##### 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, 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
    
    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
 Not Applicable
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 Yes o No þ




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##### 



TomoTherapy Incorporated and Subsidiaries
Index
 PagePart I. FINANCIAL INFORMATIONItem 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
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    32Exhibit 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)
 June 30,
    
    
    December 31,2010
    
    
    2009ASSETSCash and cash equivalents (CPAC balances of $4,125 and $1,590, respectively)
    
    $
    99,240
    
    
    $
    76,108Short-term investments
    
    
    46,434
    
    
    
    78,225Receivables, net
    
    
    32,915
    
    
    
    33,559Inventories, net
    
    
    53,204
    
    
    
    47,669Prepaid expenses and other current assets (CPAC balances of $498 and $494, respectively)
    
    
    5,507
    
    
    
    3,633Total current assets
    
    
    237,300
    
    
    
    239,194Property and equipment, net (CPAC balances of $1,738 and $555, respectively)
    
    
    18,198
    
    
    
    18,628Other non-current assets, net (CPAC balances of $25 and $30, respectively)
    
    
    10,588
    
    
    
    12,429TOTAL ASSETS
    
    $
    266,086
    
    
    $
    270,251LIABILITIES AND EQUITYAccounts payable (CPAC balances of $255 and $24, respectively)
    
    $
    11,896
    
    
    $
    6,269Accrued expenses (CPAC balances of $102 and $20, respectively)
    
    
    20,273
    
    
    
    19,588Accrued warranty
    
    
    3,776
    
    
    
    4,173Deferred revenue
    
    
    31,506
    
    
    
    34,145Customer deposits
    
    
    11,145
    
    
    
    13,266Total current liabilities
    
    
    78,596
    
    
    
    77,441Other non-current liabilities (CPAC balances of $18 and $18, respectively)
    
    
    4,404
    
    
    
    5,475TOTAL LIABILITIES
    
    
    83,000
    
    
    
    82,916COMMITMENTS AND CONTINGENCIES (Note G)Preferred stock, $1 per share par value, 10,000,000 shares authorized at June 30, 2010 and
December 31, 2009; no shares issued and outstanding at June 30, 2010 and December 31, 2009
    
    
    
    
    
    
    Common stock, $0.01 per share par value, 200,000,000 shares authorized at June 30, 2010 and
December 31, 2009; 54,155,474 and 54,106,338 shares issued and outstanding at June 30, 2010 and
53,980,728 and 53,938,955 shares issued and outstanding at December 31, 2009
    
    
    518
    
    
    
    515Additional paid-in capital
    
    
    671,685
    
    
    
    667,177Treasury stock, 49,136 and 41,773 shares at cost at June 30, 2010 and December 31, 2009, respectively
    
    
    (157
    )
    
    
    (137
    )Accumulated other comprehensive loss
    
    
    (1,084
    )
    
    
    (268
    )Accumulated deficit
    
    
    (495,464
    )
    
    
    (483,863
    )Total shareholders equity
    
    
    175,498
    
    
    
    183,424Noncontrolling interests
    
    
    7,588
    
    
    
    3,911TOTAL EQUITY
    
    
    183,086
    
    
    
    187,335TOTAL LIABILITIES AND EQUITY
    
    $
    266,086
    
    
    $
    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 June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Product
    
    $
    34,242
    
    
    $
    30,552
    
    
    $
    63,471
    
    
    $
    51,685Service and other
    
    
    13,388
    
    
    
    10,528
    
    
    
    26,239
    
    
    
    20,018Total revenue
    
    
    47,630
    
    
    
    41,080
    
    
    
    89,710
    
    
    
    71,703Cost of revenue:Product
    
    
    17,354
    
    
    
    14,253
    
    
    
    30,139
    
    
    
    25,998Service and other
    
    
    17,818
    
    
    
    18,312
    
    
    
    34,509
    
    
    
    34,651Total cost of revenue
    
    
    35,172
    
    
    
    32,565
    
    
    
    64,648
    
    
    
    60,649Gross profit
    
    
    12,458
    
    
    
    8,515
    
    
    
    25,062
    
    
    
