##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




---



##### 



TomoTherapy Incorporated
Index
  
 PagePart I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed 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
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EXHIBIT INDEX
    
    
    43Exhibit 3.1Exhibit 3.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 10.7Exhibit 10.8Exhibit 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)September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCash and equivalents
    
    $
    22,135
    
    
    $
    191,780Short-term investments
    
    
    119,884
    
    
    
    Receivables, net
    
    
    25,294
    
    
    
    44,596Inventories, net
    
    
    86,616
    
    
    
    53,171Deferred tax assets
    
    
    2,279
    
    
    
    3,433Prepaid expenses and other current assets
    
    
    4,057
    
    
    
    1,622Total current assets
    
    
    260,265
    
    
    
    294,602Property and equipment, net
    
    
    22,326
    
    
    
    19,894Deferred tax assets
    
    
    20,127
    
    
    
    6,027Other non-current assets, net
    
    
    9,645
    
    
    
    6,642TOTAL ASSETS
    
    $
    312,363
    
    
    $
    327,165LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable
    
    $
    12,902
    
    
    $
    17,655Accrued expenses
    
    
    12,240
    
    
    
    21,699Accrued warranty
    
    
    5,724
    
    
    
    7,973Deferred revenue
    
    
    21,871
    
    
    
    15,517Customer deposits
    
    
    29,856
    
    
    
    20,309Total current liabilities
    
    
    82,593
    
    
    
    83,153Other non-current liabilities
    
    
    5,876
    
    
    
    5,318Total liabilities
    
    
    88,469
    
    
    
    88,471COMMITMENTS AND CONTINGENCIES (Note D)Noncontrolling interests
    
    
    5,118
    
    
    
    SHAREHOLDERS EQUITYPreferred stock, $1 par value, 10,000,000 shares authorized at September 30, 2008 and December 31,
2007; no shares
issued and outstanding at September 30, 2008 and December 31, 2007, respectively
    
    
    
    
    
    
    Common stock, $.01 par value, 200,000,000 shares authorized at September 30, 2008 and December 31, 2007;
50,268,902 and 49,740,577 shares issued and outstanding at September 30, 2008 and December 31, 2007,
respectively
    
    
    503
    
    
    
    497Additional paid-in capital
    
    
    658,243
    
    
    
    651,725Treasury stock, 1,632 shares at cost
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    (979
    )
    
    
    (523
    )Accumulated deficit
    
    
    (438,991
    )
    
    
    (413,005
    )Total shareholders equity
    
    
    218,776
    
    
    
    238,694TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    312,363
    
    
    $
    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 September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    27,374
    
    
    $
    59,221
    
    
    $
    118,295
    
    
    $
    154,099Cost of revenue
    
    
    28,281
    
    
    
    37,151
    
    
    
    98,459
    
    
    
    95,694Gross profit (loss)
    
    
    (907
    )
    
    
    22,070
    
    
    
    19,836
    
    
    
    58,405Operating expenses:Research and development
    
    
    10,947
    
    
    
    9,624
    
    
    
    30,516
    
    
    
    24,471Selling, general and administrative
    
    
    11,547
    
    
    
    11,126
    
    
    
    35,850
    
    
    
    28,844Total operating expenses
    
    
    22,494
    
    
    
    20,750
    
    
    
    66,366
    
    
    
    53,315Income (loss) from operations
    
    
    (23,401
    )
    
    
    1,320
    
    
    
    (46,530
    )
    
    
    5,090Other income (expense):Interest income
    
    
    1,032
    
    
    
    2,411
    
    
    
    3,896
    
    
    
    3,808Interest expense
    
    
    (17
    )
    
    
    (20
    )
    
    
    (34
    )
    
    
    (94
    )Other income, net
    
    
    479
    
    
    
    384
    
    
    
    323
    
    
    
    233Total other income
    
    
    1,494
    
    
    
    2,775
    
    
    
    4,185
    
    
    
    3,947Income (loss) before income tax and noncontrolling interests
    
    
    (21,907
    )
    
    
    4,095
    
    
    
