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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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(Mark One)



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended December 31, 2002



or



| ̈ |  | TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 000-50082



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IMPAC MEDICAL SYSTEMS, INC.



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3109238                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



100 West Evelyn
Avenue, Mountain View, California 94041

(Address of principle executive offices)



(650) 623-8800

(Registrants telephone number, including area code)





(Former name, former address and former fiscal year, if changed since last
report)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ̈Yes     x  No



Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). ̈Yes    x  No



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.



Common Stock
Outstanding as of February 4, 2003                9,337,730



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EXPLANATORY NOTE



The purpose of this Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of IMPAC Medical Systems, Inc. (the
Company) for the quarter ended December 31, 2002 is to restate our consolidated financial statements at and for the quarters ended December 31, 2002 and 2001, and related disclosures, including the selected financial data included herein
as of and for the quarters ended December 31, 2002 and 2001.



Generally, no attempt has been made in this Amendment No. 1 to modify or update other disclosures presented in the original report on Form 10-Q except as required to reflect the effects of the restatement. This Form 10-Q/A generally does
not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of
the original filing of the Form 10-Q on February 5, 2003. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The following
items have been amended as a result of the restatement:



| |  |  | Part I  Item 1  Condensed Consolidated Financial Statements;
| | - |  | --------------------------------------------------------------



| |  |  | Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Part I  Item 4  Controls and Procedures; and
| | - |  | ----------------------------------------------



| |  |  | Part II  Item 6  Exhibits and Reports on Form 8-K.
| | - |  | ----------------------------------------------------



Our Chief Executive Officer and Chief Financial Officer have also reissued their certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act.



We have restated our financial results for the quarters ended December 31,
2002 and 2001 to conform certain of our revenue recognition policies to Statement of Position (SOP) 97-2 Software Revenue Recognition. As a result of the restatement, some previously recognized revenues have been shifted to later
quarters and others have been reclassified to deferred revenue and will be recognized in periods subsequent to December 31, 2002 in accordance with SOP 97-2. The restatement does not impact previously reported total cash flows from operations.



As a result of the impact of changes in the timing of revenue
recognition, net sales decreased by $1,048,000 and increased by $193,000 in the three months ended December 31, 2002 and 2001, respectively, with corresponding increases or decreases in deferred revenue. We also deferred the recognition of the
related direct incremental commission expense and certain direct incremental travel expenses associated with installations at customer sites as well as the federal income tax provision (benefit) and allowance for doubtful accounts. Net income
decreased by $589,000 and increased by $96,000 in the three months ended December 31, 2002 and 2001, respectively.



Additional detail regarding the restatement is included in Note 6 of the Notes to Condensed Consolidated Financial Statements included in Part I 
Item 1 of this Amendment No. 1 on Form 10-Q/A.



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TABLE OF CONTENTS



|                           |  |                                                                                                       |  |     
|-------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|                           |  |                                                                                                       |  | Page
|                           |  | PART I. FINANCIAL INFORMATION                                                                         |  |     
|                           |  |                                                                                                      
|Item 1.                    |  | Condensed Consolidated Financial Statements (unaudited)                                               |  | 1   
|                           |  |                                                                                                      
|                           |  | Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30, 2002                  |  | 1   
|                           |  |                                                                                                      
|                           |  | Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2002 and 2001 |  | 2   
|                           |  |                                                                                                      
|                           |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2002 and 2001 |  | 3   
|                           |  |                                                                                                      
|                           |  | Notes to Condensed Consolidated Financial Statements                                                  |  | 4   
|                           |  |                                                                                                      
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 11  
|                           |  |                                                                                                      
|Item 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 20  
|                           |  |                                                                                                      
|Item 4.                    |  | Controls and Procedures                                                                               |  | 20  
|                          
|PART II. OTHER INFORMATION
|                           |  |                                                                                                      
|Item 1.                    |  | Legal Proceedings                                                                                     |  | 22  
|                           |  |                                                                                                      
|Item 2.                    |  | Changes in Securities and Use of Proceeds                                                             |  | 22  
|                           |  |                                                                                                      
|Item 3.                    |  | Defaults Upon Senior Securities                                                                       |  | 22  
|                           |  |                                                                                                      
|Item 4.                    |  | Submission of Matter to a Vote of Securities Holders                                                  |  | 22  
|                           |  |                                                                                                      
|Item 5.                    |  | Other Information                                                                                     |  | 22  
|                           |  |                                                                                                      
|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                                      |  | 23  
|                           | 
|Signatures                 |  | 24                                                                                                   



Safe Harbor
Statement under the Private Securities Litigation Reform Act of 1995.



The statements contained in this Form 10-Q/A that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding
the Companys expectations, beliefs, hopes, intentions or strategies regarding the future. Forward looking statements include statements regarding the Companys business strategy, timing of, and plans for, the introduction of new products
and enhancements, future sales, market growth and direction, competition, market share, revenue growth, operating margins and profitability. All forward looking statements included in this document are based upon information available to the Company
as of the date hereof, and the Company assumes no obligation to update any such forward looking statement. Actual results could differ materially from the Companys current expectations. Factors that could cause or contribute to such
differences include the Companys ability to expand outside the radiation oncology market or expand into international markets, lost sales or lower sales prices due to competitive pressures, ability to integrate its products successfully with
related products and systems in the medical services industry, reliance on distributors and manufacturers of oncology equipment to market its products, and other factors and risks discussed in the Companys reports filed by the Company from
time to time with the Securities and Exchange Commission.



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Condensed Consolidated Financial Statements (unaudited)



IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                              |  |                  |        |   |                   |   |        |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                                                              |  | December 31,2002 |        |   | September 30,2002 |  
|                                                                                                                              |  | (Restated)       |       
|(In thousands)                                                                                                                |  | (See Note 6)     |       
|Assets                                                                                                                        |  |                  |        |   |                   |   |        |  
|Current assets:                                                                                                               |  |                  |        |   |                   |   |        |  
|Cash and cash equivalents                                                                                                     |  | $                | 46,561 |   |                   | $ | 23,432 |  
|Available-for-sale securities                                                                                                 |  |                  | 277    |   |                   |   | 385    |  
|Accounts receivable, net                                                                                                      |  |                  | 10,605 |   |                   |   | 8,086  |  
|Income tax refund receivable                                                                                                  |  |                  | 685    |   |                   |   | 686    |  
|Inventories                                                                                                                   |  |                  | 57     |   |                   |   | 86     |  
|Deferred income taxes, net                                                                                                    |  |                  | 4,479  |   |                   |   | 4,098  |  
|Prepaid expenses and other current assets                                                                                     |  |                  | 3,688  |   |                   |   | 4,316  |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Total current assets                                                                                                          |  |                  | 66,352 |   |                   |   | 41,089 |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Available-for-sale securities                                                                                                 |  |                  | 3,109  |   |                   |   | 3,156  |  
|Property and equipment, net                                                                                                   |  |                  | 3,541  |   |                   |   | 3,379  |  
|Deferred income taxes                                                                                                         |  |                  | 864    |   |                   |   | 864    |  
|Goodwill and other intangible assets, net                                                                                     |  |                  | 1,789  |   |                   |   | 1,892  |  
|Other assets                                                                                                                  |  |                  | 414    |   |                   |   | 341    |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Total assets                                                                                                                  |  | $                | 76,069 |   |                   | $ | 50,721 |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Liabilities, Redeemable Convertible Preferred Stock, Common Stock Subject to Rescission Rights and Stockholders Equity       |  |                  |        |   |                   |   |        |  
|Current liabilities:                                                                                                          |  |                  |        |   |                   |   |        |  
|Customer deposits                                                                                                             |  | $                | 10,043 |   |                   | $ | 9,829  |  
|Accounts payable                                                                                                              |  |                  | 866    |   |                   |   | 872    |  
|Accrued liabilities                                                                                                           |  |                  | 2,087  |   |                   |   | 3,252  |  
|Income taxes payable                                                                                                          |  |                  | 1,186  |   |                   |   | 1,950  |  
|Deferred revenue                                                                                                              |  |                  | 19,964 |   |                   |   | 18,043 |  
|Capital lease obligations                                                                                                     |  |                  | 67     |   |                   |   | 65     |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Total current liabilities                                                                                                     |  |                  | 34,213 |   |                   |   | 34,011 |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Customer deposits                                                                                                             |  |                  | 92     |   |                   |   | 92     |  
|Capital lease obligations, non-current                                                                                        |  |                  | 97     |   |                   |   | 114    |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Total liabilities                                                                                                             |  |                  | 34,402 |   |                   |   | 34,217 |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Redeemable convertible preferred stock                                                                                        |  |                  |       |   |                   |   | 14,489 |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Common stock subject to rescission rights                                                                                     |  |                  | 98     |   |                   |   |       |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Stockholders equity:                                                                                                         |  |                  |        |   |                   |   |        |  
|Preferred stock                                                                                                               |  |                  |       |   |                   |   |       |  
|Common stock                                                                                                                  |  |                  | 9      |   |                   |   | 6      |  
|Additional paid-in capital                                                                                                    |  |                  | 42,238 |   |                   |   | 1,144  |  
|Accumulated other comprehensive loss                                                                                          |  |                  | (2     | ) |                   |   | (1     | )
|Retained earnings (accumulated deficit)                                                                                       |  |                  | (676   | ) |                   |   | 866    |  
|Total stockholders equity                                                                                                    |  |                  | 41,569 |   |                   |   | 2,015  |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  
|Total liabilities, redeemable convertible preferred stock, common stock subject to rescission rights and stockholders
equity |  | $                | 76,069 |   |                   | $ | 50,721 |  
|                                                                                                                              |  |                  |        |   |                   |   |        |  



The accompanying
notes are an integral part of these condensed consolidated financial statements.