    11,054Operating expenses:Research and development
    
    
    8,960
    
    
    
    7,020
    
    
    
    16,500
    
    
    
    12,869Selling, general and administrative
    
    
    11,910
    
    
    
    11,224
    
    
    
    22,944
    
    
    
    21,876Total operating expenses
    
    
    20,870
    
    
    
    18,244
    
    
    
    39,444
    
    
    
    34,745Loss from operations
    
    
    (8,412
    )
    
    
    (9,729
    )
    
    
    (14,382
    )
    
    
    (23,691
    )Other income (expense):Interest income
    
    
    416
    
    
    
    695
    
    
    
    947
    
    
    
    1,392Interest expense
    
    
    (12
    )
    
    
    (15
    )
    
    
    (23
    )
    
    
    (29
    )Other expense, net
    
    
    (578
    )
    
    
    (107
    )
    
    
    (1,026
    )
    
    
    (363
    )Total other income (expense)
    
    
    (174
    )
    
    
    573
    
    
    
    (102
    )
    
    
    1,000Loss before income taxes
    
    
    (8,586
    )
    
    
    (9,156
    )
    
    
    (14,484
    )
    
    
    (22,691
    )Income tax expense (benefit)
    
    
    10
    
    
    
    (318
    )
    
    
    (34
    )
    
    
    (418
    )Net loss
    
    
    (8,596
    )
    
    
    (8,838
    )
    
    
    (14,450
    )
    
    
    (22,273
    )Noncontrolling interests
    
    
    1,673
    
    
    
    1,715
    
    
    
    2,849
    
    
    
    2,151Net loss attributable to shareholders
    
    $
    (6,923
    )
    
    $
    (7,123
    )
    
    $
    (11,601
    )
    
    $
    (20,122
    )Weighted-average common shares outstanding 
basic and diluted
    
    
    51,713
    
    
    
    50,592
    
    
    
    51,640
    
    
    
    50,592Loss per common share  basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.14
    )
    
    $
    (0.22
    )
    
    $
    (0.40
    )
   4




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Six Months Ended June 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (14,450
    )
    
    $
    (22,273
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    5,182
    
    
    
    5,048Share-based compensation
    
    
    3,926
    
    
    
    2,872Deferred income tax benefit
    
    
    (89
    )
    
    
    (458
    )Other noncash items
    
    
    
    
    
    
    93Changes in operating assets and liabilities:Receivables, net
    
    
    429
    
    
    
    11,528Inventories, net
    
    
    (6,126
    )
    
    
    1,800Prepaid expenses and other current assets
    
    
    (1,539
    )
    
    
    (798
    )Accounts payable
    
    
    5,653
    
    
    
    1,419Accrued expenses
    
    
    736
    
    
    
    (1,119
    )Accrued warranty
    
    
    (397
    )
    
    
    (2,524
    )Deferred revenue
    
    
    (3,487
    )
    
    
    (5,440
    )Customer deposits
    
    
    (2,121
    )
    
    
    348Net cash used in operating activities
    
    
    (12,283
    )
    
    
    (9,504
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,503
    )
    
    
    (1,445
    )Purchases of short-term investments
    
    
    
    
    
    
    (7,499
    )Proceeds from sales and maturities of short-term investments
    
    
    31,150
    
    
    
    16,626Other investing activities
    
    
    (450
    )
    
    
    (2,080
    )Net cash provided by investing activities
    
    
    28,197
    
    
    
    5,602Cash flows from financing activities:Payments on notes payable
    
    
    (68
    )
    
    
    (69
    )Repurchases of common stock
    
    
    (20
    )
    
    
    (26
    )Proceeds from exercises of stock options and warrants
    
    
    585
    
    
    
    2Proceeds from issuance of CPAC common stock
    
    
    6,526
    
    
    
    6,864Net cash provided by financing activities
    
    
    7,023
    
    
    
    6,771Effect of exchange rate changes on cash and cash equivalents
    
    
    195
    
    
    
    371Increase in cash and cash equivalents
    
    
    23,132
    
    
    
    3,240Cash and cash equivalents at beginning of period
    
    
    76,108
    
    
    
