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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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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 June 30, 2004



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.    x  Yes ̈No



Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    x  Yes ̈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 November 18, 2004                 9,929,988



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                                            |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                            |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                           
|                              |  |                                                                                                           
|Item 1.                       |  | Financial Statements (unaudited)                                                                           |  | 1   
|                              |  |                                                                                                           
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2004 and September 30, 2003                           |  | 1   
|                              |  |                                                                                                           
|                              |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2004 and 2003 |  | 2   
|                              |  |                                                                                                           
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2004 and 2003           |  | 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                                                 |  | 24  
|                              |  |                                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                                    |  | 24  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                           
|                              |  |                                                                                                           
|Item 1.                       |  | Legal Proceedings                                                                                          |  | 26  
|                              |  |                                                                                                           
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 26  
|                              |  |                                                                                                           
|Item 3.                       |  | Defaults Upon Senior Securities                                                                            |  | 26  
|                              |  |                                                                                                           
|Item 4.                       |  | Submission of Matters to a Vote of Securities Holders                                                      |  | 26  
|                              |  |                                                                                                           
|Item 5.                       |  | Other Information                                                                                          |  | 27  
|                              |  |                                                                                                           
|Item 6.                       |  | Exhibits                                                                                                   |  | 27  
|                              | 
|Signatures                    |  | 28                                                                                                        



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



The
statements contained in this Form 10-Q 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, our inability to recognize revenue from multiple element software contracts where certain elements have been delivered, installed and accepted but other
elements remain undelivered, lost sales or lower sales prices due to competitive pressures, the 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, changes in Medicare reimbursement policies, the integration and performance of acquired businesses, outstanding securities litigation and other factors and risks discussed herein under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations  Risk Factors Affecting Financial Performance and other reports filed by the Company from time to time with the Securities and
Exchange Commission.



ii



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                      |  |               |         |   |                       |   |        |  
|------------------------------------------------------------------------------------- |  | ------------- | ------- | - | --------------------- | - | ------ | -
|                                                                                      |  | June 30, 2004 |         |   | September 30, 2003    |  
|(In thousands)                                                                        |  |               |         |   | Restated (See Note 7) |  
|Assets                                                                                |  |               |         |   |                       |   |        |  
|Current assets:                                                                       |  |               |         |   |                       |   |        |  
|Cash and cash equivalents                                                             |  | $             | 41,242  |   |                       | $ | 57,979 |  
|Available-for-sale securities                                                         |  |               | 2,600   |   |                       |   | 7,052  |  
|Accounts receivable, net                                                              |  |               | 21,298  |   |                       |   | 12,100 |  
|Unbilled accounts receivable                                                          |  |               | 603     |   |                       |   |       |  
|Inventories                                                                           |  |               | 95      |   |                       |   | 66     |  
|Deferred income taxes, net                                                            |  |               | 7,079   |   |                       |   | 6,400  |  
|Income tax refund receivable                                                          |  |               |        |   |                       |   | 339    |  
|Prepaid expenses and other current assets                                             |  |               | 5,245   |   |                       |   | 4,691  |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Total current assets                                                                  |  |               | 78,162  |   |                       |   | 88,627 |  
|Available-for-sale securities                                                         |  |               | 3,688   |   |                       |   | 2,719  |  
|Property and equipment, net                                                           |  |               | 4,604   |   |                       |   | 3,573  |  
|Deferred income taxes                                                                 |  |               | 861     |   |                       |   | 883    |  
|Goodwill                                                                              |  |               | 15,351  |   |                       |   | 1,227  |  
|Other intangible assets, net                                                          |  |               | 8,273   |   |                       |   | 918    |  
|Other assets                                                                          |  |               | 482     |   |                       |   | 459    |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Total assets                                                                          |  | $             | 111,421 |   |                       | $ | 98,406 |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Liabilities, Common Stock Subject to Rescission Rights and Stockholders Equity       |  |               |         |   |                       |   |        |  
|Current liabilities:                                                                  |  |               |         |   |                       |   |        |  
|Capital lease obligations, current                                                    |  | $             | 1       |   |                       | $ | 74     |  
|Accounts payable                                                                      |  |               | 275     |   |                       |   | 864    |  
|Accrued liabilities                                                                   |  |               | 2,984   |   |                       |   | 4,758  |  
|Income taxes payable                                                                  |  |               | 1,928   |   |                       |   | 2,353  |  
|Deferred revenue                                                                      |  |               | 38,156  |   |                       |   | 27,552 |  
|Customer deposits, current                                                            |  |               | 10,518  |   |                       |   | 10,864 |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Total current liabilities                                                             |  |               | 53,862  |   |                       |   | 46,465 |  
|Customer deposits, net of current portion                                             |  |               | 284     |   |                       |   | 232    |  
|Deferred revenue, net of current portion                                              |  |               | 62      |   |                       |   |       |  
|Capital lease obligations, net of current portion                                     |  |               |        |   |                       |   | 41     |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Total liabilities                                                                     |  |               | 54,208  |   |                       |   | 46,738 |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Common stock subject to rescission rights                                             |  |               |        |   |                       |   | 98     |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Stockholders equity:                                                                 |  |               |         |   |                       |   |        |  
|Preferred stock                                                                       |  |               |        |   |                       |   |       |  
|Common stock                                                                          |  |               | 10      |   |                       |   | 10     |  
|Additional paid-in capital                                                            |  |               | 50,307  |   |                       |   | 47,792 |  
|Accumulated other comprehensive loss                                                  |  |               | (50     | ) |                       |   | (16    | )
|Retained earnings                                                                     |  |               | 6,946   |   |                       |   | 3,784  |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Total stockholders equity                                                            |  |               | 57,213  |   |                       |   | 51,570 |  
|                                                                                      |  |               |         |   |                       |   |        |  
|Total liabilities, common stock subject to rescission rights and stockholders equity |  | $             | 111,421 |   |                       | $ | 98,406 |  
|                                                                                      |  |               |         |   |                       |   |        |  



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



1



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##### Table of Contents

IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|---------------------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | --------------------- | - |  | - | ------ | -
|                                                                       |  | Three Months Ended June 30, |        |   | Nine Months Ended June 30, |  
|                                                                       |  | 2004                        |        |   | 2003                       |   |        | 2004 |  |   | 2003                  |  
|(In thousands, except per share data)                                  |  |                             |        |   | Restated (See Note 7)      |   |        |      |  |   | Restated (See Note 7) |  
|Net sales:                                                             |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Software license and other, net                                        |  | $                           | 11,476 |   |                            | $ | 11,802 |      |  | $ | 29,308                |   |  | $ | 25,852 |  
|Maintenance and services                                               |  |                             | 7,859  |   |                            |   | 5,317  |      |  |   | 20,982                |   |  |   | 14,489 |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Total net sales                                                        |  |                             | 19,335 |   |                            |   | 17,119 |      |  |   | 50,290                |   |  |   | 40,341 |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Cost of sales:                                                         |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Software license and other, net                                        |  |                             | 3,815  |   |                            |   | 2,893  |      |  |   | 10,276                |   |  |   | 7,208  |  
|Maintenance and services                                               |  |                             | 2,643  |   |                            |   | 1,919  |      |  |   | 7,358                 |   |  |   | 5,294  |  
|Amortization of purchased technology                                   |  |                             | 382    |   |                            |   | 35     |      |  |   | 833                   |   |  |   | 192    |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Total cost of sales                                                    |  |                             | 6,840  |   |                            |   | 4,847  |      |  |   | 18,467                |   |  |   | 12,694 |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Gross profit                                                           |  |                             | 12,495 |   |                            |   | 12,272 |      |  |   | 31,823                |   |  |   | 27,647 |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Operating expenses:                                                    |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Research and development                                               |  |                             | 3,117  |   |                            |   | 2,620  |      |  |   | 8,557                 |   |  |   | 7,090  |  
|Sales and marketing                                                    |  |                             | 5,085  |   |                            |   | 3,812  |      |  |   | 13,010                |   |  |   | 10,272 |  
|General and administrative                                             |  |                             | 1,781  |   |                            |   | 1,439  |      |  |   | 4,875                 |   |  |   | 3,978  |  
|Amortization of intangible assets                                      |  |                             | 199    |   |                            |   | 35     |      |  |   | 449                   |   |  |   | 83     |  
|Write-off of purchased in-process research and development             |  |                             |       |   |                            |   |       |      |  |   | 557                   |   |  |   |       |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Total operating expenses                                               |  |                             | 10,182 |   |                            |   | 7,906  |      |  |   | 27,448                |   |  |   | 21,423 |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Operating income                                                       |  |                             | 2,313  |   |                            |   | 4,366  |      |  |   | 4,375                 |   |  |   | 6,224  |  
|Interest expense                                                       |  |                             |       |   |                            |   | (4     | )    |  |   | (4                    | ) |  |   | (15    | )
|Interest and other income                                              |  |                             | 95     |   |                            |   | 150    |      |  |   | 347                   |   |  |   | 376    |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Income before provision for income taxes                               |  |                             | 2,408  |   |                            |   | 4,512  |      |  |   | 4,718                 |   |  |   | 6,585  |  
|Provision for income taxes                                             |  |                             | (794   | ) |                            |   | (1,553 | )    |  |   | (1,556                | ) |  |   | (2,267 | )
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Net income                                                             |  |                             | 1,614  |   |                            |   | 2,959  |      |  |   | 3,162                 |   |  |   | 4,318  |  
|Accretion of redeemable convertible preferred stock                    |  |                             |       |   |                            |   |       |      |  |   |                      |   |  |   | (2,229 | )
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Net income available to common stockholders                            |  | $                           | 1,614  |   |                            | $ | 2,959  |      |  | $ | 3,162                 |   |  | $ | 2,089  |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Net income per common share:                                           |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Basic                                                                  |  | $                           | 0.16   |   |                            | $ | 0.31   |      |  | $ | 0.32                  |   |  | $ | 0.24   |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Diluted                                                                |  | $                           | 0.16   |   |                            | $ | 0.29   |      |  | $ | 0.31                  |   |  | $ | 0.22   |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Weighted-average shares used in computing net income per common share: |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Basic                                                                  |  |                             | 9,903  |   |                            |   | 9,526  |      |  |   | 9,841                 |   |  |   | 8,771  |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  
|Diluted                                                                |  |                             | 10,275 |   |                            |   | 10,050 |      |  |   | 10,280                |   |  |   | 9,581  |  
|                                                                       |  |                             |        |   |                            |   |        |      |  |   |                       |   |  |   |        |  



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



2



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##### Table of Contents

IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                            |         |   |                       |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | --------------------- | - | ------- | -
|                                                                                  |  | Nine Months Ended June 30, |        
|                                                                                  |  | 2004                       |         |   | 2003                  |  
|(In thousands)                                                                    |  |                            |         |   | Restated (See Note 7) |  
|Cash flows from operating activities:                                             |  |                            |         |   |                       |   |         |  
|Net income                                                                        |  | $                          | 3,162   |   |                       | $ | 4,318   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |         |   |                       |   |         |  
|Depreciation and amortization of property and equipment                           |  |                            | 1,490   |   |                       |   | 1,239   |  
|Amortization of intangible assets                                                 |  |                            | 1,282   |   |                       |   | 275     |  
|Accretion of available-for-sale securities                                        |  |                            | 98      |   |                       |   |        |  
|Write-off of purchased in-process research and development                        |  |                            | 557     |   |                       |   |        |  
|Provision for doubtful accounts                                                   |  |                            | 100     |   |                       |   | 107     |  
|Deferred income taxes                                                             |  |                            | (678    | ) |                       |   | 295     |  
|Loss on disposal of property and equipment                                        |  |                            |        |   |                       |   | 92      |  
|Changes in assets and liabilities, net of effects of acquisitions:                |  |                            |         |   |                       |   |         |  
|Accounts receivable                                                               |  |                            | (7,686  | ) |                       |   | (4,120  | )
|Unbilled accounts receivable                                                      |  |                            | 422     |   |                       |   |        |  
|Inventories                                                                       |  |                            | (29     | ) |                       |   | 2       |  
|Prepaid expenses and other current assets                                         |  |                            | (537    | ) |                       |   | 157     |  
|Other assets                                                                      |  |                            | 14      |   |                       |   | (116    | )
|Customer deposits                                                                 |  |                            | (295    | ) |                       |   | (325    | )
|Accounts payable                                                                  |  |                            | (593    | ) |                       |   | 413     |  
|Accrued liabilities                                                               |  |                            | (1,775  | ) |                       |   | (494    | )
|Income tax payable/refund receivable                                              |  |                            | (86     | ) |                       |   | (1,454  | )
|Deferred revenue                                                                  |  |                            | 6,957   |   |                       |   | 5,893   |  
|Tax benefits from employee stock options                                          |  |                            | 662     |   |                       |   |        |  
|                                                                                  |  |                            |         |   |                       |   |         |  
|Net cash provided by operating activities                                         |  |                            | 3,065   |   |                       |   | 6,282   |  
|                                                                                  |  |                            |         |   |                       |   |         |  
|Cash flows from investing activities:                                             |  |                            |         |   |                       |   |         |  
|Acquisition of property and equipment                                             |  |                            | (2,206  | ) |                       |   | (1,828  | )
|Proceeds from disposal of property and equipment                                  |  |                            |        |   |                       |   | 94      |  
|Payments for the acquisition of Tamtron and MRS product lines                     |  |                            | (22,507 | ) |                       |   |        |  
|Purchases of available-for-sale securities                                        |  |                            | (1,076  | ) |                       |   | (26,622 | )
|Proceeds from sales of available-for-sale securities                              |  |                            | 100     |   |                       |   | 27,261  |  
|Proceeds from maturities of available-for-sale securities                         |  |                            | 4,295   |   |                       |   | 66      |  
|                                                                                  |  |                            |         |   |                       |   |         |  
|Net cash used in investing activities                                             |  |                            | (21,394 | ) |                       |   | (1,029  | )
|                                                                                  |  |                            |         |   |                       |   |         |  
|Cash flows from financing activities:                                             |  |                            |         |   |                       |   |         |  
|Principal payments on capital leases                                              |  |                            | (194    | ) |                       |   | (48     | )
|Proceeds from the issuance of common stock, net                                   |  |                            | 1,756   |   |                       |   | 29,005  |  
|                                                                                  |  |                            |         |   |                       |   |         |  
|Net cash provided by financing activities                                         |  |                            | 1,562   |   |                       |   | 28,957  |  
|                                                                                  |  |                            |         |   |                       |   |         |  
|Effect of exchange rates on cash                                                  |  |                            | 30      |   |                       |   | (40     | )
|Net increase (decrease) in cash and cash equivalents                              |  |                            | (16,737 | ) |                       |   | 34,210  |  
|Cash and cash equivalents at beginning of period                                  |  |                            | 57,979  |   |                       |   | 23,432  |  
|                                                                                  |  |                            |         |   |                       |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                          | 41,242  |   |                       | $ | 57,602  |  
|                                                                                  |  |                            |         |   |                       |   |         |  



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



3



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##### Table of Contents

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 accounting principles generally accepted in the United States of America 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 and nine month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2004, or for any future period. The balance sheet at September 30, 2003 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 with the financial statements and notes thereto for the year ended September 30, 2003
included in the Companys Form 10-K/A for the fiscal year ended September 30, 2003 filed November 1, 2004.



