
    (3.15
    )
    
    $
    (0.26
    )
    
    $
    (10.71
    )Pro forma (unaudited)Numerator:Net loss
    
    
    
    
    
    $
    (103,287
    )
    
    
    
    
    
    $
    (234,349
    )Pro forma adjustment to add back preferred stock accretion
    
    
    
    
    
    
    102,634
    
    
    
    
    
    
    
    237,582Pro forma net income (loss) available for shareholders
    
    
    
    
    
    $
    (653
    )
    
    
    
    
    
    $
    3,233Denominator for pro forma basic net income (loss) per share:Weighted-average shares of common stock outstanding
    
    
    
    
    
    
    32,819
    
    
    
    
    
    
    
    21,872Pro forma adjustments to reflect assumed conversion of preferred
stock (as if converted)
    
    
    
    
    
    
    10,532
    
    
    
    
    
    
    
    17,836Pro forma adjustment to reflect assumed conversion of contingent
common shares (as if converted)
    
    
    
    
    
    
    538
    
    
    
    
    
    
    
    912Shares used to compute pro forma basic net income (loss) per
common share
    
    
    
    
    
    
    43,889
    
    
    
    
    
    
    
    40,620Pro forma basic net income (loss) per share
    
    
    
    
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.08Denominator for pro forma diluted net income (loss) per share:Weighted-average shares of common stock outstanding
    
    
    
    
    
    
    32,819
    
    
    
    
    
    
    
    21,872Pro forma adjustments to reflect assumed conversion of preferred
stock (as if converted)
    
    
    
    
    
    
    10,532
    
    
    
    
    
    
    
    17,836Pro forma adjustment to reflect assumed conversion of contingent
common shares (as if converted)
    
    
    
    
    
    
    538
    
    
    
    
    
    
    
    912Pro forma adjustments to reflect assumed exercise of warrants and
stock options using treasury stock method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,819Shares used to compute pro forma diluted net income (loss) per
share
    
    
    
    
    
    
    43,889
    
    
    
    
    
    
    
    45,439Pro forma diluted net income (loss) per share
    
    
    
    
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.07Pro forma outstanding anti-dilutive securities not included in
diluted earnings per share calculationStock options and warrants
    
    
    
    
    
    
    6,970
    
    
    
    
    
    
    
    63
 Segment Information
 Disclosures About Segments of an Enterprise and Related Information,
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Product revenue
    
    $
    45,247
    
    
    $
    38,767
    
    
    $
    77,734
    
    
    $
    87,233Service and other revenue
    
    
    6,774
    
    
    
    4,948
    
    
    
    13,187
    
    
    
    7,645$
    52,021
    
    
    $
    43,715
    
    
    $
    90,921
    
    
    $
    94,878
  11




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Recent Accounting Pronouncements
 , Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations Accounting and Reporting of Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles
 NOTE C  INCOME TAXES
   12




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NOTE D  COMMITMENTS AND CONTINGENCIES
  Pending Litigation
    13




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Operating leases
  NOTE E  TEMPORARY EQUITY AND SHAREHOLDERS EQUITY (DEFICIT)
 Redeemable Convertible Preferred Stock
  Warrants
  Issuers Accounting under
FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are
Redeemable
   14




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Contingent Common Shares
 Application of Issue No 98-5 to Certain Convertible Instruments .
 NOTE F  STOCK OPTIONS
   Options OutstandingWeighted-AverageShares
    
    
    
    
    
    
    Weighted-
    
    
    Remaining
    
    
    AggregateAvailable
    
    
    Number of
    
    
    Average Option
    
    
    Contractual
    
    
    instrinsicfor Grant
    
    
    Shares
    
    
    Price
    
    
    Term (in years)
    
    
    valueBalance at December 31, 2007
    
    
    2,077
    
    
    
    6,331
    
    
    $
    4.24Granted
    
    
    (172
    )
    
    
    172
    
    
    
    11.85Exercised
    
    
    
    
    
    
    (456
    )
    
    
    2.57Cancelled
    
    
    6
    
    
    
    (38
    )
    
    
    6.63Balance at June 30, 2008
    
    
    1,911
    
    
    
    6,009
    
    
    $
    5.24
    
    
    