    (42,345
    )
    
    
    9,037Income tax expense (benefit)
    
    
    (6,300
    )
    
    
    1,512
    
    
    
    (12,220
    )
    
    
    3,221Income (loss) before noncontrolling interests
    
    
    (15,607
    )
    
    
    2,583
    
    
    
    (30,125
    )
    
    
    5,816Noncontrolling interests
    
    
    (2,654
    )
    
    
    
    
    
    
    (4,139
    )
    
    
    Net income (loss)
    
    
    (12,953
    )
    
    
    2,583
    
    
    
    (25,986
    )
    
    
    5,816Accretion of redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (237,582
    )Net income (loss) attributable to common shareholders
    
    $
    (12,953
    )
    
    $
    2,583
    
    
    $
    (25,986
    )
    
    $
    (231,766
    )Net income (loss) per share attributable to common shareholdersBasic
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    (7.46
    )Diluted
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    (7.46
    )Weighted average common shares outstanding used in computing
net income (loss) per share attributable to common shareholdersBasic
    
    
    50,244
    
    
    
    49,130
    
    
    
    50,147
    
    
    
    31,058Diluted
    
    
    50,244
    
    
    
    54,405
    
    
    
    50,147
    
    
    
    31,058
   4




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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Nine months ended September 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (25,986
    )
    
    $
    5,816Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    6,397
    
    
    
    4,563Share-based compensation
    
    
    3,212
    
    
    
    2,519Deferred income tax provision (benefit)
    
    
    (12,876
    )
    
    
    2,510Noncontrolling interests
    
    
    (4,139
    )
    
    
    Other noncash items
    
    
    258
    
    
    
    1,063Changes in operating assets and liabilities:Receivables
    
    
    19,144
    
    
    
    (19,801
    )Inventories
    
    
    (33,565
    )
    
    
    (16,406
    )Prepaid expenses and other assets
    
    
    (2,578
    )
    
    
    (1,038
    )Accounts payable
    
    
    (4,721
    )
    
    
    (773
    )Accrued expenses
    
    
    (9,390
    )
    
    
    2,282Accrued warranty
    
    
    (2,249
    )
    
    
    1,149Deferred revenue
    
    
    6,339
    
    
    
    4,050Customer deposits
    
    
    9,547
    
    
    
    1,662Other non-current liabilities
    
    
    678
    
    
    
    Net cash used in operating activities
    
    
    (49,929
    )
    
    
    (12,404
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (6,421
    )
    
    
    (7,087
    )Purchases of test systems
    
    
    (2,777
    )
    
    
    (2,817
    )Purchases of short-term investments
    
    
    (120,064
    )
    
    
    Other investing activities
    
    
    (797
    )
    
    
    (40
    )Net cash used in investing activities
    
    
    (130,059
    )
    
    
    (9,944
    )Cash flows from financing activities:Payments on notes payable
    
    
    (81
    )
    
    
    (25
    )Proceeds from initial public offering, net of issuance costs
    
    
    
    
    
    
    184,678Proceeds from issuance of affiliates common stock
    
    
    9,257
    
    
    
    Proceeds from exercises of stock options and warrants
    
    
    1,411
    
    
    
    2,559Net cash provided by financing activities
    
    
    10,587
    
    
    
    187,212Effect of exchange rate changes on cash and equivalents
    
    
    (244
    )
    
    
    (415
    )Increase (decrease) in cash and equivalents
    
    
    (169,645
    )
    
    
    164,449Cash and equivalents at beginning of period
    
    
    191,780
    
    
    
    20,137Cash and equivalents at end of period
    
    $
    22,135
    
    
    $
    184,586
   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
   6




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Investments
   September 30, 2008Unrealized
    
    
    UnrealizedCost basis
    
    
    gains
    
    
    losses
    
    
    Fair ValueU.S. Government and Agency securities
    
    $
    91,832
    
    
    $
    385
    
    
    $
    (153
    )
    
    $
    92,064Corporate bonds
    
    
    28,232
    
    
    
    21
    
    
    