The Companys management restated its consolidated financial statements as of and for the fiscal years ended September 30, 2003, 2002, 2001 and 2000, including the
three and six months ended March 31, 2004 and 2003, to shift some previously recognized revenues to later quarters or to defer recorded revenues and recognize them in periods subsequent to September 30, 2003. The balance sheet at September 30, 2003
has been derived from the audited consolidated financial statements, as restated, 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, 2003 included in the Companys Amendment No. 2 to its Annual Report on Form 10-K/A
filed November 1, 2004.



NOTE 2Public Offerings



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 $24,300,000, 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. The Company did not receive any proceeds from the sale of shares by the selling stockholders or the exercise
of the over-allotment.



Secondary Public Offering



On May 12, 2003, the Company completed a secondary offering in which it
sold 200,000 shares of common stock at $19.00 per share for net cash proceeds of approximately $3,200,000, net of underwriting discounts, commissions and other offering costs. In addition to the shares sold by the Company, 2,178,223 shares were sold
by selling stockholders on the date of the offering and 356,733 shares were sold by selling stockholders in the exercise of the underwriters over-allotment option during May 2003. The Company did not receive any proceeds from the sale of
shares by the selling stockholders or from the exercise of the over-allotment option.



NOTE 3Significant Accounting Policies



The
Companys significant accounting policies are disclosed in the Companys Form 10-K/A filed on November 1, 2004 for the year ended September 30, 2003. With the exception of the new significant accounting policy for revenue recognition for
pathology information management systems set forth below, the Companys significant accounting policies have not materially changed as of June 30, 2004.



Inventories



Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. As of June 30, 2004 and September 30, 2003, inventories were comprised entirely of finished goods.



Goodwill and other intangible assets



Goodwill and other intangible assets, including customer lists and acquired workforce, are
stated at cost and are amortized on a straight-line basis over their estimated useful lives of generally two 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 ceased amortizing goodwill and instead performs an assessment for impairment at least annually by applying a fair-value based test. The Company has also reclassified the
unamortized balance of acquired workforce to goodwill. Accordingly, no goodwill or acquired workforce amortization was recognized during the three and nine months ended June 30, 2003 and 2004. The annual goodwill impairment test was completed during
the first quarter of fiscal 2004, and did not result in any impairment of recorded goodwill.



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 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.



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.



4



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##### Table of Contents

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 104 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 multiple element arrangements based on VSOE for each element, which is based on the
price charged when the same element is sold separately. If VSOE of the fair value of all undelivered elements exists but VSOE of the fair value 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. If VSOE of the fair value does not exist for all undelivered elements, revenue is deferred
until VSOE of the fair value exists for all undelivered elements, the elements for which VSOE of the fair value does not exist have been delivered or the elements for which VSOE of the fair value does not exist (a) have been deleted from the
contract or (b) there is competent evidence that allows for the reasonable judgment that it is remote that the customer will request delivery.



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 recognizes that portion over the remaining term of the included maintenance and support period. Fair value of services, such as training or consulting, is 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 service 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 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.



In December 2003, the Company added a pathology information management system to its suite of product offerings with the acquisition of certain assets of Tamtron
Corporation from IMPATH Inc. (see Note 6). Pathology information management systems involve significant implementation and customization efforts essential to the functionality of the related products. Accordingly, the Company recognizes the license
and professional consulting services generated through the sale of pathology management information systems using the percentage-of-completion method using labor hours incurred as prescribed by SOP No. 81-1, Accounting for Performance of
Construction-Type and Certain Product-Type Contracts. The progress toward completion is measured based on labor hours incurred as compared to total estimated hours to complete. The Company accounts for a change in estimate in the period the
change was identified. Provisions for estimated contract losses are recognized in the period in which the loss becomes probable and can be reasonably estimated.



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 this agreement, 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.



Accounting for stock-based compensation



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 FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123
(SFAS No. 148). No compensation expense is included in the net income available to common stockholders as reported during the three and nine months ended June 30, 2004 and 2003.



5



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##### Table of Contents

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 income available to common stockholders and pro forma net income per common share, basic and diluted, would have been as follows (in thousands,
except per share data):



|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|------------------------------------------------------------ |  | --------------------------- | ----- | - | -------------------------- | - | ----- | ---- |  | - | -------------------------- | - |  | - | ----- | -
|                                                             |  | Three Months Ended June 30, |       |   | Nine Months Ended June 30, |  
|                                                             |  | 2004                        |       |   | Restated (See Note 7) 2003 |   |       | 2004 |  |   | Restated (See Note 7) 2003 |  
|Net income available to common stockholders as reported      |  | $                           | 1,614 |   |                            | $ | 2,959 |      |  | $ | 3,162                      |   |  | $ | 2,089 |  
|Less stock-based compensation cost under a fair value method |  |                             | (64   | ) |                            |   | (193  | )    |  |   | (871                       | ) |  |   | (425  | )
|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|Pro forma net income available to common stockholders        |  | $                           | 1,550 |   |                            | $ | 2,766 |      |  | $ | 2,291                      |   |  | $ | 1,664 |  
|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|Net income per common share, basic                           |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|As reported                                                  |  | $                           | 0.16  |   |                            | $ | 0.31  |      |  | $ | 0.32                       |   |  | $ | 0.24  |  
|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|Pro forma                                                    |  | $                           | 0.16  |   |                            | $ | 0.29  |      |  | $ | 0.23                       |   |  | $ | 0.19  |  
|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|Net income per common share, diluted                         |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|As reported                                                  |  | $                           | 0.16  |   |                            | $ | 0.29  |      |  | $ | 0.31                       |   |  | $ | 0.22  |  
|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  
|Pro forma                                                    |  | $                           | 0.15  |   |                            | $ | 0.28  |      |  | $ | 0.22                       |   |  | $ | 0.17  |  
|                                                             |  |                             |       |   |                            |   |       |      |  |   |                            |   |  |   |       |  



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.



Other comprehensive income



Comprehensive income 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 income that were excluded from the net income. Total comprehensive income for the three and
nine months ended June 30, 2004 and 2003 is presented in the following table (in thousands):



|                                               |  |                             |       |   |                            |   |       |      |  |   |                       |   |  |   |       |  
|---------------------------------------------- |  | --------------------------- | ----- | - | -------------------------- | - | ----- | ---- |  | - | --------------------- | - |  | - | ----- | -
|                                               |  | Three Months Ended June 30, |       |   | Nine Months Ended June 30, |  
|                                               |  | 2004                        |       |   | 2003                       |   |       | 2004 |  |   | 2003                  |  
|                                               |  |                             |       |   | Restated (See Note 7)      |   |       |      |  |   | Restated (See Note 7) |  
|Net income                                     |  | $                           | 1,614 |   |                            | $ | 2,959 |      |  | $ | 3,162                 |   |  | $ | 4,318 |  
|Other comprehensive income:                    |  |                             |       |   |                            |   |       |      |  |   |                       |   |  |   |       |  
|Change in unrealized gain (loss) on securities |  |                             | (54   | ) |                            |   |      |      |  |   | (66                   | ) |  |   | (1    | )
|Foreign currency translation adjustment        |  |                             | (3    | ) |                            |   | (15   | )    |  |   | 32                    |   |  |   | (34   | )
|                                               |  |                             |       |   |                            |   |       |      |  |   |                       |   |  |   |       |  
|Comprehensive income                           |  | $                           | 1,557 |   |                            | $ | 2,944 |      |  | $ | 3,128                 |   |  | $ | 4,283 |  
|                                               |  |                             |       |   |                            |   |       |      |  |   |                       |   |  |   |       |  



Net income per common share



Basic net income per common share is computed by dividing net income
available to common stockholders by the weighted-average number of vested common shares outstanding for the period. Diluted net income per common share is computed giving effect to all potential dilutive common stock, including options and
redeemable convertible preferred stock.



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##### Table of Contents

A reconciliation of the numerator and denominator used in basic and diluted net income per share follows (in thousands).



|                                                                               |  |                             |        |                            |   |        |  |                       |        |  |   |        |  
|------------------------------------------------------------------------------ |  | --------------------------- | ------ | -------------------------- | - | ------ |  | --------------------- | ------ |  | - | ------ | -
|                                                                               |  | Three Months Ended June 30, |        | Nine Months Ended June 30, |  
|                                                                               |  | 2004                        |        | 2003                       |   | 2004   |  | 2003                  |       
|                                                                               |  |                             |        | Restated (See Note 7)      |   |        |  | Restated (See Note 7) |       
|Numerator:                                                                     |  |                             |        |                            |   |        |  |                       |        |  |   |        |  
|Net income                                                                     |  | $                           | 1,614  |                            | $ | 2,959  |  | $                     | 3,162  |  | $ | 4,318  |  
|Accretion of redeemable convertible preferred stock                            |  |                             |       |                            |   |       |  |                       |       |  |   | (2,229 | )
|                                                                               |  |                             |        |                            |   |        |  |                       |        |  |   |        |  
|Net income available to common stockholders                                    |  | $                           | 1,614  |                            | $ | 2,959  |  | $                     | 3,162  |  | $ | 2,089  |  
|                                                                               |  |                             |        |                            |   |        |  |                       |        |  |   |        |  
|Denominator:                                                                   |  |                             |        |                            |   |        |  |                       |        |  |   |        |  
|Weighted average shares used in computing basic net income per common share    |  |                             | 9,903  |                            |   | 9,526  |  |                       | 9,841  |  |   | 8,771  |  
|Dilutive effect of options to purchase shares and employee stock purchase plan |  |                             | 372    |                            |   | 524    |  |                       | 439    |  |   | 579    |  
|Dilutive effect of redeemable convertible preferred stock                      |  |                             |       |                            |   |       |  |                       |       |  |   | 231    |  
|                                                                               |  |                             |        |                            |   |        |  |                       |        |  |   |        |  
|Weighted average shares used in computing diluted net income per common share  |  |                             | 10,275 |                            |   | 10,050 |  |                       | 10,280 |  |   | 9,581  |  
|                                                                               |  |                             |        |                            |   |        |  |                       |        |  |   |        |  



The following outstanding options were
excluded from the computation of diluted net income per share as their effect is antidilutive (in thousands):



|                                 |  |                             |  |                            |  |      |  |     
|-------------------------------- |  | --------------------------- |  | -------------------------- |  | ---- |  | ----
|                                 |  | Three Months Ended June 30, |  | Nine Months Ended June 30,
|                                 |  | 2004                        |  | 2003                       |  | 2004 |  | 2003
|Options to purchase common stock |  | 169                         |  |                           |  | 110  |  | 12  



Recent accounting pronouncements



In January 2003, the Financial Accounting Standards Board
(FASB) issued FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB 51, which subsequently has been revised by FIN 46-R. The primary objectives of FIN 46-R are to provide guidance on the identification
of entities for which control is achieved through means other than through voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). This new
model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without
receiving additional subordinated financial support from other parties. In addition, FIN 46-R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46-R is
effective for VIEs created after January 31, 2003 and is effective for all VIEs created before February 1, 2003 that are Special Purpose Entities (SPEs) in the first reporting period ending after December 15, 2003 and for all other VIEs created
before February 1, 2003 in the first reporting period ending after March 15, 2004. The Company believes there are no entities qualifying as VIEs and the adoption of FIN 46-R to date has not had any effect on the Companys financial position,
cash flows or results of operations.



In May 2003, the EITF reached a consensus
on EITF Issue No. 03-05, Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in Arrangements Containing More-Than-Incidental Software. EITF No. 03-05 addresses the applicability
of Statement of Position No. 97-2 regarding software and non-software deliverables in a multiple element arrangement, giving consideration to whether the deliverables are essential to the functionality of one another and whether the whole
arrangement falls within SOP 97-2 as a result. EITF Issue No. 03-05 is effective for interim periods beginning after August 13, 2003. The adoption of EITF Issue No. 03-05 is not expected to have a material impact on the Companys financial
position or results of operations.