    4.95
    
    
    $
    25,265Exercisable at June 30, 2008
    
    
    
    
    
    
    2,069
    
    
    $
    3.20
    
    
    
    5.42
    
    
    $
    12,124
   15




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##### Table of Contents



Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Employee Stock Option PlansExpected term (in years)
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25Risk-free interest rate
    
    
    3.0
    %
    
    
    4.6
    %
    
    
    2.7% - 3.0
    %
    
    
    4.4% - 5.0
    %Expected volatility
    
    
    48
    %
    
    
    46
    %
    
    
    46% - 48
    %
    
    
    65
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected forfeiture rate
    
    
    5.4
    %
    
    
    0.0
    %
    
    
    5.4
    %
    
    
    0.0
    %
 NOTE G  RELATED PARTY TRANSACTIONS
  NOTE
H  INVESTMENT IN COMPACT PARTICLE ACCELERATION CORPORATION
    16




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
(unaudited)
 June 30, 2008Tomo
    
    
    CPAC
    
    
    Adjustments
    
    
    ConsolidatedCurrent assets
    
    $
    288,446
    
    
    $
    4,922
    
    
    $
    (421
    )
    
    $
    292,947Investment in affiliate
    
    
    1,901
    
    
    
    
    
    
    
    (1,901
    )
    
    
    Other non-current assets, net
    
    
    35,744
    
    
    
    2,359
    
    
    
    
    
    
    
    38,103TOTAL ASSETS
    
    $
    326,091
    
    
    $
    7,281
    
    
    $
    (2,322
    )
    
    $
    331,050Current liabilities
    
    $
    88,915
    
    
    $
    820
    
    
    $
    (421
    )
    
    $
    89,314Other non-current liabilities
    
    
    5,502
    
    
    
    
    
    
    
    
    
    
    
    5,502Noncontrolling interests
    
    
    
    
    
    
    
    
    
    
    (1,485
    )
    
    
    (1,485
    )Common stock
    
    
    502
    
    
    
    148
    
    
    
    (33
    )
    
    
    617Additional paid-in capital
    
    
    656,791
    
    
    
    8,253
    
    
    
    (1,868
    )
    
    
    663,176Accumulated other comprehensive loss
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    (36
    )Accumulated deficit
    
    
    (425,583
    )
    
    
    (1,940
    )
    
    
    1,485
    
    
    
    (426,038
    )TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    326,091
    
    
    $
    7,281
    
    
    $
    (2,322
    )
    
    $
    331,050
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(unaudited)
 Three months ended June 30, 2008
    
    
    Six months ended June 30, 2008Tomo
    
    
    CPAC
    
    
    Adjustments
    
    
    Consolidated
    
    
    Tomo
    
    
    CPAC
    
    
    Adjustments
    
    
    ConsolidatedRevenue
    
    $
    52,021
    
    
    $
    
    
    
    $
    
    
    
    $
    52,021
    
    
    $
    90,921
    
    
    $
    
    
    
    $
    
    
    
    $
    90,921Cost of revenue
    
    
    39,496
    
    
    
    
    
    
    
    
    
    
    
    39,496
    
    
    
    70,178
    
    
    
    
    
    
    
    
    
    
    
    70,178Gross profit
    
    
    12,525
    
    
    
    
    
    
    
    
    
    
    
    12,525
    
    
    
    20,743
    
    
    
    
    
    
    
    
    
    
    
    20,743Operating expenses:Research and development
    
    
    8,366
    
    
    
    1,678
    
    
    
    
    
    
    
    10,044
    
    
    
    17,891
    
    
    
    1,678
    
    
    
    
    
    
    
    19,569Selling, general and administrative
    
    
    13,371
    
    
    
    264
    
    
    
    
    
    
    
    13,635
    
    
    
    24,039
    
    
    
    264
    
    
    
    
    
    
    
    24,303Total operating expenses
    
    
    21,737
    
    
    
    1,942
    
    
    
    
    
    
    
    23,679
    
    
    
    41,930
    
    
    
    1,942
    
    
    
    
    
    
    
    43,872Income (loss) from operations
    
    
    (9,212
    )
    
    
    (1,942
    )
    
    
    
    
    
    
    (11,154
    )
    
    
    (21,187
    )
    