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IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                       |  |                                |        |   |      |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                       |  | Three Months EndedDecember 31, |       
|                                                                                       |  | 2002                           |        |   | 2001 |  
|                                                                                       |  | (Restated)                     |       
|(In thousands, except per share amounts)                                               |  | (See Note 6)                   |       
|Sales:                                                                                 |  |                                |        |   |      |   |        |  
|Software license and other, net                                                        |  | $                              | 6,707  |   |      | $ | 5,360  |  
|Maintenance and services                                                               |  |                                | 4,453  |   |      |   | 3,449  |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Total net sales                                                                        |  |                                | 11,160 |   |      |   | 8,809  |  
|                                                                                       |  |                               
|Cost of sales:                                                                         |  |                                |        |   |      |   |        |  
|Software license and other, net                                                        |  |                                | 1,994  |   |      |   | 1,738  |  
|Maintenance and services                                                               |  |                                | 1,701  |   |      |   | 848    |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Total cost of sales                                                                    |  |                                | 3,695  |   |      |   | 2,586  |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Gross profit                                                                           |  |                                | 7,465  |   |      |   | 6,223  |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Operating expenses:                                                                    |  |                                |        |   |      |   |        |  
|Research and development                                                               |  |                                | 2,112  |   |      |   | 1,716  |  
|Sales and marketing                                                                    |  |                                | 3,161  |   |      |   | 2,849  |  
|General and administrative                                                             |  |                                | 1,111  |   |      |   | 799    |  
|Amortization of intangible assets                                                      |  |                                | 102    |   |      |   | 91     |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Total operating expenses                                                               |  |                                | 6,486  |   |      |   | 5,455  |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Operating income                                                                       |  |                                | 979    |   |      |   | 768    |  
|                                                                                       |  |                               
|Interest expense                                                                       |  |                                | (6     | ) |      |   | (7     | )
|Interest and other income                                                              |  |                                | 83     |   |      |   | 115    |  
|                                                                                       |  |                                |        |   |      |   |        |  
|Income before provision for income taxes                                               |  |                                | 1,056  |   |      |   | 876    |  
|Provision for income taxes                                                             |  |                                | (369   | ) |      |   | (303   | )
|                                                                                       |  |                                |        |   |      |   |        |  
|Net income                                                                             |  |                                | 687    |   |      |   | 573    |  
|Accretion of redeemable convertible preferred stock                                    |  |                                | (2,229 | ) |      |   | (1,804 | )
|                                                                                       |  |                                |        |   |      |   |        |  
|Net loss attributable to common stockholders                                           |  | $                              | (1,542 | ) |      | $ | (1,231 | )
|                                                                                       |  |                                |        |   |      |   |        |  
|Net loss per common share, basic and diluted                                           |  | $                              | (0.21  | ) |      | $ | (0.20  | )
|                                                                                       |  |                                |        |   |      |   |        |  
|Weighted-average shares used in computing net loss per common share, basic and diluted |  |                                | 7,469  |   |      |   | 6,025  |  
|                                                                                       |  |                                |        |   |      |   |        |  



The accompanying
notes are an integral part of these condensed consolidated financial statements.



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IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                            |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                            |  | Three Months EndedDecember 31, |       
|                                                                                            |  | 2002                           |        |   | 2001 |  
|                                                                                            |  | (Restated)                     |       
|(In thousands)                                                                              |  | (See Note 6)                   |       
|Cash flows from operating activities:                                                       |  |                                |        |   |      |   |        |  
|Net income                                                                                  |  | $                              | 687    |   |      | $ | 573    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization of property and equipment                                     |  |                                | 402    |   |      |   | 344    |  
|Amortization of goodwill and other intangible assets                                        |  |                                | 102    |   |      |   | 91     |  
|Provision for doubtful accounts                                                             |  |                                | 30     |   |      |   | 22     |  
|Changes in assets and liabilities, net of effects of acquisitions:                          |  |                                |        |   |      |   |        |  
|Accounts receivable                                                                         |  |                                | (2,549 | ) |      |   | 667    |  
|Inventories                                                                                 |  |                                | 29     |   |      |   |       |  
|Prepaid expenses and other current assets                                                   |  |                                | 614    |   |      |   | (78    | )
|Other assets                                                                                |  |                                | (71    | ) |      |   | 7      |  
|Customer deposits                                                                           |  |                                | 214    |   |      |   | 761    |  
|Accounts payable                                                                            |  |                                | (5     | ) |      |   | (189   | )
|Accrued liabilities                                                                         |  |                                | (1,142 | ) |      |   | (1,307 | )
|Income tax payable/refund receivable                                                        |  |                                | (1,130 | ) |      |   | 138    |  
|Deferred revenue                                                                            |  |                                | 1,904  |   |      |   | 541    |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                         |  |                                | (915   | ) |      |   | 1,570  |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Cash flows from investing activities:                                                       |  |                                |        |   |      |   |        |  
|Acquisition of property and equipment                                                       |  |                                | (565   | ) |      |   | (409   | )
|Payments for MC2 acquisition                                                                |  |                                |       |   |      |   | (250   | )
|Purchases of available-for-sale securities                                                  |  |                                | (7,648 | ) |      |   | (1,364 | )
|Proceeds from sales of available-for-sale securities                                        |  |                                | 46     |   |      |   | 1,135  |  
|Proceeds from maturities of available-for-sale securities                                   |  |                                | 7,764  |   |      |   | 238    |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Net cash used in investing activities                                                       |  |                                | (403   | ) |      |   | (650   | )
|                                                                                            |  |                                |        |   |      |   |        |  
|Cash flows from financing activities:                                                       |  |                                |        |   |      |   |        |  
|Principal payments on capital leases                                                        |  |                                | (15    | ) |      |   | (14    | )
|Proceeds from the issuance of common stock, net                                             |  |                                | 24,477 |   |      |   | 33     |  
|Repurchase of common stock                                                                  |  |                                |       |   |      |   | (14    | )
|                                                                                            |  |                                |        |   |      |   |        |  
|Net cash provided by financing activities                                                   |  |                                | 24,462 |   |      |   | 5      |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Effect of exchange rates on cash                                                            |  |                                | (15    | ) |      |   |       |  
|Net increase in cash and cash equivalents                                                   |  |                                | 23,144 |   |      |   | 925    |  
|Cash and cash equivalents at beginning of period                                            |  |                                | 23,432 |   |      |   | 12,456 |  
|                                                                                            |  |                                |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                  |  | $                              | 46,561 |   |      | $ | 13,381 |  
|                                                                                            |  |                                |        |   |      |   |        |  



The accompanying
notes are an integral part of these condensed consolidated financial statements.



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IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1 - Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of
IMPAC Medical Systems, Inc. and its subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending September 30, 2003, or for any future period. The balance sheet at September 30, 2002 has been derived from the audited consolidated financial statements at that date but
does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read in conjunction with the
financial statements and notes thereto for the year ended September 30, 2002 included in the Companys Form 10-K/A for the fiscal year ended September 30, 2003.



NOTE 2 - Initial Public Offering



On November 20, 2002, the Company completed an initial public offering in which it sold 1,875,000 shares of common stock at $15.00 per share for net cash
proceeds of approximately $24.4 million, net of underwriting discounts, commissions and other offering costs. Upon the closing of the offering, all of the Companys outstanding shares of redeemable convertible preferred stock automatically
converted into 1,238,390 shares of common stock. In addition to the shares sold by the Company, an additional 312,500 shares were sold by selling stockholders on the date of the offering and 328,125 shares were sold by selling stockholders in the
exercise of the underwriters over-allotment option during December 2002.



NOTE 3 - Significant Accounting Policies



The
Companys significant accounting policies are disclosed in the Companys Form 10-K/A for the fiscal year ended September 30, 2003. With the exception of the new significant accounting policies set forth below, the Companys
significant accounting policies have not materially changed as of December 31, 2002.



Inventories



Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. As of December 31, 2001 and 2002, inventory is comprised entirely of finished goods.



Goodwill and other intangible assets



Intangible assets other than goodwill are stated at cost and amortized on a
straight-line basis over four to five years. Effective October 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which establishes financial
accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17 (APB No. 17), Intangible Assets. In accordance with SFAS No. 142, the Company has
reclassified acquired workforce intangible assets to goodwill, has ceased amortizing goodwill and will perform an assessment for impairment at least annually by applying a fair-value based test.



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##### Table of Contents

The annual goodwill impairment test was completed during the first quarter of fiscal 2003, and it was
determined that there was no impairment of goodwill at that time. For comparative purposes, the following table illustrates the Companys net loss attributable to common stockholders adjusted to exclude goodwill amortization expense as if
amortization had ceased October 1, 2001:



|                                                         |  |                                |        |   |      |   |        |  
|-------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                         |  | Three Months EndedDecember 31, |       
|                                                         |  | 2002                           |        |   | 2001 |  
|                                                         |  | (Restated)                     |       
|In thousands, except per share amounts                   |  | (See Note 6)                   |       
|Net loss attributable to common stockholders as reported |  | $                              | (1,542 | ) |      | $ | (1,231 | )
|Amortization of goodwill                                 |  |                                |       |   |      |   | 20     |  
|                                                         |  |                                |        |   |      |   |        |  
|Adjusted net loss attributable to common stockholders    |  | $                              | (1,542 | ) |      | $ | (1,211 | )
|                                                         |  |                                |        |   |      |   |        |  
|Net loss per common share, basic and diluted             |  |                                |        |   |      |   |        |  
|As reported                                              |  | $                              | (0.21  | ) |      | $ | (0.20  | )
|                                                         |  |                                |        |   |      |   |        |  
|As adjusted                                              |  | $                              | (0.21  | ) |      | $ | (0.20  | )
|                                                         |  |                                |        |   |      |   |        |  



Redeemable convertible preferred
stock



Upon the closing of the Companys initial
public offering, all outstanding shares of redeemable convertible preferred stock automatically converted into shares of common stock. Prior to the conversion, the carrying value of the redeemable convertible preferred stock was increased by
periodic accretions using the effective interest method, so that the carrying amount would equal the redemption value at the redemption date. These increases were effected through charges against retained earnings (accumulated deficit) and were
carried out through the initial public offering closing date. Because the redeemable convertible preferred stock automatically converted into common stock upon the closing of the initial public offering, the non-cash accretion charges are no longer
required and will not be applied in future quarters.