    65,967Cash and cash equivalents at end of period
    
    $
    99,240
    
    
    $
    69,207
   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 Equity(As adjusted,Note B)Balance at December 31, 2008
    
    $
    506
    
    
    $
    659,379
    
    
    $
    
    
    
    $
    202
    
    
    $
    (446,493
    )
    
    $
    2,155
    
    
    $
    215,749Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,122
    )
    
    
    (2,151
    )
    
    
    (22,273
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    
    
    
    
    
    (140
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,413
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,863
    
    
    
    6,863Exercise of common stock warrants
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Share-based compensation expense
    
    
    
    
    
    
    2,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,872Balance at June 30, 2009
    
    $
    506
    
    
    $
    662,253
    
    
    $
    (26
    )
    
    $
    62
    
    
    $
    (466,615
    )
    
    $
    6,867
    
    
    $
    203,047Balance at December 31, 2009
    
    $
    515
    
    
    $
    667,177
    
    
    $
    (137
    )
    
    $
    (268
    )
    
    $
    (483,863
    )
    
    $
    3,911
    
    
    $
    187,335Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,601
    )
    
    
    (2,849
    )
    
    
    (14,450
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (816
    )
    
    
    
    
    
    
    
    
    
    
    (816
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,266
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,526
    
    
    
    6,526Issuance of restricted stock
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    2
    
    
    
    583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Share-based compensation expense
    
    
    
    
    
    
    3,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,926Balance at June 30, 2010
    
    $
    518
    
    
    $
    671,685
    
    
    $
    (157
    )
    
    $
    (1,084
    )
    
    $
    (495,464
    )
    
    $
    7,588
    
    
    $
    183,086
   6




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE A  DESCRIPTION OF BUSINESS
 Organization
  NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Basis of Presentation
  Use of Estimates
  Fair Value of Financial Instruments
  Revenue Recognition
   7




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
         Capitalized Software Development Costs
   8




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
 Share-Based Compensation
  Income Taxes
   Recent Accounting Pronouncements
  NOTE C  SUPPLEMENTAL FINANCIAL INFORMATION
 Cash and Cash Equivalents
  Short-term Investments
   9




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
  June 30, 2010Cost basis
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Fair valueU.S. government and U.S. governmental
agency securities
    
    $
    33,964
    
    
    $
    650
    
    
    $
    
    
    
    $
    34,614Corporate bonds
    
    
    11,620
    
    
    
    200
    
    
    
    
    
    
    
    11,820$
    45,584
    
    
    $
    850
    
    
    $
    
    
    
    $
    46,434
 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
  June 30, 2010
    
    
    December 31, 2009Cost basis
    
    
    Fair value
    
    
    Cost basis
    
    
    Fair valueDue in one year or less
    
    $
    31,809
    
    
    $
    32,190
    
    
    $
    48,345
    
    
    $
    48,809Due after one year through five years
    
    
    13,775
    
    
    
    14,244
    
    
    
    28,520
    
    
    
    29,416$
    45,584
    
    
    $
    46,434
    
    
    $
    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.
  Receivables, net
    10




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
 Inventories, net
   June 30,
    
    
    December 31,2010
    
    
    2009Raw materials
    
    $
    41,645
    
    
    $
    40,091Work-in-process
    
    
    5,118
    
    
    
    1,847Finished goods
    
    
    6,441
    
    
    
    5,731$
    53,204
    
    
    $
    47,669
 Accrued Expenses
  June 30,
    
    
    December 31,2010
    
    
    2009Commissions, severance and payroll-related
    
    $
    3,506
    
    
    $
    4,531Bonuses
    
    
    2,096
    
    
    
    1,705Accrued distributor relations costs
    
    
    5,188
    
    
    
    5,188Sales, use and other indirect taxes
    
    
    3,268
    
    
    
    3,450Other
    
    
    6,215
    
    
    
    4,714$
    20,273
    
    
    $
    19,588
 Accrued Warranty
   June 30,
    
    
    June 30,2010
    
    
    2009Balance, beginning of period
    
    $
    4,173
    
    
    $
    7,431Charged to cost of revenue
    
    
    3,210
    
    
    