    (433
    )
    
    
    27,820$
    120,064
    
    
    $
    406
    
    
    $
    (586
    )
    
    $
    119,884
  September 30, 2008Cost basis
    
    
    Fair ValueDue in one year or less
    
    $
    46,600
    
    
    $
    46,450Due after one year through five years
    
    
    73,464
    
    
    
    73,434$
    120,064
    
    
    $
    119,884
 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
   7




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Inventories
   September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    48,299
    
    
    $
    41,405Work-in-process
    
    
    9,401
    
    
    
    8,722Finished goods
    
    
    28,916
    
    
    
    3,044$
    86,616
    
    
    $
    53,171
 Accrued Expenses
  September 30,
    
    
    December 31,2008
    
    
    2007Commissions and payroll-related
    
    $
    5,000
    
    
    $
    6,597Bonuses
    
    
    48
    
    
    
    5,249Other
    
    
    7,192
    
    
    
    9,853$
    12,240
    
    
    $
    21,699
 Warranty Cost
  September 30,
    
    
    September 30,2008
    
    
    2007Balance, beginning of period
    
    $
    7,973
    
    
    $
    5,307Charged to cost of revenue
    
    
    6,762
    
    
    
    8,225Adjustments related to change in estimate
    
    
    660
    
    
    
    388Actual product warranty expenditures
    
    
    (9,671
    )
    
    
    (7,464
    )Balance, end of period
    
    $
    5,724
    
    
    $
    6,456
 Revenue Recognition
   8




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Software Revenue Recognition Software Revenue Recognition with Respect to Certain Agreements.
 Share-Based Compensation
 Share-Based
Payment
  9




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    228
    
    
    $
    195
    
    
    $
    650
    
    
    $
    464Research and development
    
    
    350
    
    
    
    320
    
    
    
    973
    
    
    
    773Selling, general and administrative
    
    
    648
    
    
    
    393
    
    
    
    1,589
    
    
    
    1,282Income tax benefit
    
    
    (39
    )
    
    
    (111
    )
    
    
    (423
    )
    
    
    (377
    )$
    1,187
    
    
    $
    797
    
    
    $
    2,789
    
    
    $
    2,142
 Net Income (Loss) Per Share of Common Stock
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic:Net income (loss)
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    0.19Net loss attributable to common shareholders
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    (7.46
    )Diluted:Net income (loss)
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    0.19Net loss attributable to common shareholders
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    (7.46
    )Weighted average common shares outstanding used in:Basic
    
    
    50,244
    
    
    
    49,130
    
    
    
    50,147
    
    
    
    31,058Diluted
    
    
    50,244
    
    
    
    54,405
    
    
    
    50,147
    
    
    
    31,058
   Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options and warrants
    
    
    5,847
    
    
    
    34
    
    
    
    5,847
    
    
    
    94Restricted stock
    
    
    1,477
    
    
    
    
    
    
    
    1,477
    
    
    
    7,324
    
    
    
    34
    
    
    
    7,324
    
    
    
    94
  10




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Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007HistoricalNumerator:Net income (loss) attributable to common shareholders
    
    $
    (12,953
    )
    
    $
    2,583
    
    
    $
    (25,986
    )
    
    $
    (231,766
    )Denominator for basic net income (loss) per share:Weighted-average shares of common stock outstanding
    
    
    50,244
    
    
    
    49,130
    
    
    
    50,147
    
    
    
    31,058Net income (loss) attributable to common shareholders per share
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    (7.46
    )Denominator for diluted net income (loss) per share:Weighted-average shares of common stock outstanding
    
    
    50,244
    
    
    
    54,405
    
    
    
    50,147
    
    
    
    31,058Net income (loss) attributable to common shareholders per share
    
    $
    (0.26
    )
    
    $
    0.05
    
    
    $
    (0.52
    )
    
    $
    (7.46
    )Pro forma (unaudited)Numerator:Net income (loss) attributable to common shareholders
    
    
    
    
    
    $
    2,583
    
    
    
    
    