NOTE 4Commitments



Facilities



In addition to facility leases listed in our Form 10-K/A filed on November 1, 2004, the Company acquired certain assets and assumed certain
liabilities of Tamtron Corporation and Medical Registry Services, Inc. on December 23, 2003 (see Note 6). In connection with this acquisition, the Company assumed lease agreements for facilities in San Jose, California and Hackensack, New Jersey
from that date forward. The lease for the San Jose, California location expired in March 2004 and was not renewed. The facility lease for the Hackensack, New Jersey location expires in July 2005. As of June 30, 2004, total minimum future payments
under the Hackensack, New Jersey lease, payable in monthly installments, amounted to approximately $97,000.



In March 2004, the Company entered into a new facility lease agreement in San Jose, California which expires in March 2007. As of June 30, 2004, total minimum future payments under this lease, payable in monthly
installments, amounted to approximately $464,000.



NOTE 5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 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. 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. For one year following the offering, the Company classified a total of 6,500 shares issued with rescission rights outside of stockholders equity, as the redemption features were not within the
control of the Company. Any possible rescission rights would have lapsed in November 2003, and the 6,500 shares were reclassified to stockholders equity.



7



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##### Table of Contents

NOTE 6Acquisitions



On December 23, 2003, the Company completed the acquisition of certain assets and certain liabilities of Tamtron Corporation (Tamtron) and Medical Registry
Services, Inc. (MRS), the PowerPath®pathology information management and
cancer registry information system businesses of IMPATH Inc. for total cash consideration of $22.0 million and approximately $507,000 of acquisition costs. The acquisitions were made pursuant to an asset purchase agreement, dated November 24, 2003,
by and among Tamtron, MRS and the Company. The Company intends to continue to operate each of the acquired businesses.



The acquisition of assets and liabilities of Tamtron and MRS was accounted for in accordance with SFAS No. 141 Business Combinations using the purchase method
of accounting and, accordingly, the results of operations of Tamtron and MRS were included in the Companys consolidated financial statements subsequent to December 23, 2003. The purchase price was allocated to the net tangible and identifiable
intangible assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition as determined by an independent appraisal and management. The excess of the purchase price over the fair value of the net
identifiable assets was allocated to goodwill. The purchase price was allocated as follows (in thousands):



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Tangible assets                     |  | $ | 3,002  |  
|Deferred revenue                    |  |   | (3,713 | )
|Other assumed liabilities           |  |   | (101   | )
|Developed/core technology           |  |   | 5,138  |  
|Customer base                       |  |   | 3,032  |  
|Tradename                           |  |   | 469    |  
|In-process research and development |  |   | 557    |  
|Goodwill                            |  |   | 14,123 |  
|                                    |  |   |        |  
|                                    |  | $ | 22,507 |  
|                                    |  |   |        |  



The Company is amortizing
developed/core technology, the customer base and tradename on a straight line basis over two to five years, five to seven years and two to six years, respectively. In accordance with SFAS No. 142, no amortization has been recorded on the goodwill.
As a result of these acquisitions, the Company expects to recognize amortization expense of approximately $511,000 during the remainder of fiscal year 2004. The Company expects to recognize amortization expense of $2.0 million, $1.6 million, $1.4
million, $1.4 million and $468,000 during fiscal years 2005, 2006, 2007, 2008 and thereafter, respectively.



The fair value of the identifiable assets, including the portion of the purchase price attributed to the developed/core technology, acquired in-process research and development, the customer base and the tradename was
determined by an independent appraisal and management. The income approach was used to value developed/core technology, acquired in-process research and development, the customer base and the tradename, which includes an analysis of the completion
costs, cash flows, other required assets and risk associated with achieving such cash flows. Gross margins were estimated to be stable and operating expense ratios were estimated to slightly improve over the years. The present value of the cash
flows for MRS was calculated with a discount rate of 15% for the developed/core technology, customer base and tradename, and 20% for the in-process research and development. The present value of the cash flows for Tamtron was calculated with a
discount rate of 15% for the developed/core technology and customer base, 17.5% for the tradename and 20% for the in-process research and development.



The in-process research and development projects relate primarily to the development of additional modules to the pathology information system and additional features for
the registry system and are expected to be completed over the next twelve months. The purchased in-process technology was not considered to have reached technological feasibility and it has no alternative future use. Accordingly, it was recorded as
a component of operating expense. The revenues, expenses, cash flows and other assumptions underlying the estimated fair value of the acquired in-process research and development involve significant risks and uncertainties. The risks and
uncertainties associated with completing the acquired in-process projects include retaining key personnel and being able to successfully and profitably produce, market and sell related products. The Company does not know of any developments which
would lead it to significantly change its original estimate of the expected timing and commercial viability of these projects.



Goodwill of approximately $14.1 million represented the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.
The Company believes that its existing registry product offering along with the assets of MRS positions it as a leader in the market for data aggregation of cancer care information. The Company also believes that the addition of assets from Tamtron
in the area of pathology information systems creates a more relevant and comprehensive product offering to its customers. The combination of both acquisitions allows the Company to better achieve its goal to provide a total solution that manages the
complexity of cancer care throughout the spectrum of detection, diagnosis, treatment and follow-up.



Pro Forma Financial Information



The following pro forma financial information is based on the respective historical financial statements of the Company, Tamtron and MRS. The pro forma financial information reflects the consolidated results of operations as if the
acquisitions of Tamtron and MRS occurred at the beginning of each of the periods presented and includes the amortization of the identifiable intangible assets. The pro form data excludes non-recurring charges, such as in-process research and
development of approximately $557,000 in the quarter ended December 31, 2003. The pro forma financial data presented is not necessarily indicative of the Companys results of operations that might have occurred had the transaction been
completed at the beginning of the periods presented, and do not purport to represent what the Companys consolidated results of operations might be for any future period (in thousands, except per share data).



|                                                                       |  |                                 |        |                            |      |        |  |   |       
|---------------------------------------------------------------------- |  | ------------------------------- | ------ | -------------------------- | ---- | ------ |  | - | ------
|                                                                       |  | Three Months Ended June 30 2003 |        | Nine Months Ended June 30,
|                                                                       |  |                                 | 2004   |                            | 2003
|Net sales                                                              |  | $                               | 20,669 |                            | $    | 53,105 |  | $ | 49,887
|Net income available to common stockholders                            |  | $                               | 3,315  |                            | $    | 3,816  |  | $ | 2,519 
|Net income per common share:                                           |  |                                 |        |                            |      |        |  |   |       
|Basic                                                                  |  | $                               | 0.35   |                            | $    | 0.39   |  | $ | 0.29  
|Diluted                                                                |  | $                               | 0.33   |                            | $    | 0.37   |  | $ | 0.26  
|Weighted-average shares used in computing net income per common share: |  |                                 |        |                            |      |        |  |   |       
|Basic                                                                  |  |                                 | 9,526  |                            |      | 9,841  |  |   | 8,771 
|Diluted                                                                |  |                                 | 10,050 |                            |      | 10,280 |  |   | 9,581 



8



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##### Table of Contents

NOTE 7  Restatement of Financial Statements



April 2004 Restatement



The Company adopted SOP 97-2 which became effective for the Company in October 1999 for the purposes of revenue recognition. Subsequent to filing the Form 10-K for the
fiscal year ended September 30, 2003, management determined that the Company had recognized revenue for certain transactions prematurely. Accordingly, in April 2004, the Company restated its financial statements for the fiscal years ended September
30, 2000, 2001, 2002 and 2003 to shift some previously recognized revenues to later quarters and to defer other previously recorded revenues to periods subsequent to September 30, 2003.



The accounting issues that gave rise to the initial restatement in April 2004 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 VSOE of the fair value of the
undelivered elements. Accordingly, the Company should have deferred the recognition of revenue on those contracts until it 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 of fair value did not exist had been formally or constructively canceled. Instances where contracts were deemed to have been constructively canceled were limited to instances where more than
a year had lapsed since the last software product was accepted.



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.



October 2004
Restatement



The accounting issue that gave rise to the second restatement
in October 2004 related to the timing of revenues recognized on sales agreements which management determined had been constructively cancelled with respect to the undelivered software products. In our April 2004 restatement, the Company applied the
concept of constructive cancellation to approximately 40 sales agreements where management determined that the probability of delivering the remaining undelivered element(s) was remote and the undelivered element(s) was not critical to the operation
of the delivered elements.



During our initial restatement, management used
hindsight and considered the passage of time since the last delivered software product had been accepted as evidence that it was remote that the customer would request delivery of the remaining software products included in the arrangement. If more
than one year had lapsed since the last software product was accepted, management deemed the undelivered elements to have been constructively canceled as of the date the last element was delivered. In those instances, the Company shifted the
revenues to the acceptance date of the last products delivered under the applicable sales agreement.



Subsequent to the Companys April 2004 restatement, management determined that it should not have used hindsight and should have instead recognized the revenue related to the previously delivered elements during
the period when management determined, based upon then available evidence, that it was remote that the customer would request delivery of the remaining undelivered software products. As a result, the Company had to shift revenue related to
arrangements with constructively canceled undelivered elements to the date when sufficient competent evidence of the constructive cancellation was obtained for the periods prior to and including March 31, 2004, or will be obtained in future periods.



The October 2004 restatement also gives effect to the recognition of a
deferred tax liability associated with the acquisition of Intellidata, Inc. in April 2002. A deferred tax liability should have been created at the time of the acquisition to account for the differences in the amortization periods of related
intangible assets for book and tax purposes. The recognition of the additional deferred tax liability of approximately $573,000 in April 2002 caused a corresponding increase to goodwill.



As a result of the impact of changes in the timing of revenue recognition, net sales increased by $1.7 million in the three months ended
June 30, 2003 and by $1.0 million in the nine months ended June 30, 2003 with a corresponding increase 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 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.



9



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##### Table of Contents

As a result, the accompanying condensed consolidated financial statements have been restated from the amounts previously
reported for the three and nine months ended June 30, 2003. The amounts under the headings As Reported reflect our originally reported results as amended by the first restatement in April 2004. The amounts under the headings
Restated reflect the Companys restated results after this restatement. A summary of the significant effects of the restatement is as follows (in thousands, except per share amounts):



|                                            |  |                                  |        |                                 |   |             |  |          |        |  |   |       
|------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ----------- |  | -------- | ------ |  | - | ------
|                                            |  | Three Months Ended June 30, 2003 |        | Nine Months Ended June 30, 2003
|                                            |  | As Reported                      |        | Restated                        |   | As Reported |  | Restated
|Consolidated Statements of Operations Data: |  |                                  |        |                                 |   |             |  |          |        |  |   |       
|Net sales                                   |  | $                                | 15,540 |                                 | $ | 17,119      |  | $        | 39,300 |  | $ | 40,341
|Gross profit                                |  |                                  | 10,725 |                                 |   | 12,272      |  |          | 26,843 |  |   | 27,647
|Operating income                            |  |                                  | 2,863  |                                 |   | 4,366       |  |          | 5,282  |  |   | 6,224 
|Net income                                  |  |                                  | 1,957  |                                 |   | 2,959       |  |          | 3,671  |  |   | 4,318 
|Net income available to common stockholders |  |                                  | 1,957  |                                 |   | 2,959       |  |          | 1,442  |  |   | 2,089 
|Net income per common share:                |  |                                  |        |                                 |   |             |  |          |        |  |   |       
|Basic                                       |  | $                                | 0.21   |                                 | $ | 0.31        |  | $        | 0.16   |  | $ | 0.24  
|                                            |  |                                  |        |                                 |   |             |  |          |        |  |   |       
|Diluted                                     |  | $                                | 0.19   |                                 | $ | 0.29        |  | $        | 0.15   |  | $ | 0.22  
|                                            |  |                                  |        |                                 |   |             |  |          |        |  |   |       



|                                          |  |                     |        |          |   |       
|----------------------------------------- |  | ------------------- | ------ | -------- | - | ------
|                                          |  | As of June 30, 2003
|                                          |  | As Reported         |        | Restated
|Consolidated Balance Sheets Data:         |  |                     |        |          |   |       
|Prepaid expenses and other current assets |  | $                   | 4,159  |          | $ | 4,247 
|Deferred income taxes, net                |  |                     | 5,715  |          |   | 6,027 
|Goodwill                                  |  |                     | 14,778 |          |   | 15,351
|Deferred revenue                          |  |                     | 24,876 |          |   | 25,829
|Retained earnings                         |  |                     | 2,308  |          |   | 1,990 



NOTE 8  Subsequent Events



Purported Shareholder Class Action Lawsuits



On September 8, 2004, an alleged shareholder of the Company filed a putative securities
class action lawsuit in the United States District Court for the Northern District of California. See Operating Engineers Construction Industry and Miscellaneous Pension Fund (Local 66  Pittsburgh), on Behalf of Itself and All Others
Similarly Situated v. IMPAC Medical Systems, Inc., Joseph K. Jachinowski and Kendra A. Borrego. The defendants in this case include the Company and two of its top executive officers. The lawsuit relates to the Companys March 1, 2004,
announcement of its intent to restate its financial statements for fiscal years 2000 through 2003, and the Companys subsequent restatement of those financial statements. The lawsuit alleges, among other things, that during the period from
November 20, 2002 to May 13, 2004 (the class period), the Company falsely reported its results for fiscal years 2000 to 2003 through improper revenue recognition, and thereby artificially inflated the price of the Companys stock.
The plaintiff purports to have brought this lawsuit as a class action on behalf of all persons who purchased the Companys securities on the open market during the class period.