Accounting for
stock-based compensation



In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123 (SFAS No. 148) which amends FASB Statement No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition
and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods ending after December 15, 2002; however, early adoption is
permitted. The Company has elected to early adopt SFAS No. 148 and all related disclosures are included herein.



The Company uses the intrinsic value method of APB Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, in
accounting for its employee stock options, and presents disclosure of pro forma information required under SFAS No. 123, as amended by SFAS No. 148. No compensation expense is included in the net loss attributable to common stockholders as reported
during the three months ended December 31, 2002 and 2001.



Other
comprehensive loss



Comprehensive loss generally
represents all changes in stockholders equity except those resulting from investments or contributions by stockholders. The Companys unrealized gains and losses on available-for-sale securities and cumulative translation adjustments
represent the components of comprehensive loss that were excluded from the net loss attributable to common stockholders.



5



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##### Table of Contents

During the three months ended December 31, 2001, the only component of accumulated other comprehensive
loss was unrealized gains (losses) on available-for-sale securities. The following table lists the beginning balance, the change during the three months ended December 31, 2002 and ending balance of each component of accumulated other comprehensive
loss:



|                                                       |  |                                       |    |   |                                       |   |    |                                   |  |   |    |  
|------------------------------------------------------ |  | ------------------------------------- | -- | - | ------------------------------------- | - | -- | --------------------------------- |  | - | -- | -
|                                                       |  | Unrealizedgains (losses)on securities |    |   | Foreigncurrencytranslationadjustments |   |    | Accumulatedothercomprehensiveloss | 
|                                                       |  | (in thousands)                        |   
|Balances, October 1, 2002                              |  | $                                     | (1 | ) |                                       | $ |   |                                   |  | $ | (1 | )
|Change during the three months ended December 31, 2002 |  |                                       | 5  |   |                                       |   | (6 | )                                 |  |   | (1 | )
|                                                       |  |                                       |    |   |                                       |   |    |                                   |  |   |    |  
|Balances, December 31, 2002                            |  | $                                     | 4  |   |                                       | $ | (6 | )                                 |  | $ | (2 | )
|                                                       |  |                                       |    |   |                                       |   |    |                                   |  |   |    |  



Revenue recognition



The Companys revenue is derived primarily from two sources: (i)
software license revenue, from sales to distributors and end users, and (ii) maintenance and services revenue from providing software support, education and consulting services to end users. The Company typically requires deposits upon the receipt
of a signed purchase and license agreement, which are classified as customer deposit liabilities on the Companys consolidated balance sheet.



The Company accounts for sales of software and maintenance revenue under the provisions of Statement of Position 97-2, (SOP 97-2),
Software Revenue Recognition, as amended. SOP 97-2 requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on vendor-specific objective evidence (VSOE) of the fair
value of the delivered and/or undelivered elements. For hardware transactions where no software is involved, the Company applies the provisions of Staff Accounting Bulletin 101 Revenue Recognition.



The fee for multiple-element arrangements is allocated to each element of the
arrangement, such as maintenance and support services, based on the relative fair values of the elements. The Company determines the fair value of each element in multi-element arrangements based on vendor-specific objective evidence for each
element which is based on the price charged when the same element is sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the
residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.



The Company recognizes revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the
product has been accepted, the fee is fixed or determinable, and collection of the resulting receivable is probable. Acceptance generally occurs after the product has been installed, training has occurred and the product is in clinical use at the
customer site. For distributor related transactions, acceptance occurs with delivery of software registration keys to the distributors order fulfillment department.



The first year of maintenance and support, which includes updates and support, for the Companys software products is
included in the purchase price. Upon revenue recognition, the Company defers 12% of the list price, which is the renewal rate, and recognize that portion over the remaining term of the included maintenance and support period. Fair value of services,
such as training or consulting, are based upon separate sales by the Company of these services to other customers. Payments received for maintenance and services are deferred and recognized as revenue ratably over the contract term. Training and
consulting services are billed based on hourly rates, and are generally recognized as revenue as these services are performed. Amounts deferred for installed and accepted software products under multiple element arrangements where VSOE of the fair
value for all undelivered elements does not exist, maintenance services and term software license agreements comprise the main components of deferred revenue.



For direct software sales licensed on a term basis, the initial term lasts from three to five years with annual renewals after the initial term. The
customer pays a deposit typically equal to the initial annual fee upon signing the license agreement, and the Company invoices the customer for subsequent annual fees 60 days before the



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anniversary date of the signed agreement. The Company recognizes revenue for the annual fees under these term license
agreements ratably over the applicable twelve-month period. The annual fee includes maintenance and support.



The Company recognizes revenue from third-party products and related configuration and installation services sold with its licensed software upon
acceptance by the customer. The Company recognizes revenue from third-party products sold separately from its licensed software upon delivery.



The Company has also entered into an application service provider agreement whereby the Company provides all software, equipment and support during the
term of the agreement. Revenues are recognized ratably over the term of the agreement, generally 60 months. Under the terms of these agreements, the customers must pay for the final two months of the term up front. These deposits are classified as
long term customer deposit liabilities on the Companys consolidated balance sheet.



Net loss per common share



Basic and diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of vested common shares outstanding for the period.



A reconciliation of the numerator and denominator used in the basic and
diluted net loss per share follows.



|                                                                                      |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Three Months EndedDecember 31, |       
|                                                                                      |  | 2002                           |        |   | 2001 |  
|                                                                                      |  | (in thousands)                 |       
|                                                                                      |  | (Restated)                     |       
|                                                                                      |  | (See Note 6)                   |       
|Numerator                                                                             |  |                                |        |   |      |   |        |  
|Net income                                                                            |  | $                              | 687    |   |      | $ | 573    |  
|Accretion of redeemable convertible preferred stock                                   |  |                                | (2,229 | ) |      |   | (1,804 | )
|                                                                                      |  |                                |        |   |      |   |        |  
|Net loss attributable to common stockholders                                          |  | $                              | (1,542 | ) |      | $ | (1,231 | )
|                                                                                      |  |                                |        |   |      |   |        |  
|Denominator                                                                           |  |                                |        |   |      |   |        |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                | 7,469  |   |      |   | 6,025  |  
|                                                                                      |  |                                |        |   |      |   |        |  



The following
outstanding options and redeemable convertible preferred stock were excluded from the computation of diluted net loss per share as their effect is antidilutive:



|                                       |  |                |  |      
|-------------------------------------- |  | -------------- |  | -----
|                                       |  | December 31,  
|                                       |  | 2002           |  | 2001 
|                                       |  | (in thousands)
|Options to purchase common stock       |  | 626            |  | 326  
|Redeemable convertible preferred stock |  |               |  | 1,238



7



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Recent accounting pronouncements



In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and develops a single accounting method under which
long-lived assets that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and its provisions are to be applied prospectively. The Company has adopted SFAS No. 144 effective October 1, 2002. This adoption has not had a material impact on the Companys financial statements and related
disclosures.



In April 2002, the FASB issued SFAS No. 145
Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections which eliminated inconsistencies between the required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe
their applicability under changed conditions. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 and for transactions occurring after May 15, 2002. The Company has adopted SFAS No. 145 effective October 1,
2002. This adoption has not had a material impact on the Companys financial statements and related disclosures.



In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities which addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect adoption of SFAS No. 146 to have a material impact on its financial position or on its results of operations.



In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company expects that the adoption of EITF Issue No. 00-21 to have no material impact on its financial position or on its results of
operations.



In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003. The Company expects that the adoption of FIN 46 to have no material impact on its financial statements.



NOTE 4 - Common Stock Subject to Rescission Rights



Prior to the effectiveness of the Companys registration statement for its initial public offering, an officer of the
Company sent an email to 15 friends whom he had designated as potential purchasers of common stock in a directed share program in connection with the initial public offering. The email requested that the recipients send an indication of interest to
the officer. The email was not accompanied by a preliminary prospectus and may have constituted a prospectus that does not meet the requirements of the Securities Act of 1933. The email was promptly followed by telephone conversations advising
recipients that they could indicate an interest in purchasing shares only after they had received a preliminary prospectus. If the email did constitute a violation of the Securities Act of 1933, the recipients of the letter who purchased common
stock in the Companys initial public offering could have the right, for a period of one year from the date of their purchase of common stock, to obtain recovery of the consideration paid in connection with their purchase of common stock or, if
they had already sold the stock, sue the



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Company for damages resulting from their purchase of common stock. The Company has classified a total of 6,500 shares
issued with rescission rights outside of stockholders equity, as the redemption features are not within the control of the Company.



NOTE 5 - Stockholders Equity



Reincorporation



On October 29, 2002, the Companys Board of Directors and stockholders approved the reincorporation of the Company in the state of Delaware, which
became effective on November 13, 2002. Under the terms of its Certificate of Incorporation, the Company is authorized to issue 60,000,000 shares of $0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred stock. The Board of
Directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights preferences, privileges and restrictions thereof. The accompanying condensed consolidated financial statements have been retroactively
restated to give effect to the reincorporation.