    
    $
    (231,766
    )Pro forma adjustment to add back accretion of redeemable convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237,582Pro forma net income
    
    
    
    
    
    $
    2,583
    
    
    
    
    
    
    $
    5,816Denominator for pro forma basic net income per share:Weighted-average shares of common stock outstanding
    
    
    
    
    
    
    49,130
    
    
    
    
    
    
    
    31,058Pro forma adjustments to reflect assumed conversion of preferred
stock (as if converted)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,825Pro forma adjustment to reflect assumed conversion of contingent
common shares (as if converted)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    604Shares used to compute pro forma basic net income per share
    
    
    
    
    
    
    49,130
    
    
    
    
    
    
    
    43,487Pro forma basic net income per share
    
    
    
    
    
    $
    0.05
    
    
    
    
    
    
    $
    0.13Denominator for pro forma diluted net income per share:Weighted-average shares of common stock outstanding
    
    
    
    
    
    
    54,405
    
    
    
    
    
    
    
    31,058Pro forma adjustments to reflect assumed conversion of preferred
stock (as if converted)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,825Pro forma adjustment to reflect assumed conversion of contingent
common shares (as if converted)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    604Pro forma adjustments to reflect assumed exercise of warrants and
stock options using treasury stock method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,099Shares used to compute pro forma diluted net income per share
    
    
    
    
    
    
    54,405
    
    
    
    
    
    
    
    48,586Pro forma diluted net income per share
    
    
    
    
    
    $
    0.05
    
    
    
    
    
    
    $
    0.12Pro forma outstanding anti-dilutive securities not included in diluted
earnings per share calculationStock options and warrants
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    94
 Segment Information
 Disclosures About Segments of an Enterprise and Related Information,
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Product revenue
    
    $
    20,416
    
    
    $
    53,403
    
    
    $
    98,150
    
    
    $
    140,636Service and other revenue
    
    
    6,958
    
    
    
    5,818
    
    
    
    20,145
    
    
    
    13,463$
    27,374
    
    
    $
    59,221
    
    
    $
    118,295
    
    
    $
    154,099
  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 Effective Date of
FASB Statement No. 157
 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
 Determination of the Useful
Life of Intangible Assets . Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles
  12




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NOTE C  INCOME TAXES
      NOTE D  COMMITMENTS AND CONTINGENCIES
   13




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Pending Litigation
   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 INCENTIVE PLANS
   Outstanding Stock Options
    
    
    Restricted StockShares
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Available
    
    
    Number of
    
    
    Average
    
    
    Number of
    
    
    Averagefor Grant
    
    
    Shares
    
    
    Exercise Price
    
    
    Shares
    
    
    Fair ValueBalance at December 31, 2007
    
    
    2,077
    
    
    
    6,331
    
    
    $
    4.24
    
    
    
    
    
    
    $
    Granted
    
    
    (1,750
    )
    
    
    273
    
    
    
    9.69
    
    
    
    1,477
    
    
    
    6.10Exercised
    
    
    
    
    
    
    (524
    )
    
    
    2.68
    
    
    
    
    
    
    
    Cancelled
    
    
    27
    
    
    
    (236
    )
    
    
    7.62
    
    
    
    
    
    
    
    Balance at September 30, 2008
    
    
    354
    
    
    
    5,844
    
    
    $
    4.14
    
    
    
    1,477
    
    
    $
    6.10Exercisable at September 30, 2008
    
    
    
    
    
    
    2,102
    
    
    $
    3.36
    
    
    
    
    
    
    $
    
   15




---



##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Employee Stock Option PlansExpected term (in years)
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25Risk-free interest rate
    
    
    2.7
    %
    
    
    4.6
    %
    
    
    2.7
    %
    
    
    4.6
    %Expected volatility
    
    
    48% - 49
    %
    
    
    45
    %
    
    
    46% - 49
    %
    
    
    45% - 65
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected forfeiture rate
    