    3,541Charged to selling, general and administrative
    
    
    
    
    
    
    282Adjustments related to change in estimate
    
    
    (940
    )
    
    
    (1,973
    )Actual product warranty expenditures
    
    
    (2,667
    )
    
    
    (4,374
    )Balance, end of period
    
    $
    3,776
    
    
    $
    4,907
 Deferred Revenue
    11




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
  Other Comprehensive Income (Loss)
  NOTE D  LOSS PER COMMON SHARE
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Stock options
    
    
    4,916
    
    
    
    5,768
    
    
    
    4,916
    
    
    
    5,768Restricted stock
    
    
    2,321
    
    
    
    1,517
    
    
    
    2,321
    
    
    
    1,5177,237
    
    
    
    7,285
    
    
    
    7,237
    
    
    
    7,285
 NOTE E  SEGMENT INFORMATION
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Americas (1)
    
    $
    26,323
    
    
    $
    25,365
    
    
    $
    39,656
    
    
    $
    43,604Europe and Middle East
    
    
    16,001
    
    
    
    12,313
    
    
    
    35,564
    
    
    
    18,588Asia-Pacific
    
    
    5,306
    
    
    
    3,402
    
    
    
    14,490
    
    
    
    9,511$
    47,630
    
    
    $
    41,080
    
    
    $
    89,710
    
    
    $
    71,703
 (1)
    
    Americas contains revenue from the United States of $25.8 million and $24.4 million for
the three months ended June 30, 2010 and 2009, respectively. For the six months ended June
30, 2010 and 2009, Americas contains revenue from the United States of $38.5 million and
$42.1 million, respectively.  12




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
 NOTE F  INCOME TAXES
   NOTE G  COMMITMENTS AND CONTINGENCIES
  Securities Litigation
 et al.
    13




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
  Stockholder Derivative Actions
    Reserve for Contingency
  Operating Leases
    14




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
 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
    
    
    $
    5.01Exercised
    
    
    
    
    
    
    (217
    )
    
    
    2.69
    
    
    
    (117
    )
    
    
    4.80Cancelled
    
    
    82
    
    
    
    (214
    )
    
    
    7.69
    
    
    
    (50
    )
    
    
    4.81Balance at June 30, 2010
    
    
    3,749
    
    
    
    4,916
    
    
    $
    5.01
    
    
    
    2,321
    
    
    $
    5.02Exercisable at June 30, 2010
    
    
    
    
    
    
    4,249
    
    
    $
    4.61
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected term (years)
    
    
    N/A
    
    
    
    4.25
    
    
    
    N/A
    
    
    
    4.25Risk-free interest rate
    
    
    N/A
    
    
    
    2.0  2.8
    %
    
    
    N/A
    
    
    
    1.9  2.8
    %Expected volatility
    
    
    N/A
    
    
    
    55
    %
    
    
    N/A
    
    
    
    53-55
    %Expected dividend
    
    
    N/A
    
    
    
    0
    %
    
    
    N/A
    
    
    
    0
    %Expected forfeiture rate
    
    
    N/A
    
    
    
    5.5
    %
    
    
    N/A
    
    
    
    5.5
    %Weighted-average fair value at grant date
    
    
    N/A
    
    
    $
    2.63
    
    
    
    N/A
    
    
    $
    2.64
 NOTE I  RELATED PARTY TRANSACTIONS
   15




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##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Unaudited)
 NOTE J  INVESTMENT IN COMPACT PARTICLE ACCELERATION CORPORATION
    NOTE K  RESTRUCTURING
  Balance at December 31, 2009
    
    $
    998Additions
    
    
    Payments
    
    
    (993
    )Balance at June 30, 2010
    
    $
    5
   16




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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
   17




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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 shipment 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 June 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 require us to lower 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.
 