Stock-based compensation



The Company has adopted the disclosure-only provisions of
SFAS No. 123 as amended by SFAS No. 148. The Company calculates the fair value of each option on the date of grant using a fair-value based method as prescribed by SFAS No. 123. No options were granted during the three months ended December 31, 2002
and 2001.



As the determination of fair value of all options
granted after the Companys initial public offering include an expected volatility factor in addition to the risk free interest rate, expected term and expected dividends, the following results may not be representative of future periods.



Had compensation costs been determined based upon the fair
value at the grant date, consistent with the methodology prescribed under SFAS No. 123, the Companys total stock-based compensation cost, pro-forma net loss attributable to common stockholders and pro-forma net loss per common share, basic and
diluted, would have been as follows:



|                                                         |  |                                |        |   |      |   |        |  
|-------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                         |  | Three Months EndedDecember 31, |       
|                                                         |  | 2002                           |        |   | 2001 |  
|                                                         |  | (Restated)                     |       
|In thousands, except per share amounts                   |  | (See Note 6)                   |       
|Net loss attributable to common stockholders as reported |  | $                              | (1,542 | ) |      | $ | (1,231 | )
|Stock-based compensation cost under a fair value method  |  |                                | (67    | ) |      |   | (44    | )
|                                                         |  |                                |        |   |      |   |        |  
|Pro-forma net loss attributable to common stockholders   |  | $                              | (1,609 | ) |      | $ | (1,275 | )
|                                                         |  |                                |        |   |      |   |        |  
|Net loss per common share, basic and diluted             |  |                                |        |   |      |   |        |  
|As reported                                              |  | $                              | (0.21  | ) |      | $ | (0.20  | )
|                                                         |  |                                |        |   |      |   |        |  
|Pro-forma                                                |  | $                              | (0.22  | ) |      | $ | (0.21  | )
|                                                         |  |                                |        |   |      |   |        |  



NOTE 6 - Restatement of Financial
Statements



The Company adopted Statement of Position
(SOP) 97-2 Software Revenue Recognition which became effective for the Company in October 1999 for the purposes of revenue recognition. Subsequent to filing the Form 10-Q for the quarter ended December 31, 2002, management determined
that the Company had recognized revenue for certain transactions prematurely. Accordingly, the Company has restated its financial statements for the three months ended December 31, 2002 and 2001 to shift some previously recognized revenues to later
quarters and to defer other previously recorded revenues to periods subsequent to December 31, 2002.



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The accounting issues that gave rise to the restatement fell into three categories. First, the Company
recognized revenue from certain multiple element software contracts once individual elements had been installed, accepted and were in clinical use at the customer site. The Company has now determined that the Company did not have vendor specific
objective evidence (VSOE) of the fair value of the undelivered elements. Accordingly, the Company should have deferred the recognition of revenue on those contracts until the Company had VSOE of the fair value for all the undelivered
elements, the elements for which VSOE of the fair value did not exist had subsequently been delivered or the elements for which VSOE did not exist had been canceled.



Second, the Company recognized revenue as of the date of first clinical use, unless a customer objected in writing within
five business days after first clinical use. The Company has now determined that formal acceptance could not have occurred without the passage of five days, and, hence, the Company must adjust the date of revenue recognition of delivered and
accepted products forward five business days from the date of first clinical use.



Third, the Company recognized revenue for maintenance and support of perpetually licensed software products during the first year by deferring 12% of the purchase price and recognizing this amount over the 12 months
following the customers acceptance. The Company has now determined that the Company should have deferred 12% of the current list price rather than purchase price.



As a result of the impact of changes in the timing of revenue recognition, net sales decreased by $1.0 million and increased
by $193,000 in the three months ended December 31, 2002 and 2001, respectively, with corresponding increases or decreases in deferred revenue. The Company also deferred the recognition of the related direct incremental commission expense and certain
direct incremental travel expenses associated with revenue now being deferred until the related revenue was or is recognized and considered the deferred revenue in the determination of its allowance for doubtful accounts. The Company also revised
its provision for income taxes for the effect of these matters.



As a result, the accompanying condensed consolidated financial statements have been restated from the amounts previously reported. A summary of the significant effects of the restatement is as follows:



|                                              |  |                                      |        |   |          |   |        |             |  |   |          |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------------ | ------ | - | -------- | - | ------ | ----------- |  | - | -------- | - |  | - | ------ | -
|                                              |  | Three Months Ended December 31,      |       
|                                              |  | 2002                                 |        |   | 2001     |  
|                                              |  | As Reported                          |        |   | Restated |   |        | As Reported |  |   | Restated |  
|                                              |  | (in thousands except per share data) |       
|Consolidated Statement of Operations Data:    |  |                                      |        |   |          |   |        |             |  |   |          |   |  |   |        |  
|Net sales                                     |  | $                                    | 12,208 |   |          | $ | 11,160 |             |  | $ | 8,616    |   |  | $ | 8,809  |  
|Gross profit                                  |  |                                      | 8,467  |   |          |   | 7,465  |             |  |   | 6,069    |   |  |   | 6,223  |  
|Operating income                              |  |                                      | 1,949  |   |          |   | 979    |             |  |   | 648      |   |  |   | 768    |  
|Net income                                    |  |                                      | 1,276  |   |          |   | 687    |             |  |   | 477      |   |  |   | 573    |  
|Net loss available to common stockholders     |  |                                      | (953   | ) |          |   | (1,542 | )           |  |   | (1,327   | ) |  |   | (1,231 | )
|                                              |  |                                      |        |  
|Net loss per common share, basic and diluted: |  | $                                    | (0.13  | ) |          | $ | (0.21  | )           |  | $ | (0.22    | ) |  | $ | (0.20  | )
|                                              |  |                                      |        |   |          |   |        |             |  |   |          |   |  |   |        |  



|                                          |  |                         |       |          |                          |        |             |  |          |       |  |   |       
|----------------------------------------- |  | ----------------------- | ----- | -------- | ------------------------ | ------ | ----------- |  | -------- | ----- |  | - | ------
|                                          |  | As of December 31, 2002 |       |          | As of September 30, 2002
|                                          |  | As Reported             |       | Restated |                          |        | As Reported |  | Restated
|                                          |  | (in thousands)         
|Consolidated Balance Sheet Data:          |  |                         |       |          |                          |        |             |  |          |       |  |   |       
|Allowance for doubtful accounts           |  | $                       | 570   |          | $                        | 254    |             |  | $        | 520   |  | $ | 224   
|Prepaid expenses and other current assets |  |                         | 2,595 |          |                          | 3,688  |             |  |          | 3,281 |  |   | 4,316 
|Deferred income taxes, net                |  |                         | 1,576 |          |                          | 5,343  |             |  |          | 1,576 |  |   | 4,962 
|Deferred revenue                          |  |                         | 9,067 |          |                          | 19,964 |             |  |          | 8,194 |  |   | 18,043
|Retained earnings (accumulated deficit)   |  |                         | 5,046 |          |                          | (676   | )           |  |          | 5,999 |  |   | 866   



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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 in conjunction with our consolidated financial statements and the related notes appearing in our Form 10-K/A
for the fiscal year ended September 30, 2003. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the
timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth elsewhere in this Form 10-Q/A.



The Managements Discussion and Analysis of Financial Condition and
Results of Operations presented below reflects the effects of the restatement of our condensed consolidated financial statements for the three months ended December 31, 2001 and 2002, as discussed in Note 6 to the condensed consolidated financial
statements.



Overview



We provide information technology systems for cancer care. Our systems
provide electronic medical record, imaging, decision support, scheduling and billing applications in an integrated platform to manage the complexities of cancer care, from detection and diagnosis through treatment and follow-up. We were founded in
1990, and our growth has been primarily organic, supplemented by several product and small company acquisitions.



Net Sales and Revenue Recognition



We sell our products directly throughout the world and primarily in North America, Europe and the Pacific Rim countries. In addition, we use non-exclusive
distributors to augment our direct sales efforts. Sales through distributors represented 10.3% of our total net sales in the three months ended December 31, 2002 and 15.7% for the same period in 2001, all of which were sold through Siemens Medical
Systems, Inc. The decline in distributor sales as a percentage of net sales is primarily attributable to a higher growth rate in our direct sales. We have signed agreements with other distributors, which have not yet generated sales. Revenues from
the sale of our products and services outside the United States accounted for 6.2% of our net sales in the three months ended December 31, 2002 and 11.0% of our net sales for the same period in 2001. The decline in international sales as a
percentage of net sales is primarily attributable to a higher growth rate in our domestic sales.



We license point-of-care and registry software products. Our point-of-care products are comprised of modules that process administrative, clinical,
imaging and therapy delivery information. Our registry products aggregate data on patient outcomes for regulatory and corporate reporting purposes. Currently, a majority of our point-of-care software is licensed on a perpetual basis, and a majority
of our registry sales is licensed on a term basis.



Our focus
with regard to software licensing and maintenance and support service is to provide flexibility in the structure and pricing of our product offerings to meet the unique functional and financial needs of our customers. For those customers who license
on a perpetual basis, we promote annual maintenance and support service agreements as an incremental investment designed to preserve the value of the customers initial investment. For those customers who license on a term basis, annual
maintenance and support contributes greatly to the value of the annual license, and the two cannot be segregated from each other. For those customers using our application service provider option, independent of the licensing method, these annual
fees allow the customer to outsource, in a cost effective manner, support and connectivity functions that are normally handled by internal resources.



The decision to implement, replace, expand or substantially modify an information system is a significant commitment for healthcare organizations. In
addition, our systems typically require significant capital expenditures by the customer. Consequently, we experience long sales and implementation cycles. The sales cycle for our systems ranges from six to twenty-four months or more from initial
contact to contract execution. Our implementation cycle generally ranges from three to nine months from contract execution to completion of implementation. In addition to the core system, approximately one-third of our customers purchase additional
product modules along with the core system that they intend to implement over a period of time beyond the typical implementation cycle of three to nine months.