    
    5.5
    %
    
    
    0.0
    %
    
    
    5.5
    %
    
    
    0.0
    %Weighted-average fair value at grant date
    
    $
    6.00
    
    
    $
    27.17
    
    
    $
    9.69
    
    
    $
    21.93
 NOTE G  RELATED PARTY TRANSACTIONS
  NOTE H INVESTMENT IN COMPACT PARTICLE ACCELERATION CORPORATION
    16




---



##### Table of Contents



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
(unaudited)
 September 30, 2008Tomo
    
    
    CPAC
    
    
    Adjustments
    
    
    ConsolidatedCurrent assets
    
    $
    256,571
    
    
    $
    3,850
    
    
    $
    (156
    )
    
    $
    260,265Investment in affiliate
    
    
    1,901
    
    
    
    
    
    
    
    (1,901
    )
    
    
    Other non-current assets, net
    
    
    49,567
    
    
    
    2,531
    
    
    
    
    
    
    
    52,098TOTAL ASSETS
    
    $
    308,039
    
    
    $
    6,381
    
    
    $
    (2,057
    )
    
    $
    312,363Current liabilities
    
    $
    82,269
    
    
    $
    480
    
    
    $
    (156
    )
    
    $
    82,593Other non-current liabilities
    
    
    5,876
    
    
    
    
    
    
    
    
    
    
    
    5,876Noncontrolling interests
    
    
    
    
    
    
    
    
    
    
    5,118
    
    
    
    5,118Common stock
    
    
    503
    
    
    
    178
    
    
    
    (178
    )
    
    
    503Additional paid-in capital
    
    
    658,243
    
    
    
    10,980
    
    
    
    (10,980
    )
    
    
    658,243Accumulated other comprehensive loss
    
    
    (979
    )
    
    
    
    
    
    
    
    
    
    
    (979
    )Accumulated deficit
    
    
    (437,873
    )
    
    
    (5,257
    )
    
    
    4,139
    
    
    
    (438,991
    )TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    308,039
    
    
    $
    6,381
    
    
    $
    (2,057
    )
    
    $
    312,363
 TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(unaudited)
 Three months ended September 30, 2008
    
    
    Nine months ended September 30, 2008Tomo
    
    
    CPAC
    
    
    Adjustments
    
    
    Consolidated
    
    
    Tomo
    
    
    CPAC
    
    
    Adjustments
    
    
    ConsolidatedRevenue
    
    $
    27,374
    
    
    $
    
    
    
    $
    
    
    
    $
    27,374
    
    
    $
    118,295
    
    
    $
    
    
    
    $
    
    
    
    $
    118,295Cost of revenue
    
    
    28,281
    
    
    
    
    
    
    
    
    
    
    
    28,281
    
    
    
    98,459
    
    
    
    
    
    
    
    
    
    
    
    98,459Gross profit (loss)
    
    
    (907
    )
    
    
    
    
    
    
    
    
    
    
    (907
    )
    
    
    19,836
    
    
    
    
    
    
    
    
    
    
    
    19,836Operating expenses:Research and development
    
    
    7,995
    
    
    
    2,952
    
    
    
    
    
    
    
    10,947
    
    
    
    25,886
    
    
    
    4,630
    
    
    
    
    
    
    
    30,516Selling, general and administrative
    
    
    11,165
    
    
    
    382
    
    
    
    
    
    
    
    11,547
    
    
    
    35,204
    
    
    
    646
    
    
    
    
    
    
    
    35,850Total operating expenses
    
    
    19,160
    
    
    
    3,334
    
    
    
    
    
    
    
    22,494
    
    
    
    61,090
    
    
    
    5,276
    
    
    
    
    
    
    
    66,366Loss from operations
    
    
    (20,067
    )
    
    
    (3,334
    )
    
    
    
    
    
    
    (23,401
    )
    
    
    (41,254
    )
    
    
    (5,276
    )
    
    
    
    
    
    
    (46,530
    )Other income
    
    
    1,477
    
    
    
    17
    
    
    
    
    
    
    
    1,494
    
    
    
    4,166
    
    
    
    19
    
    
    
    
    
    
    
    4,185Loss before income tax and
noncontrolling interests
    
    
    (18,590
    )
    