    
    The System is a major capital equipment item that represents a significant purchase for
most of our customers. While we believe macroeconomic conditions are beginning to improve,
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.
  18




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##### Table of Contents



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 in reducing 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 spare parts, increasing the price for some of
our older annual service contracts, and training our personnel to improve their
problem-solving capabilities. We believe that achieving certain of 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 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
   19




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##### Table of Contents



Selling, general and administrative expenses
   Other income (expense)
  Interest income
  Income tax expense (benefit)
   Noncontrolling interests
   20




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Product
    
    
    71.9
    %
    
    
    74.4
    %
    
    
    70.8
    %
    
    
    72.1
    %Service and other
    
    
    28.1
    
    
    
    25.6
    
    
    
    29.2
    
    
    
    27.9Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Product
    
    
    36.4
    
    
    
    34.7
    
    
    
    33.6
    
    
    
    36.3Service and other
    
    
    37.4
    
    
    
    44.6
    
    
    
    38.5
    
    
    
    48.3Total cost of revenue
    
    
    73.8
    
    
    
    79.3
    
    
    
    72.1
    
    
    
    84.6Gross profit
    
    
    26.2
    
    
    
    20.7
    
    
    
    27.9
    
    
    
    15.4Operating expenses:Research and development
    
    
    18.8
    
    
    
    17.1
    
    
    
    18.4
    
    
    
    18.0Selling, general and administrative
    
    
    25.0
    
    
    
    27.3
    
    
    
    25.5
    
    
    
    30.5Total operating expenses
    
    
    43.8
    
    
    
    44.4
    
    
    
    43.9
    
    
    
    48.5Loss from operations
    
    
    (17.6
    )
    
    
    (23.7
    )
    
    
    (16.0
    )
    
    
    (33.1
    )Other income (expense)
    
    
    (0.4
    )
    
    
    1.4
    
    
    
    (0.1
    )
    
    
    1.4Loss before income tax
    
    
    (18.0
    )
    
    
    (22.3
    )
    
    
    (16.1
    )
    
    
    (31.7
    )Income tax expense (benefit)
    
    
    0.0
    
    
    
    (0.8
    )
    
    
    (0.0
    )
    
    
    (0.6
    )Net loss
    
    
    (18.0
    )%
    
    
    (21.5
    )%
    
    
    (16.1
    )%
    
    
    (31.1
    )%
 Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
 Revenue
  Three Months Ended June 30,2010
    
    
    2009Product revenue
    
    $
    34,242
    
    
    
    71.9
    %
    
    $
    30,552
    
    
    
    74.4
    %Service and other revenue
    
    
    13,388
    
    
    
    28.1
    
    
    
    10,528
    
    
    
    25.6$
    47,630
    
    
    
    100.0
    %
    
    $
    41,080
    
    
    
    100.0
    %
  Three Months Ended June 30,2010
    
    
    2009Americas (1)
    
    $
    26,323
    
    
    
    55.3
    %
    
    $
    25,365
    
    
    
    61.7
    %Europe and Middle East
    
    
    16,001
    
    
    
    33.6
    
    
    
    12,313
    
    
    
    30.0Asia-Pacific
    
    
    5,306
    
    
    
    11.1
    
    
    
    3,402
    
    
    
    8.3$
    47,630
    
    
    
    100.0
    %
    
    $
    41,080
    
    
    
    100.0
    %
 (1)
    
    Americas contains revenue from the United States of $25.8 million and $24.4 million
for the periods ended June 30, 2010 and 2009, respectively.    21




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##### Table of Contents



Cost of revenue
     Research and development expenses
  Three Months Ended June 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeSystem R&D
    
    $
    7,562
    
    
    $
    5,353
    
    
    $
    2,209
    
    
    
    41.3
    %Proton Project / CPAC R&D
    
    
    1,398
    
    
    
    1,667
    
    
    
    (269
    )
    
    
    (16.1
    )$
    8,960
    
    
    $
    7,020
    
    
    $
    1,940
    
    
    
    27.6
    %
  Selling, general and administrative expenses
  Other income (expense)
   22




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##### Table of Contents



Income tax expense (benefit)
  Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
 Revenue
  Six Months Ended June 30,2010
    
    
    2009Product revenue
    
    $
    63,471
    
    
    
    70.8
    %
    
    $
    51,685
    
    
    
    72.1
    %Service and other revenue
    
    
    26,239
    
    
    
    29.2
    
    
    
    20,018
    
    
    
    27.9$
    89,710
    
    
    