    
    (1,942
    )
    
    
    
    
    
    
    (23,129
    )Other income
    
    
    1,000
    
    
    
    2
    
    
    
    
    
    
    
    1,002
    
    
    
    2,689
    
    
    
    2
    
    
    
    
    
    
    
    2,691Income (loss) before income tax and
noncontrolling interests
    
    
    (8,212
    )
    
    
    (1,940
    )
    
    
    
    
    
    
    (10,152
    )
    
    
    (18,498
    )
    
    
    (1,940
    )
    
    
    
    
    
    
    (20,438
    )Income tax expense (benefit)
    
    
    (1,806
    )
    
    
    
    
    
    
    
    
    
    
    (1,806
    )
    
    
    (5,920
    )
    
    
    
    
    
    
    
    
    
    
    (5,920
    )Income (loss) before noncontrolling
interests
    
    
    (6,406
    )
    
    
    (1,940
    )
    
    
    
    
    
    
    (8,346
    )
    
    
    (12,578
    )
    
    
    (1,940
    )
    
    
    
    
    
    
    (14,518
    )Noncontrolling interests
    
    
    
    
    
    
    
    
    
    
    (1,485
    )
    
    
    (1,485
    )
    
    
    
    
    
    
    
    
    
    
    (1,485
    )
    
    
    (1,485
    )Net income (loss)
    
    $
    (6,406
    )
    
    $
    (1,940
    )
    
    $
    1,485
    
    
    $
    (6,861
    )
    
    $
    (12,578
    )
    
    $
    (1,940
    )
    
    $
    1,485
    
    
    $
    (13,033
    )
 NOTE I  OTHER EVENTS
    17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our unaudited condensed consolidated financial statements and related
notes included elsewhere in this Form 10-Q . It should also be read in conjunction with our audited
consolidated financial statements and related notes included in our Annual Report on Form 10-K for
the year ended December 31, 2007. 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
   Financial Performance
  New Incoming Orders
 
    
    An important measure of our future financial performance is the value of new incoming
orders for equipment. During the three months ended June 30, 2008, we received new
incoming orders totaling $72.9 million, an 11% decrease from the three months ended June
30, 2007, but a 33% increase from the first quarter of 2008.
  18




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##### Table of Contents




    
    The dollar value of new incoming orders could be negatively impacted by the current
global economic conditions and the tightening of credit markets. Since the Hi Art
system is a major capital expenditure and may require funding through a credit facility
or lease arrangement, customers may have difficulty obtaining the necessary credit. In
addition, potential new customers may delay placing capital equipment orders in such
situations, or may choose to purchase equipment that is less costly. In the last few
months, some United States orders we expected to close have not been placed, which we
believe might be the result of concerns about economic conditions.
    
    We have experienced increased competition in the marketplace as competitors have
begun marketing products that they claim to be similar to the Hi Art system. We believe
this has created some market confusion surrounding the Hi Art system and has prevented
our involvement in a number of potential sales opportunities. We intend to selectively
increase sales force coverage and to expand product features in order to access a larger
proportion of market opportunities in the future. Our market share could decrease if we
are unable to execute these intentions.
 Backlog
   Revenue
  
    
    The Hi Art system has a lengthy sales cycle. We generally recognize revenue from a
system sale upon customer acceptance, which usually occurs three to four weeks after
delivery. Each installation represents a significant component of our revenue for a
particular period. While we believe that it is highly likely we will deliver the
majority of units in backlog within 12 months, it occasionally takes longer until a
system has been installed and accepted by the customer. Therefore, if a few customers
defer installation of the Hi Art system for even a short time, recognition of a
significant amount of revenue may be deferred to a subsequent period.
    
    Our mix of customers may impact our average selling prices. Increased sales of the
Hi Art system outside of North America have tended to favorably impact our gross margins
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.
    
    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 influence the market demand
of the Hi Art system. To compete favorably with our competitors, we may need to offer
additional features that could require substantial internal resources to develop.
    