    
    (3,317
    )
    
    
    
    
    
    
    (21,907
    )
    
    
    (37,088
    )
    
    
    (5,257
    )
    
    
    
    
    
    
    (42,345
    )Income tax benefit
    
    
    (6,300
    )
    
    
    
    
    
    
    
    
    
    
    (6,300
    )
    
    
    (12,220
    )
    
    
    
    
    
    
    
    
    
    
    (12,220
    )Loss before noncontrolling interests
    
    
    (12,290
    )
    
    
    (3,317
    )
    
    
    
    
    
    
    (15,607
    )
    
    
    (24,868
    )
    
    
    (5,257
    )
    
    
    
    
    
    
    (30,125
    )Noncontrolling interests
    
    
    
    
    
    
    
    
    
    
    (2,654
    )
    
    
    (2,654
    )
    
    
    
    
    
    
    
    
    
    
    (4,139
    )
    
    
    (4,139
    )Net income (loss)
    
    $
    (12,290
    )
    
    $
    (3,317
    )
    
    $
    2,654
    
    
    $
    (12,953
    )
    
    $
    (24,868
    )
    
    $
    (5,257
    )
    
    $
    4,139
    
    
    $
    (25,986
    )
  17




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##### Table of Contents



NOTE I  OTHER EVENTS
     18




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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,
and Section 21E of the Securities Exchange Act of 1934, as amended. 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 those discussed below
under Financial Performance and Risk Factors and elsewhere in this report, 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 do not undertake any
obligation to publicly 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.
 Overview
   Financial Performance
  New Incoming Orders
 
    
    An important measure of our future financial performance is the value of new incoming
orders for equipment. We received new incoming orders totaling $37 million for the three
months ended September 30, 2008.
    
    The amount of new incoming orders could be negatively impacted by challenging global
economic conditions and the tightening of credit markets. Since the Hi Art system is a
major capital expenditure for many of our customers, our customers may require funding
through a credit facility or lease arrangement, and customers may have difficulty
obtaining the necessary credit. In addition, potential new customers may delay placing
capital equipment orders in the current economic environment, 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 eliminated a number of potential sales opportunities. We intend to
selectively increase sales force coverage and to expand product features, as evidenced by
our recently announced plans to launch TomoDirect TM software, in order to
access increased market opportunities in the future. Our market share could decrease if
we are unable to execute this plan.
  19




---



##### Table of Contents



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. 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 new 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 have a limited
history of working with 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, and it is more challenging to
predict the installation timelines for these types of orders.
 Customer concentration.
  20




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##### Table of Contents



Geographic breakdown
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007North America
    
    $
    21,949
    
    
    $
    29,686
    
    
    $
    84,646
    
    
    $
    79,550Europe
    
    
    4,780
    
    
    
    12,090
    
    
    
    20,476
    
    
    
    45,432Asia-Pacific
    
    
    645
    
    
    
    17,445
    
    
    
    13,173
    
    
    
    29,117$
    27,374
    
    
    $
    59,221
    
    
    $
    118,295
    
    
    $
    154,099
 Cost of revenue
  Component supply and cost.
 Service and support expenses.
  Operating expenses
  Nonoperating expenses
  Interest income
   21




---



##### Table of Contents



Income tax expense (benefit)
 Multiple taxing jurisdictions and projected financial earnings or losses.
 Income tax expense reserves.
 Research and development income tax credit.
 Noncontrolling interests
  Results of Operations
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    103.3
    %
    
    
    62.7
    %
    
    
    83.2
    %
    
    
    62.1
    %Gross profit (loss)
    