On September 14, 2004, two individuals filed a second purported securities class action lawsuit in the United States District Court for the
Northern District of California that is substantively identical to the one filed on September 8, 2004. See Alan Lerner and Marvin Rogers, on Behalf of Themselves and All Others Similarly Situated v. IMPAC Medical Systems, Inc., Joseph K.
Jachinowski and Kendra A. Borrego. The second lawsuit alleges the same claims against the same defendants on behalf of the same purported class of shareholders (those who purchased the Companys securities on the open market during the
period from November 20, 2002 to May 13, 2004) as the earlier-filed lawsuit.



On September 21, 2004, another individual filed a third putative securities class action lawsuit in the United States District Court for the Northern District of California. See John Maras, Individually and On Behalf of All Others
Similarly Situated v. IMPAC Medical Systems, Inc., Joseph Jachinowski, Kendra Borrego, David Auerbach, and James Hoey. This lawsuit alleges the same claims under the federal securities laws as the two earlier-filed lawsuits, and names as
defendants, in addition to the Company and the two executives named in the two earlier-filed lawsuits, two other executive officers of the Company. This lawsuit alleges the same class period as the two earlier-filed actions (i.e., November
20, 2002 to May 13, 2004), and likewise alleges that during the class period the Company overstated its financial results for fiscal years 2000 to 2003 through improper revenue recognition, allegedly resulting in artificial inflation of the price of
the Companys stock during the class period. This action further alleges that each of the four individual defendants sold shares of the Companys stock during the class period while in possession of material nonpublic information.



Each of these three related cases has been assigned to a single judge, and the
Company anticipates that these three cases will be consolidated into a single action. On November 8, 2004, an alleged shareholder filed a motion to consolidate the three cases and to be appointed as lead plaintiff for the putative class. No date has
been set for a hearing on this motion, and other shareholders seeking appointment as lead plaintiff may file similar motions. These lawsuits are still in the pleading stage, and the Court has entered orders providing that the time for the Company
and the individual defendants to move to dismiss, answer, or otherwise respond to the complaints is extended through and including forty-five days after the later of (i) the appointment of lead plaintiff(s) or (ii) the filing of an consolidated
amended complaint.



The Company and its officers have engaged outside counsel
to defend these cases vigorously on their behalf. The Company, however, cannot be sure that it will prevail in these matters. The Companys failure to successfully defend against these lawsuits could result in a material adverse effect on its
business, financial condition, and results of operation.



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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 filed November 1, 2004. 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.



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 balance sheet as of June 30, 2003 and the condensed consolidated statements of operations for the three and nine months ended June 30, 2003 and the
condensed consolidated statement of cash flows for the nine months ended June 30, 2003. See Note 7 to the condensed consolidated financial statements for further discussion of this matter.



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.



Recent Market Factors
Affecting Business



Although our revenues in the first three quarters of
fiscal 2004 have increased over the comparable fiscal 2003 quarters, the growth rate in our core oncology point-of-care business, which constitutes the majority of our non-recurring revenue, has slowed. We initially noted a softening of backlog in
the first quarter of fiscal 2004, which, at the time, was within historical norms. However, bookings remained soft in the first three quarters of 2004. We believe several factors are contributing to this softness.



First, on the radiation oncology front, all three linear accelerator manufacturers have
introduced next generation devices which have new operator front-ends and require new integration strategies. This has created uncertainty in the marketplace as customers are not fully aware of the connectivity options and the device
manufacturers have used it as a means to confuse the marketplace and bundle their proprietary solutions. Second, we are also facing increasing pressure from competitors who have bundled deals where the software component is being offered at
significant discounts as we have seen price shifting from the software to the hardware components putting us at a pricing disadvantage. Third, the second quarter of fiscal 2004 also witnessed a consolidation of oncology software players with the two
independent medical oncology IT players being acquired by radiation oncology companies. Fourth, Medicare reimbursement policies also continue to put a damper on oncology IT spending. Decreased reimbursements in the radiation oncology segment and
anticipated reductions in the medical oncology segment have led to delays in purchasing as facilities re-examine their budgets and return on investment expectations. Fifth, over the last several quarters our accounting restatement had a minor effect
on bookings as some of our competitors used the event to sell against us. Finally, if our new installation backlog continues to contract, we will have less installation scheduling flexibility, which will expose our revenue stream to quarterly
fluctuations if customers are not willing to take installation due to, for example, construction or equipment delays.



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 our primary distributor, Siemens Medical Systems, Inc., represented 7.5% and 8.8% of our total net sales in the three and nine months ended June 30, 2004, respectively, and 7.6% and
8.4% for the same periods in fiscal 2003, respectively. Distributor sales as a percentage of net sales have been relatively constant over the past year and are growing at a rate similar to non-distributor 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 4.6% and 5.8% of our net sales in the three and nine months ended June 30, 2004, respectively, and 4.5% and
5.4% of our net sales for the same periods in fiscal 2003, respectively. International sales as a percentage of net sales have been relatively constant over the past year and are growing at a rate similar to 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 nine 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 greater than the typical implementation cycle of three to nine months.



We have experienced significant variations in revenues and operating results
from quarter to quarter. Our quarterly operating results may continue to fluctuate due to a number of factors, including: the timing, size and complexity of our product sales and implementations; our inability to recognize revenue from multiple
element software contracts where certain elements have been delivered, installed and accepted but other elements remain undelivered; construction delays at client centers which impact our ability to install products; the timing of installation of
third party medical devices, including accelerators, simulation machines and imaging devices, at client sites, which must be installed before we can implement our systems; overall demand for healthcare information technology; and other factors
discussed below under Risk Factors Affecting Financial Performance.



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 on the condensed consolidated balance sheet until products are delivered and accepted as
outlined in the terms and conditions set forth in the purchase and 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.



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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.



Our sales arrangements with customers frequently cover multiple products and services. Our
revenue is subject to SOP 97-2, as further discussed in Note 3 to our consolidated financial statements. In approximately two-thirds of our arrangements, our customers request delivery and installation of our software products in one phase, and we
generally can recognize revenue when the software products have been installed and accepted by our customers. In the balance of our arrangements, our customers request that delivery and installation of our software products be delivered in multiple
phases. Such multiple phased installations may be requested, for example, when the customer has not installed medical devices with which our software will interact. In those instances, revenue for the entire arrangement generally cannot be
recognized until the last software product is installed and accepted. In a few instances, the customer may never request delivery of all the software products included in the arrangement. In those instances, revenue from the arrangement is
recognized at the time we make the judgment, based on sufficient competent evidence, that it is remote that the customer will request delivery of the remaining undelivered software products, i.e., when they have been constructively cancelled.



We recognize revenue once software products outlined in the related purchase
and license agreement have been installed, accepted and 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 are accepted, VSOE of the fair value is established on the remaining undelivered elements, or the undelivered elements for which VSOE of the fair value does not exist have been formally or constructively
canceled, whichever occurs first. We recognize revenues on sales arrangements with undelivered products that have been constructively canceled at the date when we have sufficient competent evidence of that cancellation.



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, which is the renewal rate, 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 greater than one year prior to our ability to recognize the related revenue, it is not be 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, 12% of the license purchase 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 2.0% and 2.7% of our total net sales
in the three and nine months ended June 30, 2004, respectively, and 4.8% and 4.9% for the same periods in fiscal 2003, respectively. The decrease in third-party sales as a percentage of net sales is attributable to a lower 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 allows the distributor to deploy the software to the end user and satisfy our regulatory information tracking
requirements. We provide maintenance and support to our distributor. The cost of the first years support is included in the 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 support period. We invoice maintenance and support annually at the beginning of each fiscal year and
recognize revenue ratably over the applicable twelve-month period.



In December
2003, we added a pathology information management system to our suite of product offerings with the acquisition of certain assets of Tamtron Corporation from IMPATH Inc. (see Note 6 to the condensed consolidated financial statements). Pathology
information management systems involve significant implementation and customization efforts essential to the functionality of the related products. Accordingly, we recognize the license and professional consulting services generated through the sale
of pathology management information systems using the percentage-of-completion method using labor hours incurred as prescribed by SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Product-Type Contracts. The
progress toward completion is measured based on labor hours incurred as compared to total estimated hours to complete. We account for a change in estimate in the period the change was identified. Provisions for estimated contract losses are
recognized in the period in which the loss becomes probable and can be reasonably estimated.



Costs and Expenses



A large part of our
company cost structure is driven by the number of employees and 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.



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;
| | - | -----------------------------------------------------------------------------------------



| |  | overhead attributed to our client services personnel; and
| | - | ---------------------------------------------------------



| |  | amortization of purchased technology.
| | - | -------------------------------------



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



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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.



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 nine 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 and, as a result, decreased the amount of net income available 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.



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Results of Operations



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



|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|--------------------------------------------- |  | --------------------------- | - |  | ----------------------------------------------------------------------- | - |  | ----- | - |  | ----------------------------------------------------------------------- | -
|                                              |  | Three Months Ended June 30, |   |  | Nine Months Ended June 30,                                              |  
|                                              |  | 2004                        |   |  | 2003                                                                    |   |  | 2004  |   |  | 2003                                                                    |  
|                                              |  |                             |   |  | Restated (See Note 7 to ourcondensed consolidated financial statements) |   |  |       |   |  | Restated (See Note 7 to ourcondensed consolidated financial statements) |  
|Sales:                                        |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Software license and other, net               |  | 59.4                        | % |  | 68.9                                                                    | % |  | 58.3  | % |  | 64.1                                                                    | %
|Maintenance and services                      |  | 40.6                        |   |  | 31.1                                                                    |   |  | 41.7  |   |  | 35.9                                                                    |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Total net sales                               |  | 100.0                       |   |  | 100.0                                                                   |   |  | 100.0 |   |  | 100.0                                                                   |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Cost of sales:                                |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Software license and other, net               |  | 19.7                        |   |  | 16.9                                                                    |   |  | 20.4  |   |  | 17.9                                                                    |  
|Maintenance and services                      |  | 13.7                        |   |  | 11.2                                                                    |   |  | 14.6  |   |  | 13.1                                                                    |  
|Amortization of purchased technology          |  | 2.0                         |   |  | 0.2                                                                     |   |  | 1.7   |   |  | 0.5                                                                     |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Total cost of sales                           |  | 35.4                        |   |  | 28.3                                                                    |   |  | 36.7  |   |  | 31.5                                                                    |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Gross profit                                  |  | 64.6                        |   |  | 71.7                                                                    |   |  | 63.3  |   |  | 68.5                                                                    |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Operating expenses:                           |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Research and development                      |  | 16.1                        |   |  | 15.2                                                                    |   |  | 17.0  |   |  | 17.6                                                                    |  
|Sales and marketing                           |  | 26.3                        |   |  | 22.3                                                                    |   |  | 25.9  |   |  | 25.5                                                                    |  
|General and administrative                    |  | 9.2                         |   |  | 8.4                                                                     |   |  | 9.7   |   |  | 9.9                                                                     |  
|Amortization of intangible assets             |  | 1.0                         |   |  | 0.2                                                                     |   |  | 0.9   |   |  | 0.2                                                                     |  
|In-process research and development write-off |  |                            |   |  |                                                                        |   |  | 1.1   |   |  |                                                                        |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Total operating expenses                      |  | 52.6                        |   |  | 46.1                                                                    |   |  | 54.6  |   |  | 53.2                                                                    |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Operating income                              |  | 12.0                        |   |  | 25.6                                                                    |   |  | 8.7   |   |  | 15.3                                                                    |  
|Interest and other income, net                |  | 0.4                         |   |  | 0.9                                                                     |   |  | 0.7   |   |  | 0.9                                                                     |  
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Income before provision for income taxes      |  | 12.4                        |   |  | 26.5                                                                    |   |  | 9.4   |   |  | 16.2                                                                    |  
|Provision for income taxes                    |  | (4.1                        | ) |  | (9.1                                                                    | ) |  | (3.1  | ) |  | (5.6                                                                    | )
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  
|Net income                                    |  | 8.3                         | % |  | 17.4                                                                    | % |  | 6.3   | % |  | 10.6                                                                    | %
|                                              |  |                             |   |  |                                                                         |   |  |       |   |  |                                                                         |  



Comparison of Three Months Ended
June 30, 2004 and 2003



Net Sales. Net sales increased 12.9% to
$19.3 million in the three months ended June 30, 2004 from $17.1 million for the same period in fiscal 2003 including $2.5 million related to the acquisition of certain assets and certain liabilities of Tamtron Corporation (Tamtron) and
Medical Registry Services, Inc. (MRS), the PowerPath® pathology information management and cancer registry information system businesses of IMPATH Inc.



Net software sales decreased 2.8% to $11.5 million in the three months ended June 30, 2004 from $11.8 million for the same period in fiscal 2003. The decrease is a result
of decreased sales of new systems in oncology of $1.6 million and imaging systems of $575,000, partially offset by increased sales of registry systems of $1.1 million, pathology lab systems of $506,000, new products to existing customers of $179,000
and urology systems of $27,000.



Maintenance and services sales increased 47.8%
to $7.9 million for the three months ended June 30, 2004 from $5.3 million for the same period in fiscal 2003. Maintenance and support contracts accounted for $2.3 million of the total $2.5 million increase with the remaining portion attributed to
increased non-contract training and support. The acquired pathology line of business contributed $878,000 of the total increase in maintenance and services. Our continued high customer retention on maintenance and support contracts, the general
price increase, deferral of installed and accepted software license revenue, and expansion of our service offerings all contributed to the growth of maintenance and services as a percentage of net sales.