We record orders for products licensed on a perpetual basis upon the receipt of a signed purchase and license agreement, purchase order, and a
substantial deposit. We record orders for products licensed on a term basis upon receipt of a signed purchase and license agreement, purchase order and a deposit typically equal to the first years fees. All contract deposits are held as a
liability as outlined in the terms and conditions set forth in the purchase and



11



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##### Table of Contents

license agreement. Maintenance and support is recorded as deferred revenue upon the invoice date and held as a current
liability on the balance sheet. Under the terms of the original purchase and license agreement, maintenance and support automatically renews on an annual basis unless the customer provides a written cancellation. We recognize revenue from these
sales ratably over the underlying maintenance period.



For
direct software sales licensed on a perpetual basis, we include one year of maintenance and support as part of the purchase price. Standard annual fees for maintenance and support after the first year equal 12% of the then current list price unless
the customer negotiates other terms or service levels.



We
recognize revenue once software products have been installed, accepted and are in clinical use at the customer site. When a customer accepts only a subset of the products outlined in a multiple-element purchase and license agreement and we have not
established vendor specific objective evidence, or VSOE, of the fair value of the undelivered elements, we invoice the customer for the accepted products and record the transaction as deferred software license revenue. We recognize the deferred
revenue when all elements in a multiple-element arrangement have been accepted, VSOE of the fair value is established for the remaining undelivered elements, or the undelivered elements for which VSOE of the fair value does not exist have been
canceled, whichever occurs first.



The first year of
maintenance and support for our software products is included in the purchase price. Upon revenue recognition, we defer 12% of the list price and recognize that portion over the remaining term of the included maintenance and support period. For
example, if revenue recognition occurs four months subsequent to product acceptance, we would recognize one-third of the 12% maintenance and support deferral as revenue and recognize the remaining two-thirds of the deferral over the following eight
months. In situations where the first phase of software products are installed more than one year before our ability to recognize the related revenue, it is not necessary to defer 12% of the list price and recognize that portion over the included
maintenance and support period as the first year maintenance and support obligation is no longer applicable. In these cases, however, 12% of the list price is classified as maintenance and services revenue at the time of revenue recognition.



For direct software sales licensed on a term basis, the
initial term lasts from three to five years with annual renewals after the initial term. The customer pays a deposit typically equal to the initial annual fee upon signing the license agreement, and we invoice the customer for subsequent annual fees
60 days before the anniversary date of the signed agreement. We recognize revenue for the annual fees under these term license agreements ratably over the applicable twelve-month period. The purchase price includes annual maintenance and support.



We recognize revenue from third-party products and related
configuration and installation services sold with our licensed software upon acceptance by the customer. We recognize revenue from third-party products sold separately from our licensed software upon delivery. Third-party products represented 4.3%
of our total net sales in the three months ended December 31, 2002 and 2.9% for the same period in 2001. The increase in third party sales as a percentage of net sales is attributable to a higher growth rate in our third party product sales.



We recognize distributor related revenues upon the receipt of
a completed purchase order and the related customer information needed to generate software registration keys, which allow us to distribute the software to the end user and satisfy our regulatory information tracking requirements. We provide
maintenance and support to our primary distributor. The distributors cost of the first years support is included in the transfer fee. Renewal support is purchased for 5% of the transfer price. For software licenses sold to their
customers, we defer the distributors first year post-contract support, based on the renewal rate, and recognize that portion of the revenue ratably over the remaining support period. We invoice renewal maintenance and support annually to our
distributor at the beginning of each fiscal year and recognize the revenue ratably over the applicable twelve-month period.



Costs and Expenses



A large part of our company cost structure is driven by the number of employees and all related benefit and facility costs. As a result, a significant
amount of strategic and fiscal planning is focused on this area, so we can develop internal resources at a controlled and sustainable rate. Since revenue recognition happens subsequent to all implementation and training activities, we incur the
costs of labor, travel and some third party product expenses in advance.



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Cost of sales consists primarily of:



| |  |  | labor costs relating to the implementation, installation, training and application support of our point-of-care and registry software;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | travel expenses incurred in the installation and training of our point-of-care software;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | direct expenses related to the purchase, shipment, installation and configuration of third-party hardware and software sold with our point-of-care software;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuing engineering expenses related to the maintenance of existing released software; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | overhead attributed to our client services personnel.
| | - |  | -----------------------------------------------------



System installations require several phases of implementation in the process of accepting product delivery and have led to our development of a highly
specialized client service organization. All new orders require multiple site visits from our personnel to properly install, configure and train customer personnel. In transactions where we are required to defer the recognition of software license
revenue, the associated incremental direct travel expenses are recorded as a prepaid expense until the associated revenue is recognized. Several point-of-care products are used with various third-party hardware and software products that are also
sold and configured during the implementation process. After the initial implementation process, our application support staff provides phone support and any applicable system updates. A substantial percentage of engineering costs are allocated to
client services due to continuing engineering efforts related to the support and enhancement of our products. Historically, cost of sales has increased at approximately the same rate as net sales. However, as newly developed products and acquired
product lines are released to the customers, additional investments in client service staff could cause gross margins to fluctuate.



Research and development expenses include costs associated with the design, development and testing of our products. These costs consist primarily of:



| |  |  | salaries and related development personnel expenses;
| | - |  | ----------------------------------------------------



| |  |  | software license and support fees associated with development tools;
| | - |  | --------------------------------------------------------------------



| |  |  | travel expenses incurred to test products in the customer environment; and
| | - |  | --------------------------------------------------------------------------



| |  |  | overhead attributed to our development and test engineering personnel.
| | - |  | ----------------------------------------------------------------------



We currently expense all research and development costs as incurred. Our research and development efforts are periodically subject to significant
non-recurring costs that can cause fluctuations in our quarterly research and development expense trends. We expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest in
product development.



Sales and marketing expenses primarily
consist of:



| |  |  | salaries, commissions and related travel expenses for personnel engaged in sales and the contracts administration process;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | salaries and related product marketing, marketing communications, media services and business development personnel expenses;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | expenses related to marketing programs, public relations, trade shows, advertising and related communications; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | overhead attributed to our sales and marketing personnel.
| | - |  | ---------------------------------------------------------



We have recently expanded our sales force, made significant investments in marketing communications and increased trade show activities to enhance market
awareness of our products. We expect that sales and marketing expenses will increase in absolute dollars for the foreseeable future as we continue to expand our sales and marketing capabilities. In transactions where we are required to defer the
recognition of software license revenue, the associated incremental direct commission expense is recorded as a prepaid expense until the associated revenue is recognized.



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General and administrative expenses primarily consist of:



| |  |  | salaries and related administrative, finance, human resources, regulatory, information services and executive personnel expenses;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | other significant expenses relate to facilities, recruiting, external accounting and legal and regulatory fees;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | general corporate expenses; and
| | - |  | -------------------------------



| |  |  | overhead attributed to our general and administrative personnel.
| | - |  | ----------------------------------------------------------------



A significant portion of facility, infrastructure and maintenance costs are allocated as overhead to other functions based on distribution of headcount.
We expect that our general and administrative expenses will increase as a public company.



Depreciation and Amortization



Our property and equipment is recorded at our cost minus accumulated depreciation and amortization. We depreciate the costs of our tangible capital assets on a straight-line basis over the estimated economic life of the asset, which is
generally three to seven years. Acquisition related intangible assets have historically been amortized based upon the estimated economic life, which is generally two to five years. Leasehold improvements and equipment purchased through a capital
lease are amortized over the life of the related asset or the lease term, if shorter. If we sell or retire an asset, the cost and accumulated depreciation is removed from the balance sheet and the appropriate gain or loss is recorded. We expense
repair and maintenance costs as incurred.



Accretion of Redeemable
Convertible Preferred Stock



From September 27, 2002 until
our initial public offering, the holders of a majority of our then outstanding redeemable convertible preferred stock could have required us to redeem the preferred shares by paying in cash an amount equal to the greater of $3.23 per share or the
fair market value plus all declared or accumulated but unpaid dividends within thirty days. These shares automatically converted to common stock upon the closing of our initial public offering in November 2002. We accreted charges that reflected the
increase in market value of the redeemable convertible preferred stock as an adjustment to retained earnings (accumulated deficit) and, as a result, increased the amount of net loss attributable to common stockholders. After the initial public
offering, no further accretion is required. The redemption value of the redeemable convertible preferred stock was $16.8 million at the time of the initial public offering. This amount was reallocated on our balance sheet from redeemable convertible
preferred stock to common stock and additional paid-in capital, less the stated par value.



Restatement of Financial Statements



We adopted Statement of Position (SOP) 97-2 Software Revenue Recognition which became effective for us in October 1999 for the purposes of revenue recognition. Subsequent to filing the Form 10-Q for the
quarter ended December 31, 2002, management determined that we recognized revenue for certain transactions prematurely. Accordingly, we have restated our financial statements for the quarters ended December 31, 2001 and 2002 to shift some previously
recognized revenues to later quarters and to defer other previously recorded revenues to periods subsequent to December 31, 2002.



The accounting issues that gave rise to the restatement fell into three categories. First, we recognized revenue from certain multiple element software
contracts once individual elements had been installed, accepted and were in clinical use at the customer site. We have now determined that we did not have vendor specific objective evidence (VSOE) of the fair value of the undelivered
elements. Accordingly, we should have deferred the recognition of revenue on those contracts until we had VSOE of the fair value for all the undelivered elements, the elements for which VSOE of the fair value did not exist had subsequently been
delivered or the elements for which VSOE did not exist had been canceled.