    Our focus on sales to for-profit, multi-center customers may require us to lower the
selling price of the Hi Art system, as these customers tend to be more price conscious
and may be motivated by quantity discounts. In addition, we are not experienced in
working with many of these for-profit, multi-center customers. These orders may remain
in backlog longer than our historical experience with single unit orders. These orders
tend to install sequentially and over a longer
period of time. It is more challenging to predict the installation timelines for these
types of orders, particularly given our limited history with such customers.
  19




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Customer concentration.
 Geographic breakdown
 Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007North America
    
    $
    32,822
    
    
    $
    24,399
    
    
    $
    62,697
    
    
    $
    49,864Europe
    
    
    10,911
    
    
    
    10,773
    
    
    
    15,696
    
    
    
    33,342Asia-Pacific
    
    
    8,288
    
    
    
    8,543
    
    
    
    12,528
    
    
    
    11,672$
    52,021
    
    
    $
    43,715
    
    
    $
    90,921
    
    
    $
    94,878
 Cost of revenue
  Component supply and cost.
 Service and support expenses.
  Operating expenses
  Nonoperating expenses
   20




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##### Table of Contents



Interest income
  Income tax expenses
 Multiple taxing jurisdictions and projected financial earnings or losses.
 Income tax expense reserves.
 Research and development income tax credit.
 Noncontrolling interests
   21




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##### Table of Contents



Results of Operations
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    75.9
    %
    
    
    66.8
    %
    
    
    77.2
    %
    
    
    61.7
    %Gross profit
    
    
    24.1
    %
    
    
    33.2
    %
    
    
    22.8
    %
    
    
    38.3
    %Operating expenses:Research and development
    
    
    19.3
    %
    
    
    17.6
    %
    
    
    21.5
    %
    
    
    15.6
    %Selling, general and administrative
    
    
    26.2
    %
    
    
    20.8
    %
    
    
    26.7
    %
    
    
    18.7
    %Total operating expenses
    
    
    45.5
    %
    
    
    38.4
    %
    
    
    48.2
    %
    
    
    34.3
    %Income (loss) from operations
    
    
    -21.4
    %
    
    
    -5.2
    %
    
    
    -25.4
    %
    
    
    4.0
    %Other income
    
    
    1.9
    %
    
    
    2.5
    %
    
    
    3.0
    %
    
    
    1.2
    %Income (loss) before income tax and noncontrolling interests
    
    
    -19.5
    %
    
    
    -2.7
    %
    
    
    -22.4
    %
    
    
    5.2
    %Income tax expense (benefit)
    
    
    -3.5
    %
    
    
    -1.2
    %
    
    
    -6.5
    %
    
    
    1.8
    %Noncontrolling interests
    
    
    -2.9
    %
    
    
    0.0
    %
    
    
    -1.6
    %
    
    
    0.0
    %Net income (loss)
    
    
    -13.1
    %
    
    
    -1.5
    %
    
    
    -14.3
    %
    
    
    3.4
    %
 Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Revenue
   Cost of revenue
    22




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##### Table of Contents



Research and development expenses
  Selling, general and administrative expenses
  Share-based compensation
  Other income (expense)
  Income tax expense (benefit)
  Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Revenue
    23




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##### Table of Contents



Cost of revenue
   Research and development expenses
  Selling, general and administrative expenses
  Share-based compensation
  Other income (expense)
  Income tax expense (benefit)
   24




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##### Table of Contents



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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##### Table of Contents



Financial Condition
  Loans and Available Borrowings
  Contractual Obligations and Commitments
  Operating Capital and Capital Expenditure Requirements
  
    
    revenue generated by sales of the Hi Art system and service contracts;
    
    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.
  Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   26




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##### Table of Contents



Investments
 Fair Value Measurements Effective Date of FASB Statement No. 157
 
    
    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.
  Investment
in CPAC
 Consolidated
Financial Statements
 Recent Accounting Pronouncements
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles
  27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
     
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Commitments and Contingencies
  28




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##### Table of Contents



Item 1A. Risk Factors
  We currently 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.
  Since substantially all of our revenue is derived from sales of the Hi Art system, and because
of the long sales cycle and high unit price of the Hi Art system, results will very significantly
from period to period. These fluctuations in revenue may make it difficult to compare our results
of operations to prior periods.
  Our ability to maintain revenue growth and increase our profitability depends in part on
maintaining our average selling prices and increasing our gross margins, which we may not be able
to achieve.
   29