Cost of Sales. Total cost of sales increased 41.1% to $6.8 million for the three
months ended June 30, 2004 from $4.8 million for the same period in fiscal 2003. Our gross margin decreased to 64.6% for the three months ended June 30, 2004 from 71.7% for the same period in fiscal 2003.



Cost of sales relating to net software sales increased 31.9% to $3.8 million for the three
months ended June 30, 2004 from $2.9 million for the same period in fiscal 2003. Our gross margin associated with net software sales decreased to 66.8% for the three months ended June 30, 2004 compared to 75.5% for the same period in fiscal 2003.
The increase in expenses was related to $1.0 million in employee costs, $199,000 in travel costs, $71,000 in implementation costs and $47,000 in telephone costs partially offset by a reduction of $424,000 in supplies and materials. We expect to
recognize the deferred travel expenses once the associated product revenues are recognized. The decline in gross margins associated with net software sales related to fewer than projected implementations of new oncology systems as a result of flat
order volume and increased employee expenses associated with the two product line acquisitions in December 2003. We believe the margins related to the acquired businesses should improve once we have depleted the acquired deferred revenue backlog. In
addition, due to the acquisition of MRS and Tamtron, amortization expense associated with purchased technology increased to $382,000 for the three months ended June 30, 2004 from $35,000 for the same period in fiscal 2003.



Cost of sales relating to maintenance and services increased 37.7% to $2.6 million for the
three months ended June 30, 2004 from $1.9 million for the same period in fiscal 2003. Our gross margin associated with maintenance and services increased to 66.4% for the three months ended June 30, 2004 from 64.0% for the same period in fiscal
2003. The increase in expenses of $723,000 was related to $380,000 in continuing engineering costs, $297,000 in employee related expenses, $56,000 in



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telephone expense and $6,000 in travel expenses partially offset by a reduction of $16,000 in supplies and materials. An
increase in net sales of maintenance and services due to continued customer post-contract support renewals and revenue of the acquired product lines for the three months ended June 30, 2004 contributed to the improvement in our gross margin
associated with maintenance and services.



Research and Development.
Research and development expenses increased 18.9% to $3.1 million for the three months ended June 30, 2004 from $2.6 million for the same period in fiscal 2003. As a percentage of total net sales, research and development expenses increased to 16.1%
for the three months ended June 30, 2004 from 15.2% for the same period in fiscal 2003. Additional engineering headcount and the associated personnel expenses accounted for $487,000, travel expenses accounted for $16,000 and telephone expenses
accounted for $14,000 partially offset by reductions of $20,000 of supplies and materials and outside services. The increase as a percentage of total net sales in the three months ended June 30, 2004 was primarily due to increased engineering
headcount associated with the acquired product lines in December 2003.



Sales and Marketing. Sales and marketing expenses increased 33.5% to $5.1 million for the three months ended June 30, 2004 from $3.8 million for the same period in fiscal 2003. As a percentage of total net sales, sales and marketing
expenses increased to 26.3% for the three months ended June 30, 2004 from 22.3% for the same period in fiscal 2003. The increase in expenses in absolute dollars related to $1.1 million in employee related expenses, $180,000 in travel expenses,
$55,000 in supplies and materials, $48,000 in sponsorships, $46,000 in tradeshow expense, $26,000 in telephone expenses and $25,000 in advertising expenses and outside services partially offset by a reduction in commissions of $202,000. The increase
as a percentage of total net sales in the three months ended June 30, 2003 was primarily due to the expansion and specialization of our domestic and international sales force.



General and Administrative. General and administrative expenses increased 23.7% to $1.8 million for the three months ended June 30,
2004 from $1.4 million for the same period in fiscal 2003. As a percentage of total net sales, general and administrative expenses increased to 9.2% for the three months ended June 30, 2004 from 8.4% for the same period in fiscal 2003. The increase
in absolute dollars was primarily due to increases in accounting and legal fees of $222,000 primarily related to our restatement, regulatory fees of $154,000, maintenance expense of $34,000, and travel expense of $16,000 partially offset by
reductions of employee related expenses of $28,000, depreciation expense of $23,000, telephone expense of $15,000, rent expense of $12,000 and other various operational expenses of $15,000. The increase as a percentage of total net sales in the
three months ended June 30, 2004 was influenced by additional expenses related to the restatement of our financial statements.



Amortization of Intangible Assets. Amortization expenses increased to $199,000 for the three months ended June 30, 2004 from $35,000 for the same period in fiscal
2003. Our acquisition of substantially all of the assets of Tamtron and MRS in December 2003 increased amortization expense as it relates to customer base and trade name.



Operating Income. Operating income decreased 47.0% to $2.3 million for the three months ended June 30, 2004 from $4.4 million for the
same period in fiscal 2003. Operating income decreased significantly due to fewer than projected implementations of new oncology systems as a result of flat order volume, higher amortization of intangible assets related to the December 2003 asset
purchases and additional fees associated with the restatement of our financial statements.



Interest and Other Income, Net. Interest and other income, net decreased 34.9% to $95,000 for the three months ended June 30, 2004 from $146,000 for the same period in fiscal 2003. The decrease was primarily
related to our lower cash balance subsequent to the asset purchases in December 2003.



Income Taxes. Our effective tax rate decreased to 33.0% during the three months ended June 30, 2004 from 34.4% during the same period in fiscal 2003 due to lower profitability in the current fiscal period and the effect of the
research and development tax credits.



Comparison of Nine Months Ended June
30, 2004 and 2003



Net Sales. Net sales increased 24.7% to $50.3
million in the nine months ended June 30, 2004 from $40.3 million for the same period in fiscal 2003 including $4.7 million related to the acquisition of certain assets and certain liabilities of Tamtron and MRS.



Net software related sales increased 13.4% to $29.3 million in the nine months ended June 30,
2004 from $25.9 million for the same period in fiscal 2003. Registry sales accounted for $2.1 million of the $3.5 million increase, sales of pathology and lab systems accounted for $1.0 million, imaging systems accounted for $370,000 and new systems
to customers in oncology, new products to existing customers in oncology and urology sales accounted for the remaining amount.



Maintenance and services increased 44.8% to $21.0 million for the nine months ended June 30, 2004 from $14.5 million for the same period in fiscal 2003. Maintenance and
support contracts accounted for $6.4 million of the total $6.5 million increase. Our continued high customer retention on maintenance and support contracts, the general price increase, deferral of installed and accepted software license revenue, and
expansion of our service offerings all contributed to the growth of maintenance and services as a percentage of net sales.



Cost of Sales. Total cost of sales increased 45.5% to $18.5 million for the nine months ended June 30, 2004 from $12.7 million for the same period in fiscal 2003.
Our gross margin decreased to 63.3% for the nine months ended June 30, 2004 from 68.5% for the same period in fiscal 2003.



Cost of sales relating to net software sales increased 42.6% to $10.3 million for the nine months ended June 30, 2004 from $7.2 million for the same period in fiscal
2003. Our gross margin associated with net software sales decreased to 65.0% for the nine months ended June 30, 2004 from 72.2% for the same period in fiscal 2003. The increase in expenses related to $2.7 million in employee costs, $619,000 in
travel expenses, $236,000 in implementation costs, $63,000 in telephone expenses partially offset by a reduction of $553,000 in supplies and materials. We expect to recognize the deferred travel expenses once the associated product revenues are
recognized. The decline in gross margins associated with net software sales related to fewer than projected implementations of new oncology systems as a result of flat order volume and increased employee expenses associated with the two product line
acquisitions in December 2003. We believe the margins related to the acquired businesses should improve once we have recognized the acquired deferred revenue balance. In addition, due to the acquisition of MRS and Tamtron, amortization expense
associated with purchased technology increased to $833,000 for the nine months ended June 30, 2004 from $192,000 for the same period in fiscal 2003.



Cost of sales relating to maintenance and services increased 39.0% to $7.4 million for the nine months ended June 30, 2004 from $5.3 million for the same period in fiscal
2003. Our gross margin associated with maintenance and services increased to 65.0% for the nine months ended June 30, 2004 from 63.5% for the same period in fiscal 2003. The increase in expenses was associated with $1.1 million in continuing
engineering costs, $958,000 in employee related expenses, $30,000 in telephone expenses partially offset by reductions of $42,000 in supplies and materials and $9,000 in travel expenses. An increase in net sales of maintenance and services due to
continued customer post-contract support renewals and revenue of the acquired product lines for the nine months ended June 30, 2004 contributed to the improvement in our gross margin associated with maintenance and services.



Research and Development. Research and development expenses increased 20.7% to $8.6
million for the nine months ended June 30, 2004 from $7.1 million for the same period in fiscal 2003. As a percentage of total net sales, research and development expenses decreased to 17.0% for the nine months ended June 30, 2004 from 17.6% for the
same period in fiscal 2003. Additional engineering headcount and the associated personnel expenses accounted for $1.5 million and travel expenses accounted for $38,000 partially offset by a reduction of $58,000 in supplies and materials and $15,000
in telephone expense and outside services. The decrease as a percentage of total net sales in the nine months ended June 30, 2004 was due to increased net sales relative to research and development expenses.



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Sales and Marketing. Sales and marketing expenses increased 26.7% to $13.0 million for the nine months ended June
30, 2004 from $10.3 million for the same period in fiscal 2003. As a percentage of total net sales, sales and marketing expenses increased to 25.9% for the nine months ended June 30, 2004 from 25.5% for the same period in fiscal 2003. The increase
in expenses related to $2.3 million in employee related expenses, $342,000 in travel expenses, $128,000 in advertising expenses, $113,000 in sponsorships, $108,000 in outside services, $100,000 in supplies and materials, $74,000 in trade show
expenses and $26,000 in telephone expense partially offset by a reduction in commission expense of $454,000. The increase as a percentage of total net sales in the nine months ended June 30, 2004 was primarily due to the expansion and specialization
of our domestic and international sales force. We expect to recognize the deferred commission expenses when the associated product revenues are recognized.



General and Administrative. General and administrative expenses increased 22.5% to $4.9 million for the nine months ended June 30, 2004 from $4.0 million for the
same period in fiscal 2003. As a percentage of total net sales, general and administrative expenses decreased to 9.7% for the nine months ended June 30, 2004 from 9.9% for the same period in fiscal 2003. The increase in absolute dollars was
primarily due to increases in accounting and legal fees of $653,000, regulatory fees of $188,000, maintenance fees of $127,000, travel expenses of $27,000 and contributions of $20,000 partially offset by reductions in employee related expenses of
$32,000, depreciation expense of $27,000, business insurance expense of $19,000 and other various operational expenses of $41,000. The decrease as a percentage of total net sales in the nine months ended June 30, 2004 was due to a higher growth rate
in net sales partially offset by additional expenses related to the restatement of our financial statements.



In-process Research and Development. We recorded a write-off of in-process research and development in the amount of $557,000 in the nine months ended June 30, 2004 due to an analysis allocating the purchase
price paid for certain intellectual property in that period. Both product lines that were acquired were in the process of bringing certain new products and functionality to their existing product offerings at the time of acquisition. In conjunction
with the management of those businesses, we estimated that the products were incomplete and believed there were sufficient technological risks associated with these products to qualify the in-process research and development $557,000 write-off. We
did not have an in-process research and development write-off for the same period in 2003.



Amortization of Intangible Assets. Amortization expenses increased to $449,000 for the nine months ended June 30, 2004 from $83,000 for the same period in fiscal 2003. Our acquisition of substantially all of
the assets of Tamtron and MRS in December 2003 increased amortization expense as it relates to customer base and trade name.



Operating Income. Operating income decreased 29.7% to $4.4 million for the nine months ended June 30, 2004 from $6.2 million for the same period in fiscal 2003.
Operating income decreased significantly due to fewer than projected implementations of new oncology systems as a result of flat order volume, higher amortization of intangible assets related to the December 2003 asset purchases and fees associated
with the restatement of our financial statements.



Interest and Other
Income, Net. Interest and other income, net decreased 5.0% to $343,000 for the nine months ended June 30, 2004 from $361,000 for the same period in fiscal 2003. The decrease was primarily related to additional cash balances being invested from
our public offering proceeds offset by lower cash balances subsequent to our product line acquisitions in December 2003.



Income Taxes. Our effective tax rate decreased slightly to 33.0% during the nine months ended June 30, 2004 from 34.4% during the same period in fiscal 2003 due to
lower profitability in the current fiscal period and the effects of research and development tax credits.



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. Several factors influenced our determination of the value of the
redeemable convertible preferred stock. These factors included plans for the initial 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 nine months ended June 30, 2003, we recorded accretion charges of $2.2 million, all of which was incurred during the first quarter in the time period leading up to the initial public
offering. There were no accretion charges recorded for the nine months ending June 30, 2004. 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 have not incurred, nor will we incur, accretion charges related to the Series A redeemable convertible preferred stock after our initial public offering.



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 is recognized. 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. If VSOE of the
fair value of all undelivered elements exists but VSOE of the fair value 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. If VSOE of the fair value does not exist for all undelivered elements, revenue is deferred until VSOE of the fair value exists for all undelivered elements, the
elements for which VSOE of the fair value does not exist have been delivered or the elements for which VSOE of the fair value does not exist (a) have been deleted from the contract or (b) there is available competent evidence that allows for the
reasonable judgment that it is remote that the customer will request delivery. 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.