Second, we recognized revenue as of the date of first clinical use, unless a customer objected in writing within five business days after first clinical use. We have now determined that formal acceptance could not
have occured without the passage of five days, and, hence, we must adjust the date of revenue recognition of delivered and accepted products forward five business days from the date of first clinical use.



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Third, we recognized revenue for maintenance and support of perpetually licensed software products during
the first year by deferring 12% of the purchase price and recognizing this amount over the 12 months following the customers acceptance. We have now determined that we should have deferred 12% of the current list price rather than purchase
price.



Details regarding the restatement are discussed further
in Note 6 to the condensed consolidated financial statements.



Results of
Operations



The following table sets forth certain
operating data as a percentage of net sales for the periods indicated:



|                                         |  |                                                         |   |  |       |  
|---------------------------------------- |  | ------------------------------------------------------- | - |  | ----- | -
|                                         |  | Percentage of Net Sales Three Months Ended December 31, |  
|                                         |  | 2002                                                    |   |  | 2001  |  
|                                         |  | (Restated)                                              |  
|                                         |  | (See Note 6)                                            |  
|Sales:                                   |  |                                                         |   |  |       |  
|Software license and other, net          |  | 60.1                                                    | % |  | 60.8  | %
|Maintenance and services                 |  | 39.9                                                    |   |  | 39.2  |  
|                                         |  |                                                         |   |  |       |  
|Total net sales                          |  | 100.0                                                   |   |  | 100.0 |  
|Cost of sales:                           |  |                                                         |   |  |       |  
|Software license and other, net          |  | 17.9                                                    |   |  | 19.7  |  
|Maintenance and services                 |  | 15.2                                                    |   |  | 9.7   |  
|                                         |  |                                                         |   |  |       |  
|Total cost of sales                      |  | 33.1                                                    |   |  | 29.4  |  
|                                         |  |                                                         |   |  |       |  
|Gross profit                             |  | 66.9                                                    |   |  | 70.6  |  
|                                         |  |                                                         |   |  |       |  
|Operating expenses:                      |  |                                                         |   |  |       |  
|Research and development                 |  | 18.9                                                    |   |  | 19.5  |  
|Sales and marketing                      |  | 28.3                                                    |   |  | 32.3  |  
|General and administrative               |  | 10.0                                                    |   |  | 9.1   |  
|Amortization of intangible assets        |  | 0.9                                                     |   |  | 1.0   |  
|                                         |  |                                                         |   |  |       |  
|Total operating expenses                 |  | 58.1                                                    |   |  | 61.9  |  
|                                         |  |                                                         |   |  |       |  
|Operating income                         |  | 8.8                                                     |   |  | 8.7   |  
|Interest and other income, net           |  | 0.7                                                     |   |  | 1.2   |  
|                                         |  |                                                         |   |  |       |  
|Income before provision for income taxes |  | 9.5                                                     |   |  | 9.9   |  
|Provision for income taxes               |  | (3.3                                                    | ) |  | (3.4  | )
|                                         |  |                                                         |   |  |       |  
|Net income                               |  | 6.2                                                     | % |  | 6.5   | %
|                                         |  |                                                         |   |  |       |  



Three Months Ended December 31,
2002 Compared with Three Months Ended December 31, 2001



Net Sales. Net sales increased 26.7% to $11.2 million in the three months ended December 31, 2002 from $8.8 million for the same period in 2001. Net software related sales increased 25.1% to $6.7 million in the three months ended
December 31, 2002 from $5.4 million for the same period in 2001. New system sales in oncology accounted primarily for the $1.3 million increase. Maintenance and services also increased 29.1% to $4.5 million for the three months ended December 31,
2002 from $3.5 million for the same period in 2001. Maintenance and support contracts contributed $925,000 of the $1.0 million increase with the remaining amount attributable to additional training and installation. Our strong customer demand for
installation of new systems contributed to the growth of net software related sales as a percentage of net sales. For a discussion of Deferred Revenue, see Backlog below.



Cost of Sales. Total cost of sales increased 42.9% to $3.7 million for the three months ended December 31, 2002 from
$2.6 million for the same period in 2001. Our gross margin decreased to 66.9% for the three months ended December 31, 2002 from 70.6% for the same period in 2001. Cost of sales relating to net software sales increased 14.7% to $2.0 million for the
three months ended December 31, 2002 from $1.7 million for the same period in 2001. Our gross margin associated with net software sales increased to 70.3% for the three months ended December 31, 2002 from 67.6% for the same period in 2001. The
increase in expenses related to $153,000 in employee costs and $112,000 in supplies and materials. The improvement in gross margins associated with net software sales relates to stronger demand for installation of new systems during the three months
ended December 31, 2002 as well as efficiencies gained by organizational improvements during fiscal 2001. Cost of sales relating to



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maintenance and services increased 100.6% to $1.7 million for the three months ended December 31, 2002 from $848,000 for
the same period in 2001. Our gross margin associated with maintenance and services decreased to 61.8% for the three months ended December 31, 2002 from 75.4% for the same period in 2001. The increase in expenses was related to $379,000 in employee
related expenses, $201,000 in continuing engineering costs, $199,000 in telephone costs, and $51,000 in travel expenses. Planned investment in our support organization to accommodate the application service provider agreement signed with US Oncology
and continued development of our direct international support presence for the three months ended December 31, 2002 contributed to the decline in our gross margin associated with maintenance and services. During the three months ended December 31,
2002, we deferred $46,000 in direct incremental travel expenses associated with software installation and training trips compared to the recognition of an additional $39,000 during the same period in fiscal 2002. We expect to recognize the deferred
travel expenses once the associated product revenues are recognized.



Research and Development. Research and development expenses increased 23.1% to $2.1 million for the three months ended December 31, 2002 from $1.7 million for the same period in 2001. As a percentage of total net sales, research and
development expenses decreased to 18.9% for the three months ended December 31, 2002 from 19.5% for the same period in 2001. Additional engineering headcount and the associated personnel expenses were the primary factors for the increase in absolute
dollars. The decrease as a percentage of total net sales in the three months ended December 31, 2002 was due to increased net sales relative to research and development expenses.



Sales and Marketing.Sales and marketing expenses increased 11.0% to $3.2 million for the three months ended December
31, 2002 from $2.8 million for the same period in 2001. As a percentage of total net sales, sales and marketing expenses decreased to 28.3% for the three months ended December 31, 2002 from 32.3% for the same period in 2001. The increase in expenses
related to $214,000 in commissions due to higher sales, $136,000 in employee related costs, $78,000 in travel expenses, $20,000 in telephone costs and $14,000 in trade show expenses offset by a $105,000 reduction in outside services for marketing
communications. The decrease as a percentage of total net sales in the three months ended December 31, 2002 was due to increased net sales relative to sales and marketing expenses. During the three months ended December 31, 2002, we deferred $12,000
in direct incremental commission expenses compared to the recognition of an additional $13,000 of commission expense during the same period in fiscal 2002. We expect to recognize the deferred commission expenses once the associated product revenues
are recognized.



General and Administrative.
General and administrative expenses increased 39.0% to $1.1 million for the three months ended December 31, 2002 from $800,000 for the same period in 2001. As a percentage of total net sales, general and administrative expenses increased to 10.0%
for the three months ended December 31, 2002 from 9.1% for the same period in 2001. The increase in absolute dollars was primarily due to increases in employee related expenses of $134,000, travel costs of $78,000, business insurance premiums of
$62,000 and depreciation costs of $26,000.



Amortization of
Intangible Assets. Amortization expenses increased 12.1% to $102,000 for the three months ended December 31, 2002 from $91,000 for the same period in 2001. Our acquisition of Intellidata in April 2002 increased amortization expense as it relates
to developed/core technology, customer base and a covenant-not-to-compete. No goodwill is included in the amortization related to this transaction. In compliance with SFAS No. 142, we have ceased amortization of goodwill and acquired workforce
effective October 1, 2002.



Operating Income. Operating
income increased 27.5% to $979,000 for the three months ended December 31, 2002 from $768,000 for the same period in 2001. Operating income increased due to the higher rate of increase in net sales relative to the rate of increase in operating
expenses.



Interest and Other Income, Net. Interest and
other income, net decreased 28.7% to $77,000 for the three months ended December 31, 2002 from $108,000 for the same period in 2001. The decline is related to lower interest income from investments in short and long-term marketable securities
resulting from lower interest rates in the 2002 period.



Income Taxes. Our effective tax rate was 34.9% for the three months ended December 31, 2002 and 34.6% for the same period in 2001. The increase in absolute dollars was primarily due to higher operating income.



Accretion of Redeemable Convertible Preferred Stock. Historically,
each reporting period, the carrying value of the redeemable convertible preferred stock has been increased by periodic accretions, using the effective interest method, so that the carrying amount would equal the redemption value at the redemption
date. These increases were effected through charges against retained earnings (accumulated deficit). Several factors have influenced our determination of the value of the redeemable convertible preferred stock. These factors included plans for the
initial



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public offering, the performance of our business, changes in our business model and significant product introductions,
current market conditions and the performance of the stock price of our comparable companies. During the three months ended December 31, 2002, we recorded accretion charges of $2.2 million, representing the increase in the redemption value of the
Series A redeemable convertible preferred stock in the period after our fiscal year end and immediately leading up to the initial public offering, compared to $1.8 million for the corresponding three month period in the prior year. Upon the closing
of our initial public offering in November 2002, all shares of our redeemable convertible preferred stock automatically converted into an equal number of shares of common stock. Therefore, we will not incur accretion charges related to the Series A
redeemable convertible preferred stock in future reporting periods.