    
    -3.3
    %
    
    
    37.3
    %
    
    
    16.8
    %
    
    
    37.9
    %Operating expenses:Research and development
    
    
    40.0
    %
    
    
    16.3
    %
    
    
    25.8
    %
    
    
    15.9
    %Selling, general and administrative
    
    
    42.2
    %
    
    
    18.8
    %
    
    
    30.3
    %
    
    
    18.7
    %Total operating expenses
    
    
    82.2
    %
    
    
    35.1
    %
    
    
    56.1
    %
    
    
    34.6
    %Income (loss) from operations
    
    
    -85.5
    %
    
    
    2.2
    %
    
    
    -39.3
    %
    
    
    3.3
    %Other income
    
    
    5.5
    %
    
    
    4.7
    %
    
    
    3.5
    %
    
    
    2.6
    %Income (loss) before income tax and noncontrolling interests
    
    
    -80.0
    %
    
    
    6.9
    %
    
    
    -35.8
    %
    
    
    5.9
    %Income tax expense (benefit)
    
    
    -23.0
    %
    
    
    2.5
    %
    
    
    -10.3
    %
    
    
    2.1
    %Noncontrolling interests
    
    
    -9.7
    %
    
    
    0.0
    %
    
    
    -3.5
    %
    
    
    0.0
    %Net income (loss)
    
    
    -47.3
    %
    
    
    4.4
    %
    
    
    -22.0
    %
    
    
    3.8
    %
  22




---



##### Table of Contents



Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Revenue
   Cost of revenue
   Research and development expenses
  Selling, general and administrative expenses
   23




---



##### Table of Contents



Share-based compensation
  Other income (expense)
  Income tax expense (benefit)
  Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Revenue
   Cost of revenue
   24




---



##### Table of Contents



Research and development expenses
  Selling, general and administrative expenses
  Share-based compensation
  Other income (expense)
  Income tax expense (benefit)
  Liquidity and Capital Resources
   25




---



##### Table of Contents



Cash Flows
 Cash flows from operating activities
   Cash flows from investing activities
   Cash flows from financing activities
     26




---



##### 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
   27




---



##### 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
 Fair Value Measurements Effective Date of
FASB Statement No. 157
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
  28




---



##### Table of Contents



Determination of the Useful
Life of Intangible Assets . Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
     29




---



##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Note D  Commitments and Contingencies  Pending Litigation
 
 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.
  Because 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 vary
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 or increasing our average selling prices and increasing our gross margins, which we may
not be able to achieve.
   30




---



##### 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 and maintain or
increase our prices.
  We may not increase long-term sales if we fail to develop and introduce products that enhance the
functionality and throughput of the Hi Art system.
  Sales could be adversely affected if we fail to educate clinicians and patients about the benefits
and functionality of the Hi Art system.
   31




---



##### Table of Contents



Our sales and receivables may be materially adversely impacted if the global economic problems
existing as of the date of this report on Form 10-Q persist or worsen.
  We may be required to use more cash generated from our initial public offering to pay expenses,
reducing our ability to use those proceeds for long term investments.
  We are dependent upon third-party 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.
    32




---



##### Table of Contents



Our ability to increase our profitability depends in part on increasing our 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, while also
effectively managing employee costs and growth.
  In April 2008, we 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.
  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 materially 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;
  33




---



##### Table of Contents




    
    a requirement that special meetings of shareholders be called only by our president,
a majority of our Board of Directors, such officer(s) as our Board of Directors may
authorize from time to time or by our president or secretary if a written request of the
holders of record of at least 25% of all the votes entitled to be cast upon the
matter(s) set forth as the purpose of the meeting in the written request is delivered to
our president or secretary and such written requirements satisfies certain information
requirements contained in our amended and restated bylaws;
    
    advance notice requirements for shareholder proposals and nominations; and
    
    the ability of our Board of Directors to amend our bylaws except where our articles
of incorporation or the Wisconsin Business Corporation Law reserves the power
exclusively to our shareholders or our shareholders, in adopting, amending or repealing
a particular bylaw, provide within the bylaws that our Board of Directors may not amend,
repeal or readopt such bylaw.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (b) Use of Proceeds from Public Offering of Common Stock
   