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The components of backlog as of June 30, 2004 and 2003 and March 31, 2004 are as follows (amounts in thousands):



|                                  |  |          |        |                                                                          |   |                                                                          |  |   |       
|--------------------------------- |  | -------- | ------ | ------------------------------------------------------------------------ | - | ------------------------------------------------------------------------ |  | - | ------
|                                  |  | June 30, |        | March 31, 2004                                                          
|                                  |  | 2004     |        | 2003                                                                     |  
|                                  |  |          |        | Restated (See Note 7 to our condensed consolidated financial statements) |   | Restated (See Note 7 to our condensed consolidated financial statements)
|Customer deposits                 |  | $        | 10,802 |                                                                          | $ | 9,566                                                                    |  | $ | 11,473
|Deferred software license revenue |  |          | 16,023 |                                                                          |   | 12,923                                                                   |  |   | 16,739
|Other deferred revenue            |  |          | 22,133 |                                                                          |   | 12,905                                                                   |  |   | 18,945
|Unearned revenue                  |  |          | 26,382 |                                                                          |   | 17,256                                                                   |  |   | 32,859
|                                  |  |          |        |                                                                          |   |                                                                          |  |   |       
|Total backlog                     |  | $        | 75,340 |                                                                          | $ | 52,650                                                                   |  | $ | 80,016
|                                  |  |          |        |                                                                          |   |                                                                          |  |   |       



Total backlog increased 43.1% to $75.3
million at June 30, 2004 from $52.7 million at June 30, 2003, but total backlog decreased 5.8%, or $4.7 million, from $80.0 million at March 31, 2004. During the three months ended June 30, 2004, bookings in our domestic core oncology point-of-care
business were flat. We initially noted a softening of backlog in the three months ended December 31, 2003; however, at that time the amount was within historical norms and we expected our typical second quarter upswing. In the three months ended
March 31, 2004 bookings remained soft, and they continued that trend in the three months ended June 30, 2004. Of the total $75.3 million of backlog at June 30, 2004, we expect to recognize approximately $70.5 million of our backlog during the twelve
months following June 30, 2004 with the remaining portion to be completed in subsequent periods. However, 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 $12.4 million to
$38.2 million at June 30, 2004 from $25.8 million at June 30, 2003. Of the $12.4 million increase, deferred oncology software license revenue and the related deferred maintenance and support contributed $3.1 million. The remaining $9.3 million
increase relates to other deferred revenue of $4.0 million in post contract maintenance and support for oncology products, $2.1 million in registry term licenses, $1.6 million in post-contract maintenance and support for pathology products and $1.6
million of pathology license revenue.



Seasonality



Historically, we have experienced 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. We believe the seasonality of our revenue is 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.



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, net proceeds of $24.4 million from our initial public offering of common stock in November 2002 and net proceeds of $3.2 million from our secondary
public offering of common stock in May 2003. Cash, cash equivalents and available-for-sale securities were $47.5 million at June 30, 2004.



During the nine months ended June 30, 2004, net cash provided by operating activities was $3.1 million compared to $6.3 million for the same period in fiscal 2003. In the
nine months ended June 30, 2004, cash provided by operations was primarily attributable to net income after adjustment for the non-cash charges relating to depreciation and amortization, an increase in deferred revenue, a tax benefit from employee
stock options and an decrease in unbilled accounts receivable partially offset by increases in accounts receivable, prepaid expenses and other current assets and a decrease in accrued liabilities, accounts payable and customer deposits. In the nine
months ended June 30, 2003, cash provided by operations was primarily attributable to increases in sales leading to a higher net income after adjustment for the non-cash charges relating to depreciation and amortization, an increase in deferred
revenue, accounts payable and income taxes payable and a decrease in prepaid expenses, offset by a decrease in customer deposits, an increase in accounts receivable due to higher sales and a decrease in accrued liabilities. As discussed in the
Backlog section, bookings in our core oncology point-of-care business have unexpectedly flattened in the last several quarters. As a result, the subsequent impact of flattened orders may effect the historical trend of operating cash in subsequent
quarters.



In determining average days sales outstanding and accounts
receivable turnover, we use our gross annual invoicing and gross accounts receivable balances in each calculation as we believe this provides a more conservative and relevant measurement basis due to the significance of our deferred revenue. Our
accounts receivable turnover decreased to 3.5 for the nine months ended June 30, 2004 from 5.2 for the same period in fiscal 2003. Our days sales outstanding at June 30, 2004 increased to 102 from 70 at June 30, 2003. We believe that the
acquired accounts receivable balances from Tamtron and MRS have impacted the calculation of accounts receivable turnover and days sales outstanding ratios. In addition, during the three months ended June 30, 2004, the full impact of our increased
collections efforts had not had a full quarter to improve accounts receivable turnover and days sales outstanding; however, we did see minor improvement over both metrics compared to the three months ended March 31, 2004 . We have added
collections personnel during the last quarter, and we continue our efforts to improve collections by 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 recognized as a receivable or revenue until it is due and payable.



Net cash used in investing activities was $21.4 million for the nine months ended June 30, 2004 and $1.0 million for the same period in fiscal 2003. During the nine months ended June 30, 2004, cash used in investing activities primarily
related to the acquisition of certain assets of Tamtron and MRS for $22.0 million and approximately $507,000 in acquisition costs and the purchase of $2.2 million of capital equipment to support two office moves during the period, partially offset
by $3.3 million in net proceeds from sales and maturities of available-for-sale securities. During the nine months ended June 30, 2003, cash used in investing activities primarily related to the purchase of $1.8 million in capital assets partially
offset by $705,000 in net sales and maturities of available-for-sale securities and proceeds of $94,000 on the disposal of certain property and equipment.



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Net cash provided by financing activities was $1.6 million for the nine months ended June 30, 2004, compared to $29.0
million for the same period in fiscal 2003. Cash provided by financing activities during the nine months ended June 30, 2004 can be attributed to $1.8 million received from the issuance of common stock, partially offset by capital lease principal
payments of $194,000. Cash provided by financing activities during the nine months ended June 30, 2003 can be attributed primarily to net proceeds of $29.0 million received in our initial public offering during November 2002 and our secondary
offering in May 2003.



The following table describes our commitments to settle
contractual obligations in cash not recorded on the balance sheet as of June 30, 2004 (in thousands). The telecommunications contracts with AT&T include wireless, frame-relay, voice/data and internet transport services.



|                                         |  |                  |       |                              |   |                          |  |   |       
|---------------------------------------- |  | ---------------- | ----- | ---------------------------- | - | ------------------------ |  | - | ------
|Fiscal Year                              |  | Operating Leases |       | Telecommunications Contracts |   | Total Future Obligations
|Less than one year (before 9/30/2004)    |  | $                | 788   |                              | $ | 380                      |  | $ | 1,168 
|One to three years (10/1/20049/30/2007) |  |                  | 6,934 |                              |   | 3,429                    |  |   | 10,363
|                                         |  |                  |       |                              |   |                          |  |   |       
|Total                                    |  | $                | 7,722 |                              | $ | 3,809                    |  | $ | 11,531
|                                         |  |                  |       |                              |   |                          |  |   |       



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 January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB 51, which subsequently has been revised by FIN 46-R. The primary objectives of FIN 46-R are to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). This new model for consolidation applies to an
entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46-R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46-R is effective for VIEs created after January
31, 2003 and is effective for all VIEs created before February 1, 2003 that are Special Purpose Entities (SPEs) in the first reporting period ending after December 15, 2003 and for all other VIEs created before February 1, 2003 in the first
reporting period ending after March 15, 2004. We believe there are no entities qualifying as VIES and the adoption of FIN 46-R to date has not had any effect on our financial position, cash flows or results of operations.



In May 2003, the EITF reached a consensus on EITF Issue No. 03-05, Applicability of
AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in Arrangements Containing More-Than-Incidental Software. EITF No. 03-05 addresses the applicability of Statement of Position No. 97-2 regarding
software and non-software deliverables in a multiple element arrangement, giving consideration to whether the deliverables are essential to the functionality of one another. EITF Issue No. 03-05 is effective for interim periods beginning after
August 13, 2003. The adoption of EITF Issue No. 03-05 is not expected to have a material impact on our financial position or results of operations.



Risk Factors Affecting Financial Performance



This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of factors both in and out of our control, including the risks faced by us described below and elsewhere in this Form 10-Q and in our Form 10-K/A for the fiscal year ended September 30, 2003.



You should carefully consider the risks described below. In addition, the risks described
below are not the only ones facing us. We have only described the risks we consider to be the most material. However, there may be additional risks that are viewed by us as not material or are not presently known to us.



If any of the events described below were to occur, our business, prospects, financial
condition and/or results of operations could be materially adversely affected. When we say below that something could or will have a material adverse effect on us, we mean that it could or will have one or more of these effects. In any such case,
the price of our common stock could decline, and you could lose all or part of your investment in our company.



Risks Relating to Our Business



Our operating results may fluctuate significantly and may cause our stock price to decline.



We have experienced significant variations in revenues and operating results from quarter to quarter. Our quarterly operating results may continue to fluctuate due to a
number of factors, including:



| |  | the timing, size and complexity of our product sales and implementations, in each case exacerbated by the lengthy sales and implementation cycles and unpredictable buying patterns
of our customers;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our inability to recognize revenue from multiple element software contracts where certain elements have been delivered, installed and accepted but other elements remain undelivered;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | overall demand for healthcare information technology, particularly in the oncology market;
| | - | ------------------------------------------------------------------------------------------



| |  | the impact of Medicare reimbursement policies on oncology IT spending;
| | - | ----------------------------------------------------------------------



| |  | seasonality of our quarterly operating results, which may be impacted by the degree to which our customers have allocated and spent their yearly budgets and slower systems
implementation during the holiday seasons;
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| |  | market acceptance of services, products and product enhancements by us and our competitors;
| | - | -------------------------------------------------------------------------------------------



| |  | product and price competition;
| | - | ------------------------------



| |  | changes in our operating expenses;
| | - | ----------------------------------



| |  | the timing and size of future acquisitions;
| | - | -------------------------------------------



| |  | personnel changes; and
| | - | ----------------------



| |  | the financial condition of our current and potential customers.
| | - | ---------------------------------------------------------------



Because a significant percentage of our expenses will be relatively fixed, changes in the timing of sales and implementations could cause significant variations in
operating results from quarter to quarter. We believe that period to period comparisons of our historical results of operations are not necessarily meaningful. You should not rely on these comparisons as indicators of our future performance.



Due to the length of our sales cycle, we are required to spend substantial
time and expense before we are able to recognize revenue.



The sales cycle
for our systems ranges from nine to twenty four months or more from initial contact to contract execution, and we may require an additional three to nine months to complete implementation. During this period, we will expend substantial time, effort
and financial resources preparing contract proposals, negotiating the contract and implementing our systems. As a result, we may not realize any revenues from some customers after expending considerable resources. Even if we do realize revenues from
a project, delays in implementation may keep us from recognizing these revenues during the same period in which sales and implementation expenses were incurred. This could cause our operating results to fluctuate from quarter to quarter.



The majority of our sales has been into the radiation oncology market. If we are unable
to expand outside the radiation oncology market or expand into international markets, our ability to grow will be limited.



Sales of our products into the radiation oncology market in the United States, including maintenance and services, represented approximately 74% of our net sales in the
fiscal year ended September 30, 2003. Many of the largest radiation oncology facilities and practices in the United States have previously purchased our systems. In addition, in fiscal 2004, we have experienced softness in bookings in our core
oncology point-of-care business. To sustain our growth, we must expand our radiation oncology sales outside the United States and increase our sales outside of the radiation oncology market. We have expanded our product offerings domestically to
address medical oncology, hospital and central registry data aggregation and reporting, and recently, laboratory information systems, urology and pathology. However, we may not be successful selling our products in international radiation oncology
markets, or marketing our products in new markets.



If we are unable to
integrate our products successfully with existing information systems and oncology treatment devices, or we are restricted from access to new device interfaces, customers may choose not to use our products and services.



For healthcare facilities to fully benefit from our products, our systems must integrate
with the customers existing information systems and medical devices. This may require substantial cooperation, investment and coordination on the part of our customers. There is little uniformity in the systems and devices currently used by
our customers, which complicates the integration process. If these systems are not successfully integrated, our customers could choose not to use, or to reduce their use of, our systems, which would harm our business.



Our ability to design systems that integrate applications, devices and information systems
has been a key to our success in the radiation oncology market. Our competitors include manufacturers of radiation oncology equipment. The three major linear accelerator manufacturers have introduced next generation devices in 2004,
which have new operator front-ends and require new integration strategies. We have been in the process of developing our next generation of connectivity options and expect them to be ready for clinical use in late calendar 2004 or early calendar
2005. If these manufacturers were to deny us access to new device interfaces, we would lose one of our key competitive advantages and our sales would be adversely impacted. In addition, we dont know whether our new products will be accepted in
the marketplace or whether they will generate revenues and margins comparable to our current products.



We operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do, and companies who bundle their software with hardware sales at little
or no additional cost, which makes it harder for us to sell our systems.



We operate in a market that is intensely competitive. Our principal oncology competitor is Varian Medical Systems, Inc. We also face competition from providers of enterprise level healthcare information systems, practice management systems,
general decision support and database systems and other segment-specific software applications. In addition, although we have cooperative strategic arrangements with Siemens Medical Systems, Inc. and other companies for the sale of some of our
products, these companies also compete with us on the sale of some of our products. A number of existing and potential competitors are more established than we are and have greater name recognition and financial, technical and marketing resources
than we do.