    100.0
    %
    
    $
    71,703
    
    
    
    100.0
    %
  Six Months Ended June 30,2010
    
    
    2009Americas (1)
    
    $
    39,656
    
    
    
    44.2
    %
    
    $
    43,604
    
    
    
    60.8
    %Europe and Middle East
    
    
    35,564
    
    
    
    39.6
    
    
    
    18,588
    
    
    
    25.9Asia-Pacific
    
    
    14,490
    
    
    
    16.2
    
    
    
    9,511
    
    
    
    13.3$
    89,710
    
    
    
    100.0
    %
    
    $
    71,703
    
    
    
    100.0
    %
 (1)
    
    Americas contains revenue from the United States of $38.5 million and $42.1 million for
the periods ended June 30, 2010 and 2009, respectively.   Cost of revenue
    23




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##### Table of Contents



Research and development expenses
  Six Months Ended June 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeSystem R&D
    
    $
    14,204
    
    
    $
    10,934
    
    
    $
    3,270
    
    
    
    29.9
    %Proton Project / CPAC R&D
    
    
    2,296
    
    
    
    1,935
    
    
    
    361
    
    
    
    18.7$
    16,500
    
    
    $
    12,869
    
    
    $
    3,631
    
    
    
    28.2
    %
  Selling, general and administrative expenses
  Other income (expense)
  Income tax benefit
  Liquidity and Capital Resources
   24




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##### Table of Contents



Financial Condition
  June 30, 2010Cost basis
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Fair valueU.S. Government and Agency securities
    
    $
    33,964
    
    
    $
    650
    
    
    $
    
    
    
    $
    34,614Corporate bonds
    
    
    11,620
    
    
    
    200
    
    
    
    
    
    
    
    11,820$
    45,584
    
    
    $
    850
    
    
    $
    
    
    
    $
    46,434
   Cash Flows
 Cash flows from operating activities
   Cash flows from investing activities
   25




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##### Table of Contents



Cash flows from financing activities
    Loans and Available Borrowings
  Contractual Obligations and Commitments
  Pending Litigation
  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.
   26




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##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   Recent Accounting Pronouncements
  
 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
   27




---



##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  If our backlog, which is an important measure of future revenue, declines, our future financial
performance will be adversely affected.
  We face competition from numerous competitors, many of which have greater resources than we do,
which may make it more difficult for us to achieve significant market penetration and maintain or
increase our prices.
   28




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##### Table of Contents



Changes in reimbursement to healthcare providers for use of the TomoTherapy treatment system could
adversely affect sales of the TomoTherapy treatment system.
   If current economic conditions in the United States and elsewhere improve, our suppliers could
experience increased demand, resulting in us experiencing longer lead times for or inadequate
supply of key components.
  Our success will depend on our ability to attract and retain qualified personnel while also
managing employee costs.
   29




---



##### Table of Contents



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
    Working capital
    
    $
    71.7Purchases of property and equipment
    
    
    18.5Purchases of test systems
    
    
    5.7Acquisition of Chengdu Twin Peak Accelerator Technology Inc.
    
    
    1.5Repayment of debt
    
    
    0.3Total net proceeds used
    
    $
    97.7
 (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)
    
    Termination Agreement, dated May 28, 2010, between the Company and Avalon Capital Group, Inc.,
Avalon Portfolio, LLC, and Avalon Technology, LLC31.1
    *
    
    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 June 1, 2010
(File No. 001-33452).*
    
    Filed herewith.  30




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##### Table of Contents



SIGNATURES
  TOMOTHERAPY INCORPORATEDDate: August 5, 2010
    By:
    /s/ Frederick A. RobertsonFrederick A. RobertsonChief Executive Officer and PresidentDate: August 5, 2010
    By:
    /s/ Thomas E. PowellThomas E. PowellChief Financial Officer and Treasurer  31




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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)
    
    Termination Agreement, dated May 28, 2010, between the Company and Avalon Capital Group, Inc.,
Avalon Portfolio, LLC, and Avalon Technology, LLC31.1
    *
    
    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 June 1, 2010
(File No. 001-33452).*
    
    Filed herewith.  32