 Item 5. Other Information
   Annual Meetings of Shareholders
  34




---



##### Table of Contents



Special Meetings of Shareholders
 Information Requirements
  35




---



##### Table of Contents



36




---



##### Table of Contents



Compensation and Other Benefits
 Named Executive Officers
    
    Base SalaryFrederick A. Robertson
    
    $
    450,000Stephen C. Hathaway
    
    
    280,000Steven G. Books
    
    
    324,875Paul J. Reckwerdt
    
    
    202,500Gustavo H. Olivera
    
    
    265,000
 Termination for Cause.
 Termination by Executive for Good Reason.
 Change of Control
  37




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##### Table of Contents



Termination Upon Death or Disability.
 Termination Upon Resignation or Retirement
 Definition of Separation from Service and Termination of Employment.
 COBRA Group Health Insurance.
 Payment of Accrued Obligations.
 Timing of Payment of Severance Payment
 Severance and Change of Control Payments
    38




---



##### Table of Contents



SeverancePaymentWithout Causeor forOther Named Executive Officers
    
    Good ReasonStephen C. Hathaway
    
    $
    437,649Steven G. Books
    
    
    506,445Paul J. Reckwerdt
    
    
    376,066Gustavo H. Olivera
    
    
    427,900
  SeverancePayment due toChange ofOther Named Executive Officers
    
    ControlStephen C. Hathaway
    
    $
    875,299Steven G. Books
    
    
    1,012,891Paul J. Reckwerdt
    
    
    752,133Gustavo H. Olivera
    
    
    855,800
   39




---



##### Table of Contents



General
 Indemnification for Costs, Charges, and Expenses of Successful Party
 Mandatory Allowance of Expenses
 Directors and Officers Liability Insurance
   40




---



##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description3.1
    
    Amended and Restated Articles of Incorporation. (1)3.2
    
    Amended and Restated Bylaws. (1)10.1
    
    Equity Interest Transfer Agreement dated September 11, 2008, by and among Sichuan Nanguang Vacuum
Technology Incorporated Ltd., Yao Chongguo and the Company. (2)*10.2
    
    Termination Agreement dated September 11, 2008, by and among Sichuan Nanguang Vacuum Technology
Incorporated Ltd., Yao Chongguo and the Company. (2)10.3
    
    Form of Indemnification Agreement for Directors, Executive Officers, and Controller. (1)10.4
    
    Employment Agreement for Frederick A. Robertson. (1)10.5
    
    Employment Agreement for Stephen C. Hathaway. (1)10.6
    
    Employment Agreement for Steven G. Books. (1)10.7
    
    Employment Agreement for Paul J. Reckwerdt. (1)10.8
    
    Employment Agreement for Gustavo H. Olivera. (1)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
 
 (1)
    
    Filed as an exhibit to this quarterly report on Form 10-Q.(2)
    
    Previously filed as an exhibit to the Companys current report on Form 8-K, filed on
September 17, 2008.*
    
    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.  41




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##### Table of Contents



TOMOTHERAPY INCORPORATEDDate:  November 7, 2008
    By:

/s/
Frederick A. RobertsonFrederick A. RobertsonChief Executive Officer
(Duly Authorized Officer)Date:  November 7, 2008
    By:

/s/
Stephen C. HathawayStephen C. Hathaway
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)  42




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##### Table of Contents



Exhibit Number
    
    Description3.1
    
    Amended and Restated Articles of Incorporation. (1)3.2
    
    Amended and Restated Bylaws. (1)10.1
    
    Equity Interest Transfer Agreement dated September 11, 2008, by and among Sichuan Nanguang Vacuum
Technology Incorporated Ltd., Yao Chongguo and the Company. (2)*10.2
    
    Termination Agreement dated September 11, 2008, by and among Sichuan Nanguang Vacuum Technology
Incorporated Ltd., Yao Chongguo and the Company. (2)10.3
    
    Form of Indemnification Agreement for Directors, Executive Officers, and Controller. (1)10.4
    
    Employment Agreement for Frederick A. Robertson. (1)10.5
    
    Employment Agreement for Stephen C. Hathaway. (1)10.6
    
    Employment Agreement for Steven G. Books. (1)10.7
    
    Employment Agreement for Paul J. Reckwerdt. (1)10.8
    
    Employment Agreement for Gustavo H. Olivera. (1)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
  43