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##### Table of Contents



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.
  We may be delayed or prevented from implementing our long-term sales strategy if we fail to
implement enhancements to the system in a timely manner and also fail to educate clinicians and
patients about the benefits and functionality of the Hi Art system.
   Our sales may be impacted, or we may be faced with order cancellations, if economic conditions in
the United States or elsewhere worsen.
   30




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##### Table of Contents



We rely on local distributors to market and distribute the Hi Art system in key markets.
  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.
   Our ability to increase our profitability depends in part on increasing our gross margins in the
service business, which we may not be able to achieve.
  Our success will depend on our ability to attract and retain qualified personnel as well as
effective management of our growth.
   31




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##### Table of Contents



We recently invested in continued development of a new compact proton therapy system through a
separate entity. If this development project is unsuccessful, or we are unable to raise the
additional capital that may be necessary for this project on acceptable terms, our ability to
diversify our business could be impaired.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Sales of Unregistered Securities
   (b) Use of Proceeds from Public Offering of Common Stock
     32




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##### Table of Contents



(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
  Proposal One
  For
    
    
    WithheldThomas Rockwell Mackie
    
    
    42,686,091
    
    
    
    372,124John J. McDonough
    
    
    41,516,940
    
    
    
    1,541,275Frances S. Taylor
    
    
    42,814,791
    
    
    
    243,424
  For
    
    
    WithheldJohn J. Greisch
    
    
    42,872,678
    
    
    
    185,537
  Proposal Two
  
    
    
    40,761,824
    
    
    Votes For
    
    
    1,987,464
    
    
    Votes Against
    
    
    308,927
    
    
    Abstentions
  
 Item 5. Other Information
   33




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##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description2.1
    
    
    Equity Interest Transfer Agreement, dated April 17, 2008. (1)*10.1
    
    
    Stock Purchase Agreement dated as of April 25, 2008 by and among Compact Particle Acceleration
Corporation, TomoTherapy Incorporated and the other shareholders named therein. (2)10.2
    
    
    Shareholder Agreement dated as of April 25, 2008 by and among Compact Particle Acceleration
Corporation, TomoTherapy Incorporated and the other shareholders named therein. (2)10.3
    
    
    Investors Rights Agreement for Compact Particle Acceleration Corporation dated as of April 25, 2008
by and among Compact Particle Acceleration Corporation, TomoTherapy Incorporated and the other
shareholders named therein. (2)10.4
    
    
    Limited Exclusive License Agreement for Dielectric Wall Accelerator Technology for Particle and
Radiotherapy dated as of February 23, 2007 between The Regents of the University of California and
TomoTherapy Incorporated. (2)*10.5
    
    
    Amendment One dated as of April 8, 2008 to Limited Exclusive Patent License Agreement for Dielectric
Wall Accelerator Technology for Particle and Radiotherapy between Lawrence Livermore National
Security, LLC and TomoTherapy Incorporated. (2)*10.6
    
    
    Limited Exclusive Sublicense Agreement dated as of April 25, 2008 for Dielectric Wall Accelerator
Technology between TomoTherapy Incorporated and Compact Particle Acceleration Corporation. (2)*10.7
    
    
    Supply Agreement dated June 25, 2008 between Hitachi Medical Corporation and TomoTherapy Incorporated.
(3)*31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (4)31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (4)32.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)32.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (4)
 
 (1)
    
    Previously filed as an exhibit to Form 8-K/A on April 21, 2008.(2)
    
    Previously filed as an exhibit to Form 8-K on April 28, 2008.(3)
    
    Previously filed as an exhibit to Form 8-K on June 30, 2008.(4)
    
    Filed as an exhibit to this Form 10-Q.*
    
    Confidential treatment has been requested for portions of this exhibit. These portions have
been omitted from the Form 8-K and submitted separately to the Securities and Exchange
Commission.  34




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##### Table of Contents



SIGNATURES
   TOMOTHERAPY INCORPORATED/s/ Frederick A. RobertsonFrederick A. RobertsonChief Executive OfficerTOMOTHERAPY INCORPORATED/s/ Stephen C. HathawayStephen C. HathawayChief Financial Officer and Treasurer  35




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##### Table of Contents



EXHIBIT INDEX
 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.
  36