Our most significant competitors also manufacture radiation
oncology devices and other equipment used by healthcare providers who may be our potential customers. These particular competitors pose a competitive risk for us because they market their software with their hardware products as a bundled solution
at little or no additional cost, which could enhance their ability to meet a potential customers needs. In recent quarters, this bundling practice has been intensified, placing us at a pricing disadvantage. As a result, to make a sale, we must
convince potential customers that our products are sufficiently superior to the software offered by the medical device manufacturer to justify the additional costs of purchasing our products. In addition, one of our most significant competitors
recently acquired an oncology software company, which may make it a more effective competitor. We also expect that competition will continue to increase, particularly if enterprise level healthcare software providers, such as Cerner Corporation and
Eclipsys Corporation, choose to focus on the oncology market. As a result of increased competition, we may need to reduce the price of our products and services, and we may experience reduced gross margins or loss of market share, any one of which
could significantly reduce our future revenues and operating results.



A
decline in spending for healthcare information technology and services may result in less demand for our products and services, which could adversely affect our financial results.



The purchase of our products and services involves a significant financial commitment by our customers. The cost of our systems typically
ranges from $75,000 to more than $500,000. At the same time, the healthcare industry faces significant financial pressures that could adversely affect overall spending on healthcare information technology and services. For example, the Balanced
Budget Act of 1997 significantly reduced Medicare reimbursements to hospitals, leaving them less money to invest in infrastructure. To date in 2004, we estimate that reimbursements in the radiation oncology segment have decreased by approximately
10%. In 2005, some models suggest a net increase in reimbursement for radiation oncology services based on figures released from the Center for Medicare and Medicaid Servies, or CMS, although this may not be known until 2005. Drug reimbursement in
the medical oncology segment is expected to decrease in 2005. CMS has estimated that reimbursement for medical oncologists will decrease on average 6% this year assuming constant utilization. Moreover, a general economic decline or further
reductions



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in Medicare reimbursements to hospitals and private practices could cause providers to reduce or eliminate information
technology-related spending. If spending for healthcare information technology and services declines or increases slower than we anticipate, demand for our products and services could decline, adversely affecting the prices we may charge.



Changing customer requirements could decrease the demand for our products,
which could harm our business and adversely affect our revenues.



The
market for our products and services is characterized by rapidly changing technologies, evolving industry standards and new product introductions and enhancements that may render existing products obsolete or less competitive. For example, the three
major linear accelerator manufacturers have introduced next generation devices in 2004, which have new operator front-ends and require new integration strategies. As a result, our position in the healthcare information technology market
could erode rapidly due to these changes in the features, functions or pricing of competing products. Our future success will depend in part on our ability to enhance our existing products and services and to develop and introduce new products and
services to meet changing customer requirements. We have been in the process of developing our next generation of connectivity options and expect them to be ready for clinical use in late calendar 2004 or early calendar 2005. We dont know;
however, whether our new products will be accepted in the marketplace or whether they will generate revenues and margins comparable to our current products.



The process of developing products and services such as those we offer is complex and in the future is expected to become increasingly more complex and expensive as new
technologies and new methods of treating cancer are introduced. If we are unable to enhance our existing products or develop new products to meet changing customer requirements, including the introduction of new cancer treatment methods with which
our products are not currently compatible, demand for our products could suffer.



We face certain litigation risks that could harm our business.



In September 2004, we had several lawsuits filed against us asserting securities class actions. The results of complex legal proceedings, such as these, are difficult to predict. Moreover, some of the complaints filed against us do not
specify the amount of damages that the plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. While we are unable to estimate the potential damages
arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect
on our financial position, liquidity or results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation.
Litigation can be costly, time consuming and disruptive to normal business operations. The costs of defending these lawsuits could be quite significant, and certain costs, such as those below a deductible amount, are not covered by our insurance
policies. The defense of these lawsuits could also result in continued diversion of our managements time and attention away from business operations, which could harm our business.



We may be subject to regulatory scrutiny and may sustain a loss of public confidence, if we are unable to satisfy regulatory requirements
relating to internal controls over financial reporting.



Section 404 of
the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal controls over financial reporting and have our auditor attest to such evaluation. This evaluation will be required in our Form 10-K for the fiscal year ended
September 30, 2005. During the next year, we will be performing the system and process evaluation and testing (and any necessary remediation) required in an effort to comply with the management certification and auditor attestation requirements. As
a result, we expect to incur additional expenses and diversion of managements time. While we currently anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely
fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with
adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the Securities Exchange Commission or The Nasdaq Stock Market. Any such action could adversely affect our financial results and could cause our
stock price to fall.



Changes in stock option accounting rules may
adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace.



Technology companies like ours have a history of using broad based employee stock option
programs to hire, incentivize and retain our workforce in a competitive marketplace. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) allows companies the choice of
either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We have elected to apply APB 25, and, accordingly, we generally do not recognize any
expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.



In March 2004, the FASB issued a proposed Statement, Share-Based Payment, an amendment of FASB Statements No. 123 and 95, which
generally would require share-based payments to employees be accounted for using a fair-value-based method and recognized as expenses in our statements of operations. The effective date for the proposed standard is for quarterly periods beginning
after June 15, 2005. This proposed statement is expected to be finalized, and would have a significant impact on our consolidated statement of operations as we will be required to expense the fair value of our stock options rather than disclosing
the impact on our consolidated result of operations within our footnotes. This will result in lower reported earnings per share which could negatively impact our future stock price. In addition, should the proposal be finalized, this could impact
our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.



We depend on our relationships with distributors and oncology equipment manufacturers to market our products, and if these relationships are discontinued, or we are
unable to develop new relationships, our revenues could decline.



To
successfully market and sell our products both in the United States and in foreign markets, we have developed relationships with distributors and leading oncology equipment manufacturers, including Siemens Medical Systems, Inc. Sales to Siemens
represented 8.0% of our net sales in fiscal 2003, 13.5% in fiscal 2002 and 13.5% in fiscal 2001. We rely on these collaborative relationships to augment our direct sales efforts and maintain market access to potential customers, particularly in
Europe and Asia, and our business strategy includes entering into additional third-party relationships in the future. Some of these manufacturers and distributors also produce or distribute products that directly compete with our core products.



We may not be able to maintain or develop these relationships with
distributors and oncology equipment manufacturers, and these relationships may not continue to be successful. If any of these relationships is terminated, not renewed or otherwise unsuccessful, or if we are unable to develop additional
relationships, our sales could decline, and our ability to continue to grow our business could be adversely affected. This is particularly the case for our international sales, where we rely on our distributors expertise regarding foreign
regulatory matters and their access to actual and potential customers. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers. In addition, if these
relationships fail, we will have to devote additional resources to market our products than we would otherwise, and our efforts may not be as effective as those of the distributors and manufacturers with whom we have relationships. We are currently
investing, and plan to continue to invest, significant resources to develop these relationships. Our operating results could be adversely affected if these efforts with distributors and manufacturers do not generate revenues necessary to offset
these investments.



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Recent changes to Medicare reimbursement policies could negatively affect oncologists, which could adversely affect
their IT spending decisions and our growth prospects.



Sales of our IT
systems to medical oncologists, who treat cancer through the infusion of chemotherapy agents, represent a small but growing portion of our current revenue and an opportunity for future growth. The Centers for Medicare and Medicaid Services (CMS),
which regulates payment rates for drugs and services reimbursed under Medicare Part B, including chemotherapy drugs and services, has indicated that it will reduce the charges for chemotherapy agents in 2005. While there is not necessarily a direct
correlation between provider revenue and IT spending, a significant decease in the Part B reimbursement could negatively influence an oncologists willingness to invest in new systems. If these Medicare reforms result in reduced IT spending by
oncologists, our growth opportunities could be adversely impacted.



We are
subject to extensive federal, state and international regulations, which could cause us to incur significant costs.



Four of our medical device products, including two device connectivity products and two imaging products, are subject to extensive regulation by the U.S. Food and Drug
Administration, or FDA, under the Federal Food, Drug and Cosmetic Act, or FDC Act, and by the Food and Drug Branch of the California Department of Health Services, or FDB, which is the California state agency that oversees compliance with FDA
regulations. The FDAs regulations govern product design and development, product testing, product labeling, product storage, premarket clearance or approval, advertising and promotion, and sales and distribution. Unanticipated changes in
existing regulatory requirements or adoption of new requirements could hurt our business, financial condition and results of operations.



Numerous regulatory requirements apply to our medical device products, including the FDAs Quality System Regulations, which require that our manufacturing
operations follow design, testing, process control, documentation and other quality assurance procedures during the manufacturing process. We are also subject to FDA regulations regarding labeling, adverse event reporting, and the FDAs
prohibition against promoting products for unapproved or off-label uses.



We face the risk that a future inspection by the FDA or FDB could find that we are not in full regulatory compliance. Our failure to comply with any applicable FDA regulation could lead to warning letters, non-approvals, suspensions of
existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions and criminal prosecution. If we fail to take adequate corrective action in response to any FDA observation of noncompliance, we
could face enforcement actions, including a shutdown of our manufacturing operations and a recall of our products, which would cause our product sales, operating results and business reputation to suffer.



To market and sell our products in countries outside the United States, we must obtain and
maintain regulatory approvals and comply with the regulations of those countries. These regulations and the time required for regulatory review vary from country to country. Obtaining and maintaining foreign regulatory approvals is expensive and
time consuming. We plan to apply for regulatory approvals in particular countries, but we may not receive the approvals in a timely way or at all in any foreign country in which we plan to market our products, and if we fail to receive such
approvals, our ability to generate revenue will be harmed.



Our products
could be subject to recalls even after receiving FDA approval or clearance. A recall would harm our reputation and adversely affect our operating results.



The FDA, FDB and similar governmental authorities in other countries in which we market and sell our products have the authority to require the recall of our products
in the event of material deficiencies or defects in design or manufacture. A government mandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errors or design defects, including defects in
labeling. A recall could divert managements attention, cause us to incur significant expenses, harm our reputation with customers and negatively affect our future sales.



Regulation of additional products of ours not currently subject to regulation as medical devices by the FDA could increase our costs,
delay the introduction of new products and adversely affect our revenue growth.



The FDA has increasingly regulated computer products and computer-assisted products as medical devices under the FDC Act. If the FDA chooses to regulate any more of our products as medical devices, we would likely be required to take the
following actions:



| |  | seek FDA clearance by demonstrating that our product is substantially equivalent to a device already legally marketed, or obtain FDA approval by establishing the safety and
effectiveness of our product;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | comply with rigorous regulations governing pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | comply with the FDC Acts general controls, including establishment registration, device listing, compliance with good manufacturing practices and reporting of specified device
malfunctions and other adverse device events.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We may not be able
to convince the FDA to grant approval to a request for market clearance. If any of our products fails to comply with FDA requirements, we could face FDA refusal to grant pre-market clearance or approval of products, withdrawal of existing FDA
clearances and approvals, fines, injunctions or civil penalties, recalls or product corrections, production suspensions and criminal prosecution. FDA regulation of additional products could increase our operating costs, delay or prevent the
marketing of new or existing products and adversely affect our revenue growth.



New and potential federal regulations relating to patient confidentiality could require us to redesign our products.



State, federal and foreign laws regulate the privacy and security of individually identifiable health information. Although compliance with these laws and regulations is
presently the principal responsibility of the hospital, physician or other healthcare provider, we must ensure that our products and business operations support these requirements by providing adequate privacy and security protection to associated
patient health information. Regulations governing electronic health data transmission, privacy and security are evolving rapidly and are often unclear and difficult to apply.



Of particular importance is the Health Insurance Portability and Accountability Act of 1996, or HIPAA. Under HIPAA, the Secretary of Health
and Human Services, or HHS, has adopted national data interchange standards for some types of electronic transactions and the data elements used in those transactions; adopted security standards to protect the confidentiality, integrity and
availability of patient health information; and adopted privacy standards to prevent inappropriate access, use and disclosure of patient health information. In December 2000, HHS published the final privacy regulations, which took effect in April
2003. These regulations restrict the use and disclosure of individually identifiable health information without the prior informed consent of the patient. In February 2003, HHS published the final security regulations, which will take effect in
April 2005. These regulations mandate that healthcare facilities implement operational, physical and technical security measures to



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reasonably prevent accidental, negligent or intentional inappropriate access or disclosure of patient health information.
We have made changes to our products and business operations to support these regulatory requirements. We feel that our currently available products and operations fully support our customers requirements to comply with the above regulations.
However, HHS enforcement efforts may find that our operations and product offerings are insufficient to support our customers regulatory requirements. A customers failure to meet any applicable HIPAA regulation could lead to fines,
injunctions or criminal prosecution of the customer, which would cause our product sales and business reputation to suffer. Initial enforcement efforts and regulatory changes could also force us to redesign our products or further change our
operations. We may incur significant product development costs to modify or redesign our products to address evolving data security and privacy requirements.



We cannot predict the potential impact of any rules that have not yet been proposed or any forthcoming changes to the newly enacted rules. In addition, other foreign,
federal and/or state privacy and security legislation may be enacted at any time.



If our products fail to provide accurate and timely information to our customers in their treatment of patients, our customers may be able to assert claims against us that could result in substantial costs to us, harm our reputation in
the industry and cause demand for our products to decline.