Backlog



Our backlog is comprised of customer deposits, deferred
software license revenue, other deferred revenue and unearned revenue. Customer deposits represent required deposits paid by our customers when they place orders. These deposits are held as a liability until revenue recognition. Deferred software
license revenue represents the revenues on installed, accepted and invoiced products that we cannot yet recognize because the products installed were only a subset of the products outlined in a multiple element arrangement for which we do not have
VSOE of the fair value on all of the undelivered elements. The amounts classified as deferred software license revenue will be recognized as revenue once we establish VSOE of the fair value on the remaining undelivered elements, the remaining
elements for which VSOE of the fair value does not exist have been installed and accepted or the remaining elements for which VSOE of the fair value does not exist have been canceled, whichever occurs first. Other deferred revenue represents
maintenance and support services and term licenses which are generally recognized ratably over the support period and license term, respectively. Unearned revenue represents the value of products ordered but not installed or accepted in excess of
the contract deposit. Orders are recognized only once we have received a signed purchase and license agreement, an authorized purchase order and a deposit check. Therefore, amounts in our sales pipeline that have not met all three order recognition
criteria are not included in our backlog.



The components of
backlog as of December 31, 2002 and 2001 are as follows (amounts in thousands):



|                                  |  |              |        |      |   |       
|--------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                  |  | December 31,
|                                  |  | 2002         |        | 2001
|                                  |  | (Restated)  
|                                  |  | (See Note 6)
|Customer deposits                 |  | $            | 10,135 |      | $ | 7,778 
|Deferred software license revenue |  |              | 9,229  |      |   | 4,245 
|Other deferred revenue            |  |              | 10,735 |      |   | 7,814 
|Unearned revenue                  |  |              | 21,724 |      |   | 13,375
|                                  |  |              |        |      |   |       
|Total backlog                     |  | $            | 51,823 |      | $ | 33,212
|                                  |  |              |        |      |   |       



Of the total $51.8
million of backlog at December 31, 2002, we expect to recognize approximately $47.3 million of our backlog during the twelve months following December 31, 2002 with the remaining portion to be completed in subsequent periods. We cannot assure you
that contracts included in backlog will generate the specified revenues or that these revenues will be fully recognized within the specified time periods.



Deferred revenue increased $7.9 million to $20.0 million for the twelve months ended December 31, 2002 from $12.1 million at December 31, 2001. Of the
$7.9 million increase, deferred software license revenue and the related deferred maintenance and support contributed $5.7 million. This increase was comprised of $3.9 million of new installations in oncology, $1.4 million in imaging systems and
$419,000 in new products to existing customers. The remaining $2.2 million was associated with other deferred revenue related to term licenses and post contract maintenance and support.



Seasonality



After giving effect to the restatement, we continue to experience a seasonal pattern in our revenues, with our first quarter typically having the lowest
revenues followed by increasing revenue growth in the subsequent quarters of our fiscal year. Although our seasonality is less pronounced after the restatement, we believe the seasonality of our revenue continues to be influenced by the year end of
many of our customers budgetary cycles. As much of the labor and indirect expense associated with software systems for which revenue has been deferred are not matched with the subsequent revenue recognition, net income does not display a clear
and predictable seasonal pattern.



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In addition, the implementation of a significant contract previously included in backlog, or a contract
intended to be installed in a phased manner over a longer than average time period, could generate a large increase in revenue and net income for any given quarter or fiscal year, which may prove unusual when compared to changes in revenue and net
income in other periods. Furthermore, we typically experience long sales cycles for new customers, which may extend over several quarters before a sale is consummated and a customer implementation occurs. As a result, we believe that quarterly
results of operations will continue to fluctuate and that quarterly results may not be indicative of future periods. The timing of revenues is influenced by a number of factors, including the timing of individual orders, customer implementations and
seasonal customer buying patterns.



Liquidity and Capital Resources



We have financed our operations since inception primarily
through cash from operating activities, a $4.0 million private placement of equity in 1996 and in November 2002, we received net proceeds of $24.4 million from our initial public offering of common stock. Cash, cash equivalents and
available-for-sale securities were $49.9 million at December 31, 2002.



During the three months ended December 31, 2002, net cash used in operating activities was $915,000 compared to net cash provided by operating activities of $1.6 million for the same period in 2001. Cash used in operations during the three
months ended December 31, 2002 was primarily attributable to an increase in the accounts receivable balance and to decreases in the accrued liabilities and income taxes payable balances. These uses of cash were partially offset by an increase in
deferred revenues, net income after non-cash adjustments for depreciation and amortization and a decrease in the prepaid expenses and other current assets balance. Cash provided by operating activities during the three months ended December 31, 2001
was primarily attributable to net income after adjustment for non-cash charges relating to depreciation and amortization. A decrease in the accounts receivable balance and increases in the customer deposits and deferred revenue balances also
contributed to cash provided by operating activities. Total cash provided by cash from operations was offset in part by decreases in accrued liabilities and accounts payable and an increase in accounts receivable.



In determining average days sales outstanding and accounts receivable
turnover, we use our gross annual invoicing in each calculation as we believe this provides a more relevant measurement basis due to the significance of our deferred revenue. Our accounts receivable turnover decreased to 4.9 for the three months
ended December 31, 2002 from 6.2 for the same period in 2001. Our days sales outstanding at December 31, 2002 increased to 73 from 58 at December 31, 2001. We believe stronger demand for implementation of new systems which increased our sales late
in the quarter and the seasonal impact of holidays which slowed cash collections late in the quarter have increased the accounts receivable balance beyond historical levels which impacts the calculation of accounts receivable turnover and days sales
outstanding ratios. We continue our efforts to improve collections by maintaining appropriate staffing levels, formalizing escalation procedures, and improving internal communications. Revenue is only recognized when all of the criteria for revenue
recognition have been met which is upon acceptance and invoicing of the final balance of the fee unless the invoice has payment terms extending longer than 60 days. Any invoice that has payment terms longer than 60 days is considered to have
extended payment terms and is not be recognized as a receivable or revenue until it is due and payable.



Net cash used in investing activities was $403,000 for the three months ended December 31, 2002 and $650,000 for the same period in 2001. During the three
months ended December 31, 2002, cash used in investing activities primarily related to the purchase of $565,000 of capital equipment to support ongoing operations offset by net proceeds from sales and maturities of available-for-sale securities of
$162,000. During the three months ended December 31, 2001, cash used in investing activities primarily related to the purchase of $409,000 in capital assets and a $250,000 payment relating to the acquisition of MC2, offset by net proceeds from sales and maturities of available-for-sale securities of $9,000.



Net cash provided by financing activities was $24.5 million for the three
months ended December 31, 2002, and $5,000 for the same period in 2001. Cash provided by financing activities during the three months ended December 31, 2002 can be attributed primarily to net proceeds of $24.4 million received in our initial public
offering during November 2002. During the three months ended December 31, 2001, cash provided by financing activities was from proceeds from the issuance of common shares through the exercise of common stock options of $33,000 offset by the $14,000
repurchase of common stock and $14,000 in capital lease principal payments.



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In fiscal 2000, we entered a capital lease for the purchase of furniture for our corporate headquarters.
This capital lease is scheduled to be fully repaid in February 2005. The interest rate for this financing is 13.54% per year and equates to an aggregate monthly payment of $7,000. As of December 31, 2002, the principal balance outstanding on the
capital lease totaled $164,000. We have granted a security interest to the lenders in all furniture covered by this lease.



The following table describes our commitments to settle contractual obligations in cash not recorded on the balance sheet as of December 31, 2002. The
telecommunications contracts with AT&T include wireless, frame-relay, voice/data and internet transport services.



|            |  |                 |           |                  |   |                             |  |                          |           |  |   |          
|----------- |  | --------------- | --------- | ---------------- | - | --------------------------- |  | ------------------------ | --------- |  | - | ---------
|Fiscal Year |  | Property Leases |           | Operating Leases |   | TelecommunicationsContracts |  | Total Future Obligations
|2003        |  | $               | 1,582,000 |                  | $ | 43,000                      |  | $                        | 638,000   |  | $ | 2,263,000
|2004        |  |                 | 2,105,000 |                  |   | 49,000                      |  |                          | 1,204,000 |  |   | 3,358,000
|2005        |  |                 | 2,145,000 |                  |   | 23,000                      |  |                          | 1,200,000 |  |   | 3,368,000
|2006        |  |                 | 1,900,000 |                  |   | 4,000                       |  |                          | 1,200,000 |  |   | 3,104,000
|2007        |  |                 | 804,000   |                  |   |                            |  |                          | 930,000   |  |   | 1,734,000



We expect to increase
capital expenditures consistent with our anticipated growth in infrastructure and personnel. We also may increase our capital expenditures as we expand our product lines or invest in new markets. We believe that the net proceeds from the common
stock sold in the initial public offering, together with available funds and cash generated from operations will be sufficient to meet our operating requirements, assuming no change in the operations of our business, for at least the next 18 months.



Recent Accounting Pronouncements



In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or
Disposal Activities, which addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that
the Emerging Issues Task Force, or EITF, has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect adoption of SFAS No. 146 to have a material impact on our financial position or on our results of operations.



In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of EITF Issue No. 00-21 will have no material impact on our
financial position or on our results of operations.



In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123 which amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods ending after December 15, 2002; however, early adoption is permitted. We elected to
early adopt SFAS No. 148 and all related disclosures are included herein.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We believe that the adoption of this FIN 46 will have no material impact on our financial statements.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. These exposures may change
over time as business practices evolve and could have a material adverse impact on our financial results.



We have been exposed to interest rate risk as it applies to our limited use of debt instruments and interest earned on holdings of long and short-term
marketable securities. Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have experienced in the past. A 10% change in interest rates would not be material to our results of
operations. We reduce the sensitivity of our results of operations to these risks by maintaining an investment portfolio, which is primarily comprised of highly rated, short-term investments. We do not hold or issue derivative, derivative commodity
instruments or other financial instruments for trading purposes.