We provide
products that assist clinical decision-making and relate to patient medical histories and treatment plans. If these products fail to provide accurate and timely information, customers may be able to assert liability claims against us. Any potential
liability claims, regardless of their outcome, could result in substantial costs to us, divert managements attention from operations and decrease market acceptance of our products. We attempt to limit by contract our liability for damages
arising from negligence, errors or mistakes. Despite this precaution, the limitations of liability set forth in our contracts may not be enforceable or may not otherwise protect us from liability for damages. We maintain general liability insurance
coverage, including coverage for errors or omissions. However, this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims against us. In addition, the insurer
might refuse coverage as to any future claim.



Highly complex software products
such as ours often contain undetected errors or failures when first introduced or as updates and new versions are released. It is particularly challenging for us to test our products because it is difficult to simulate the wide variety of computing
environments in which our customers may deploy them. Despite extensive testing, from time to time we have discovered defects or errors in our products. Defects, errors or difficulties could cause delays in product introductions and shipments, result
in increased costs and diversion of development resources, require design modifications or decrease market acceptance or customer satisfaction with our products. In addition, despite testing by us and by current and potential customers, errors may
be found after commencement of commercial shipments, which may result in loss of or delay in market acceptance of our products.



We completed a major acquisition in December 2003. If we undertake additional acquisitions, they may be disruptive to our business and could have an adverse effect on
our future operations and cause the market price of our common stock to decline.



An element of our business strategy has been expansion through acquisitions. Since 1997, we have completed seven acquisitions of businesses or product lines, including the acquisition of certain assets and certain liabilities of Tamtron
Corporation and Medical Registry Services, Inc., the pathology information management and cancer registry information system businesses of IMPATH Inc., for total cash consideration, including acquisition costs, of $22.5 million. As a result of these
acquisitions, we face the following risks:



| |  | integrating the existing management, sales force, engineers and other personnel into one existing culture and business;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | developing and implementing an integrated business strategy from what had been previously independent companies; and
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | developing compatible or complementary products and technologies from previously independent operations.
| | - | --------------------------------------------------------------------------------------------------------



If we pursue any future acquisitions, we will also face additional risks, including the following:



| |  | the diversion of our managements attention and the expense of identifying and pursuing suitable acquisition candidates, whether or not consummated;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the anticipated benefits from any acquisition may not be achieved;
| | - | ------------------------------------------------------------------



| |  | the integration of acquired businesses requires substantial attention from management;
| | - | --------------------------------------------------------------------------------------



| |  | the diversion of the attention of management and any difficulties encountered in the transition process could hurt our business;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | in future acquisitions, we could issue additional shares of our capital stock, incur additional indebtedness or pay consideration in excess of book value, which could have a
dilutive effect on future net income, if any, per share; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the potential negative effect on our financial statements from the increase in goodwill and other intangibles, the write-off of research and development costs and the high cost and
expenses of completing acquisitions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interruptions in our
power supply or telecommunications capabilities or the occurrence of an earthquake or other natural disaster could disrupt our operations and cause us to lose revenues or incur additional expenses.



Our primary facilities are located in California near known earthquake fault zones and are
vulnerable to significant damage from earthquakes. We are also vulnerable to damage from other types of disasters, including tornadoes, fires, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability
to operate our business at our facilities could be seriously impaired or destroyed. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.



We currently do not have backup generators to be used as alternative sources of power in the
event of a loss of power to our facilities. During any power outage, we would be temporarily unable to continue operations at our facilities. This would have adverse consequences for our customers who depend on us for system support and outsourcing
services. Any such interruption in operations at our facilities could damage our reputation and harm our ability to obtain and retain customers, which could result in lost revenue and increased operating costs.



We have customers for whom we store and maintain critical patient and administrative data on
computer servers in our application service provider, or ASP, data center. Those customers access this data remotely through telecommunications lines. If our back-up power generators fail during any power outage or if our telecommunications lines
are severed or impaired for any reason, those customers would be unable to access their critical data causing an interruption in their operations. In such event our remote access customers and their patients could seek to hold us responsible for any
losses. We may also potentially lose those customers and our reputation could be harmed.



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If we fail to attract, motivate and retain highly qualified technical, marketing, sales and management personnel, our
ability to operate our business could be impaired.



Our success depends,
in significant part, upon the continued services of our key technical, marketing, sales and management personnel and on our ability to continue to attract, motivate and retain highly qualified employees. Competition for these employees is intense.
In addition, the process of recruiting personnel with the combination of skills and attributes required to operate our business can be difficult, time-consuming and expensive. The success of our business depends to a considerable degree on our
senior management team. The loss of any member of that team, particularly Joseph Jachinowski, James Hoey or David Auerbach, our founders, could hurt our business.



We depend on licenses from third parties for rights to the technology used in several of our products. If we are unable to continue these
relationships and maintain our rights to this technology, our business could suffer.



We depend upon licenses for some of the technology used in our products from a number of third-party vendors, including Pervasive Software Inc., Medicomp Systems, Inc., First DataBank, Inc., Crystal Decisions, Inc.
and SoftVelocity, Inc. If we were unable to continue using the technology made available to us under these licenses on commercially reasonable terms or at all, we may have to discontinue, delay or reduce product shipments until we obtain equivalent
replacement technology, which could hurt our business. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we may not be able to modify or adapt our own products.



If we fail to protect our intellectual property, our business could be harmed.



We are dependent upon our proprietary information and technology. Our
means of protecting our proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Also, despite the steps we have taken
to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. In some limited instances,
customers can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code. Although our license agreements with these customers attempt to prevent misuse of the source code, the possession
of our source code by third parties increases the ease and likelihood of potential misappropriation of such software. Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary
rights. In addition, infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us. Regardless of the validity of any claims, defending against these claims could result
in significant costs and diversion of our resources. The assertion of infringement claims could also result in injunctions preventing us from distributing products. If any claims or actions are asserted against us, we might be required to obtain a
license to the disputed intellectual property rights, which might not be available on reasonable terms or at all.



Our international sales, marketing and service activities expose us to uncertainties that could limit our growth and adversely affect our operating results.



In addition to our domestic operations, we currently conduct sales,
marketing and service activities in other countries in North America, Europe and the Pacific Rim. Our international operations pose risks that include:



| |  | potential adverse tax consequences;
| | - | -----------------------------------



| |  | foreign currency fluctuations;
| | - | ------------------------------



| |  | potentially higher operating expenses, resulting from the establishment of international offices, the hiring of additional personnel and the localization and marketing of products
for particular countries;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the impact of smaller healthcare budgets in some international markets, which could result in greater pricing pressure and reduced gross margins;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | uncertainties relating to product feature requirements in foreign markets;
| | - | --------------------------------------------------------------------------



| |  | order deposits at lower levels than historically achieved with U.S. orders;
| | - | ---------------------------------------------------------------------------



| |  | unproven performance of new distributors;
| | - | -----------------------------------------



| |  | greater difficulty in collecting accounts receivable;
| | - | -----------------------------------------------------



| |  | the difficulty of building and managing an organization with geographically dispersed operations;
| | - | -------------------------------------------------------------------------------------------------



| |  | burdens and uncertainties related to foreign laws; and
| | - | ------------------------------------------------------



| |  | lengthy sales cycles typical in overseas markets.
| | - | -------------------------------------------------



If we are unable to meet and overcome these challenges, our international operations may not be successful, which would limit the growth of our business.



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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 nine months ended
June 30, 2004 and 2003. 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 June 30, 2004. Based on 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, except as set
forth below.



As described in Note 7 of the notes to the condensed consolidated
financial statements included in Part I  Item 1 of this Form 10-Q, subsequent to the issuance of IMPACs consolidated financial statements for the year ended September 30, 2003, our management has twice determined to restate our
consolidated financial statements as of and for the years ended September 30, 2000, 2001, 2002 and 2003, to shift some previously deferred or recognized revenues to earlier or later quarters or to defer recorded revenues and recognize them in
periods subsequent to March 31, 2004.



During the April 2004
restatement, our independent auditors at the time, 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 initial restatement, we 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.



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 were the subject of the two restatements. 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. In addition to the changes in internal control listed below, 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:



| |  | Continuing to search for additional in-house finance personnel with extensive software revenue recognition experience, including the application of SOP 97-2.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Conducting and continuing to develop the internal training program for affected employees on applicable policies and procedures and sending finance personnel to 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Continuing to refine the review of documentation 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 and the Office of the Chief Accountant of the Securities and Exchange
Commission, 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We believe 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.



During the three months ended June 30, 2004, we completed the following actions 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:



| |  | Hired one individual, with significant software revenue recognition experience, including the application of SOP 97-2.
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | Established an internal training program for affected employees on applicable policies and procedures and sent finance management personnel to external training and continuing
education programs on current accounting issues, including revenue recognition.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increased the level of 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Purported
Shareholder Class Action Lawsuits



On September 8, 2004, an alleged
shareholder of the Company filed a putative securities class action lawsuit in the United States District Court for the Northern District of California. See Operating Engineers Construction Industry and Miscellaneous Pension Fund (Local 66 
Pittsburgh), on Behalf of Itself and All Others Similarly Situated v. IMPAC Medical Systems, Inc., Joseph K. Jachinowski and Kendra A. Borrego. The defendants in this case include the Company and two of its top executive officers. The lawsuit
relates to the Companys March 1, 2004, announcement of its intent to restate its financial statements for fiscal years 2000 through 2003, and the Companys subsequent restatement of those financial statements. The lawsuit alleges, among
other things, that during the period from November 20, 2002 to May 13, 2004 (the class period), the Company falsely reported its results for fiscal years 2000 to 2003 through improper revenue recognition, and thereby artificially
inflated the price of the Companys stock. The plaintiff purports to have brought this lawsuit as a class action on behalf of all persons who purchased the Companys securities on the open market during the class period.



On September 14, 2004, two individuals filed a second purported securities class action
lawsuit in the United States District Court for the Northern District of California that is substantively identical to the one filed on September 8, 2004. See Alan Lerner and Marvin Rogers, on Behalf of Themselves and All Others Similarly
Situated v. IMPAC Medical Systems, Inc., Joseph K. Jachinowski and Kendra A. Borrego. The second lawsuit alleges the same claims against the same defendants on behalf of the same purported class of shareholders (those who purchased the
Companys securities on the open market during the period from November 20, 2002 to May 13, 2004) as the earlier-filed lawsuit.



On September 21, 2004, another individual filed a third putative securities class action lawsuit in the United States District Court for the Northern District of
California. See John Maras, Individually and On Behalf of All Others Similarly Situated v. IMPAC Medical Systems, Inc., Joseph Jachinowski, Kendra Borrego, David Auerbach, and James Hoey. This lawsuit alleges the same claims under the federal
securities laws as the two earlier-filed lawsuits, and names as defendants, in addition to the Company and the two executives named in the two earlier-filed lawsuits, two other executive officers of the Company. This lawsuit alleges the same class
period as the two earlier-filed actions (i.e., November 20, 2002 to May 13, 2004), and likewise alleges that during the class period the Company overstated its financial results for fiscal years 2000 to 2003 through improper revenue
recognition, allegedly resulting in artificial inflation of the price of the Companys stock during the class period. This action further alleges that each of the four individual defendants sold shares of the Companys stock during the
class period while in possession of material nonpublic information.



Each of
these three related cases has been assigned to a single judge, and the Company anticipates that these three cases will be consolidated into a single action. On November 8, 2004, an alleged shareholder filed a motion to consolidate the three cases
and to be appointed as lead plaintiff for the putative class. No date has been set for a hearing on this motion, and other shareholders seeking appointment as lead plaintiff may file similar motions. These lawsuits are still in the pleading stage,
and the Court has entered orders providing that the time for the Company and the individual defendants to move to dismiss, answer, or otherwise respond to the complaints is extended through and including forty-five days after the later of (i) the
appointment of lead plaintiff(s) or (ii) the filing of an consolidated amended complaint.



The Company and its officers have engaged outside counsel to defend these cases vigorously on their behalf. The Company, however, cannot be sure that it will prevail in these matters. The Companys failure to
successfully defend against these lawsuits could result in a material adverse effect on its business, financial condition, and results of operation.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



Unregistered Sales of Equity Securities



On April 12, 2004, the Company issued 10,000 shares of its common stock to an employee pursuant to the exercise of an outstanding employee stock option granted in April 1994 at an exercise price of $0.32 per share. The issuance of the
shares was deemed to be exempt from registration under the Securities Act of 1933 (the Act) in reliance on Section 4(2) of the Act as a transaction by an issuer not involving any public offering. The recipient of the common stock
represented her intention to acquire the common stock for investment only and not with a view to or for sale in connection with any distribution thereof and an appropriate legend was affixed to the share certificate. The recipient had adequate
access, through her relationship with the Company, to information about the Company.



Use of Proceeds



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. As discussed in Note 6 to the condensed consolidated financial statements, we acquired certain assets and assumed certain liabilities of Tamtron
Corporation and Medical Registry Services, Inc. from IMPATH Inc. We used approximately $22.5 million of the funds received in our public offerings to finance this acquisition. The remaining net proceeds of the offering have been used for working
capital and to expand our business generally.



Item 3. Defaults Upon Senior Securities



Not
Applicable.



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



Not Applicable



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##### Table of Contents

Item 5. Other Information



Not applicable.



Item 6. Exhibits



Exhibits



|     |  |                                                                                 
|---- |  | --------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer Pursuant to Rule 13a-14(b).        
|     | 
|31.2 |  | Certification of Principal Financial Officer Pursuant to Rule 13a-14(b).        
|     | 
|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.



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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: November 19, 2004/s/ JOSEPH K. JACHINOWSKIJoseph K. Jachinowski Chairman of the Board, President and Chief Executive Officer/s/ KENDRA A. BORREGOKendra A. Borrego Chief Financial Officer




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