We have operated mainly in the United States and greater than 99% of our sales were made in U.S. dollars in each of the three months ended December 31, 2002 and 2001. Accordingly, we have not had any material exposure to foreign currency
rate fluctuations. Currently, all of our international distributors denominate all transactions in U.S. dollars. However, as we sell to customers in the United Kingdom and Europe through our recently formed UK subsidiary a majority of those sales
may be denominated in euros or pounds sterling. The functional currency of our new UK subsidiary is pounds sterling. Thus, exchange rate fluctuations between the euro and pounds sterling will be recognized in the statements of operations as these
foreign denominated sales are remeasured by our UK subsidiary. As exchange rate fluctuations occur between pounds sterling and the U.S. dollar, these fluctuations will be recorded as cumulative translation adjustments within stockholders
equity as a component of accumulated other comprehensive income (loss) as our UK subsidiary is translated into U.S. dollars for consolidation purposes.



Item 4. Controls and Procedures



a. Evaluation Of Disclosure Controls And Procedures.



Joseph Jachinowski, our Chief Executive Officer, and Kendra Borrego, our Chief Financial Officer, conducted an evaluation of the effectiveness of IMPACs disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) as of December 31, 2002. Based upon their evaluation, they each found the Companys disclosure controls and procedures were adequate to ensure that information required to be disclosed in the reports
that IMPAC files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required, and that information required to be disclosed is accumulated and communicated to them as appropriate to allow timely decisions
regarding required disclosure.



As described in Note 6 of the
notes to the condensed consolidated financial statements included in Part I  Item of this Form 10-Q/A, subsequent to the issuance of IMPACs consolidated financial statements for the quarter ended December 31, 2002, our management
determined to restate our consolidated financial statements as of and for the quarters ended December 31, 2002 and 2001, to shift some previously recognized revenues to later quarters or to defer recorded revenues and recognize them in periods
subsequent to December 31, 2002.



In connection with restating
our financial statements as provided in this report, our Chief Executive Officer and Chief Financial Officer, with the participation of other management, re-evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report and as of the date of this report. During the restatement, our independent auditors, PricewaterhouseCoopers LLP, advised management and the Audit Committee that it noted certain matters regarding software revenue
recognition practices during the periods under review that it considered to be material weaknesses. As part of the re-evaluation, we have conducted an extensive internal review of our revenue recognition practices for all periods for which financial
statements are included in this report. Among other things, this involved the review of each of the over 1,500 customer contracts entered into since October 1, 1999.



Based on the re-evaluation by our Chief Executive Officer and Chief Financial Officer, they concluded that, as of the end of
the period covered by this report, there were deficiencies in our disclosure controls and procedures.



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As part of our disclosure controls and procedures over the selection and application of accounting
principles, in particular software revenue recognition under SOP 97-2, our accounting officers independently reviewed SOP 97-2 together with other accounting literature, consulted with our independent auditing firm regarding revenue recognition and
accounting developments, attended continuing education courses for the accounting profession and reviewed various accounting journals and other literature with respect to the existence of new accounting pronouncements and their application to IMPAC.



These controls and procedures were found to be deficient in
identifying the accounting issues which are the subject of the restatement. Specifically, the controls and procedures did not result in (i) our proper understanding of the application of SOP 97-2 for multiple element contracts, (ii) the
identification of an improper usage of a retroactive acceptance clause resulting in revenue being recognized in the incorrect period and (iii) the deferral of 12% of the current list price of the software rather than 12% of the net purchase price.



In response to the matters identified, we have taken steps to
strengthen control processes and procedures to identify, rectify and prevent the recurrence of the circumstances that resulted in our determination to restate prior period financial statements. We intend to correct the identified weaknesses in our
disclosure controls and procedures that led to the restatement by taking the following steps, among others:



| |  |  | Initiating a search for an in-house finance person with extensive software revenue recognition experience, including the application of SOP 97-2.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishing a procedure for conducting internal training sessions for affected employees on applicable policies and procedures and providing opportunities for accounting personnel
to attend external training and continuing education programs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Supplementing our revenue recognition policy to include a clearly understandable summary of key elements of the policy to better ensure broader understanding of the policy among our
personnel.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Documenting the review of revenue transactions prior to recognizing revenue, including how each of the four criteria for revenue recognition (i.e. persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable) has been met, and requiring that this documentation be reviewed and approved by a responsible person prior to recording revenue.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishing procedures to perform an on-going analysis of the VSOE of maintenance to support the fair value of maintenance to be used in deferring the fair value from multiple
element arrangements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corresponding with accounting professionals, including but not limited to our independent auditing firm, to ascertain any changes in application of Generally Accepted Accounting
Principles (GAAP).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing the Financial Accounting Standards Boards (FASB) and American Institute of Certified Public Accountants websites and any available information to acknowledge,
review and interpret any applicable accounting changes, including changes relating to software revenue recognition.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe these changes to our system of internal controls and our disclosure controls and procedures will be adequate to provide reasonable assurance
that the objectives of these control systems will be met. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.



b. Changes in Internal Controls.



There were none.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



We
are not currently a party to any material legal proceedings.



Item 2. Changes in Securities and Use of Proceeds



From October 1, 2002 through December 31, 2002, we issued 271 shares of our common stock to employees pursuant to exercises of stock options (with an average exercise price of $3.23 per share) under our 1998 stock
option plan. These issuances were deemed exempt from registration under Section 5 of the Securities Act of 1933 in reliance upon Rule 701 thereunder.



Our registration statement (Registration No. 333-89724) under the Securities Act of 1933, as amended, for our initial public offering became effective on
November 19, 2002. A total of 2,515,625 shares of common stock were registered, and we sold 1,875,000 shares of our common stock to an underwriting syndicate. Thomas Weisel Partners LLC, SG Cowen Securities Corporation and U.S. Bancorp Piper Jaffray
Inc. were the managing underwriters of the offering. An additional 640,625 shares of common stock were sold on behalf of selling stockholders as part of the same offering. All shares were sold to the public at a price of $15.00 per share. In
connection with the offering, we paid approximately $2.0 million in underwriting discounts and commissions to the underwriters. Offering proceeds, net of aggregate costs to us of approximately $1.8 million, were approximately $24.4 million. We
intend to use the net proceeds of the offering for working capital and to expand our business generally, including possible acquisitions.



Item 3. Defaults Upon Senior Securities



Not Applicable.



Item 4. Submission of Matter to a Vote of Securities Holders



On October 29, 2002, the holders of a majority of the outstanding shares of the Company approved the Companys reincorporation from California to Delaware (the Reincorporation) by written consent
without a meeting. This shareholder written consent was signed by the holders of 4,340,268 of the 6,072,989 outstanding shares of the Companys common stock as of October 29, 2002, and by the holders of 1,215,170 of the 1,238,390 outstanding
shares of the Companys redeemable convertible preferred stock as of October 29, 2002. Written notice of the action by written consent of the shareholders, together with an Information Statement providing shareholders with certain information
about the Reincorporation, was sent on October 30, 2002 to all shareholders who were entitled to vote on the matters included in the October 29, 2002 written consent and who had not consented thereto in writing.



On November 15, 2002, the holders of a majority of the outstanding shares of
the Company, by written consent without a meeting, adopted resolutions to (i) approve and adopt, effective upon the closing of the Companys initial public offering, the Second Amended and Restated Certificate of Incorporation of the Company,
(ii) approve and adopt, effective upon the closing of the Companys initial public offering, the Amended and Restated Bylaws of the Company, (iii) approve and adopt the 2002 Employee Stock Purchase Plan, and (iv) approve and adopt the 2002
Stock Plan. This stockholder written consent was signed by the holders of 4,340,268 of the 6,072,989 outstanding shares of the Companys common stock as of November 15, 2002, and by the holders of 1,215,170 of the 1,238,390 outstanding shares
of the Companys redeemable convertible preferred stock as of November 15, 2002. Written notice of the action by written consent of the stockholders was sent on November 20, 2002 to all stockholders who were entitled to vote on the matters
included in the November 15, 2002 written consent and who had not consented thereto in writing.



Item 5. Other Information



The
audit committee has reviewed the range of services provided by PricewaterhouseCoopers LLP to the Company for both historic and proposed projects. In addition to audit services for the Company and all wholly owned subsidiaries, PricewaterhouseCoopers
LLP is authorized to provide services related to federal and state tax compliance and any transaction services that may be needed in connection with due diligence projects.



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Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 3.1 |  | Second Amended and Restated Certificate of Incorporation of IMPAC Medical Systems, Inc.*
| | --- |  | ----------------------------------------------------------------------------------------



| | 3.2 |  | Amended and Restated Bylaws of IMPAC Medical Systems, Inc.*
| | --- |  | -----------------------------------------------------------



| | 31.1 |  | Certification of Principal Executive Officer Pursuant to Section 302.
| | ---- |  | ---------------------------------------------------------------------



| | 31.2 |  | Certification of Principal Financial Officer Pursuant to Section 302.
| | ---- |  | ---------------------------------------------------------------------



| | 32.1 |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
| | ---- |  | --------------------------------------------------------------------------------



| | 32.2 |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
| | ---- |  | --------------------------------------------------------------------------------

---

|* |  | Previously filed.
|- |  | -----------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



There were no reports on form 8-K filed during the three-month period ended December 31, 2002.



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SIGNATURES



Pursuant to the
requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.



IMPAC MEDICAL SYSTEMS, INC.RegistrantDated: April 16, 2004/s/    JOSEPH K. JACHINOWSKIJoseph K. JachinowskiChairman of the Board, President andChief Executive Officer/s/    KENDRA A. BORREGOKendra A. BorregoChief Financial Officer




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