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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 December 31, 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 February 4, 2005    9,950,318



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TABLE OF CONTENTS



|                              |  |                                                                                                       |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                      
|                              |  |                                                                                                       |  |     
|                              |  |                                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Financial Statements (unaudited)                                                                      |  | 1   
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Balance Sheets as of December 31, 2004 and September 30, 2004                  |  | 1   
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2004 and 2003 |  | 2   
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 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                 |  | 9   
|                              |  |                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 15  
|                              |  |                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                               |  | 15  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                     |  | 17  
|                              |  |                                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                           |  | 17  
|                              |  |                                                                                                      
|Item 3.                       |  | Defaults Upon Senior Securities                                                                       |  | 17  
|                              |  |                                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                   |  | 17  
|                              |  |                                                                                                      
|Item 5.                       |  | Other Information                                                                                     |  | 17  
|                              |  |                                                                                                      
|Item 6.                       |  | Exhibits                                                                                              |  | 17  
|                              |  |                                                                                                      
|Signatures                    |  |                                                                                                       |  | 19  



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 in our Form 10-K
for the fiscal year ended September 30, 2004 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.



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PART I. FINANCIAL INF
ORMATION



Item 1. Fina
ncial Statements



IMPAC MEDICAL
SYSTEMS, INC. AND SUBSIDIARIES

CONDENS
ED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                           |  |                  |         |   |                   |   |         |  
|------------------------------------------ |  | ---------------- | ------- | - | ----------------- | - | ------- | -
|                                           |  | December 31,2004 |         |   | September 30,2004 |  
|(In thousands)                             |  |                  |         |   |                   |  
|Assets                                     |  |                  |         |   |                   |   |         |  
|Current assets:                            |  |                  |         |   |                   |   |         |  
|Cash and cash equivalents                  |  | $                | 52,227  |   |                   | $ | 54,605  |  
|Available-for-sale securities              |  |                  | 1,115   |   |                   |   | 115     |  
|Accounts receivable, net                   |  |                  | 18,999  |   |                   |   | 16,850  |  
|Unbilled accounts receivable               |  |                  | 645     |   |                   |   | 696     |  
|Inventories                                |  |                  | 105     |   |                   |   | 115     |  
|Deferred income taxes, net                 |  |                  | 7,630   |   |                   |   | 7,630   |  
|Prepaid expenses and other current assets  |  |                  | 5,195   |   |                   |   | 4,879   |  
|                                           |  |                  |         |   |                   |   |         |  
|Total current assets                       |  |                  | 85,916  |   |                   |   | 84,890  |  
|Available-for-sale securities              |  |                  | 6,163   |   |                   |   | 3,574   |  
|Property and equipment, net                |  |                  | 4,362   |   |                   |   | 4,367   |  
|Deferred income taxes                      |  |                  | 1,247   |   |                   |   | 1,247   |  
|Goodwill                                   |  |                  | 15,509  |   |                   |   | 15,509  |  
|Other intangible assets, net               |  |                  | 7,111   |   |                   |   | 7,692   |  
|Other assets                               |  |                  | 491     |   |                   |   | 481     |  
|                                           |  |                  |         |   |                   |   |         |  
|Total assets                               |  | $                | 120,799 |   |                   | $ | 117,760 |  
|                                           |  |                  |         |   |                   |   |         |  
|Liabilities and Stockholders Equity       |  |                  |         |   |                   |   |         |  
|Current liabilities:                       |  |                  |         |   |                   |   |         |  
|Accounts payable                           |  | $                | 475     |   |                   | $ | 334     |  
|Accrued liabilities                        |  |                  | 3,682   |   |                   |   | 4,128   |  
|Income taxes payable                       |  |                  | 2,485   |   |                   |   | 3,082   |  
|Deferred revenue                           |  |                  | 45,385  |   |                   |   | 41,023  |  
|Customer deposits, current                 |  |                  | 10,214  |   |                   |   | 10,655  |  
|                                           |  |                  |         |   |                   |   |         |  
|Total current liabilities                  |  |                  | 62,241  |   |                   |   | 59,222  |  
|Customer deposits, net of current portion  |  |                  | 302     |   |                   |   | 302     |  
|Deferred revenue, net of current portion   |  |                  | 78      |   |                   |   | 74      |  
|                                           |  |                  |         |   |                   |   |         |  
|Total liabilities                          |  |                  | 62,621  |   |                   |   | 59,598  |  
|                                           |  |                  |         |   |                   |   |         |  
|Stockholders equity:                      |  |                  |         |   |                   |   |         |  
|Preferred stock                            |  |                  |        |   |                   |   |        |  
|Common stock                               |  |                  | 10      |   |                   |   | 10      |  
|Additional paid-in capital                 |  |                  | 50,503  |   |                   |   | 50,431  |  
|Accumulated other comprehensive loss       |  |                  | (36     | ) |                   |   | (19     | )
|Retained earnings                          |  |                  | 7,701   |   |                   |   | 7,740   |  
|                                           |  |                  |         |   |                   |   |         |  
|Total stockholders equity                 |  |                  | 58,178  |   |                   |   | 58,162  |  
|                                           |  |                  |         |   |                   |   |         |  
|Total liabilities and stockholders equity |  | $                | 120,799 |   |                   | $ | 117,760 |  
|                                           |  |                  |         |   |                   |   |         |  



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



1



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IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED
 CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                              |  |                                |        |   |      |   |        |  
|----------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                              |  | Three Months EndedDecember 31, |       
|                                                                              |  | 2004                           |        |   | 2003 |  
|(In thousands, except per share data)                                         |  |                                |        |   |      |  
|Net sales:                                                                    |  |                                |        |   |      |   |        |  
|Software license and other, net                                               |  | $                              | 8,842  |   |      | $ | 9,225  |  
|Maintenance and services                                                      |  |                                | 8,556  |   |      |   | 6,207  |  
|                                                                              |  |                                |        |   |      |   |        |  
|Total net sales                                                               |  |                                | 17,398 |   |      |   | 15,432 |  
|                                                                              |  |                                |        |   |      |   |        |  
|Cost of sales:                                                                |  |                                |        |   |      |   |        |  
|Software license and other, net                                               |  |                                | 4,168  |   |      |   | 2,991  |  
|Maintenance and services                                                      |  |                                | 2,350  |   |      |   | 2,203  |  
|Amortization of purchased technology                                          |  |                                | 382    |   |      |   | 69     |  
|                                                                              |  |                                |        |   |      |   |        |  
|Total cost of sales                                                           |  |                                | 6,900  |   |      |   | 5,263  |  
|                                                                              |  |                                |        |   |      |   |        |  
|Gross profit                                                                  |  |                                | 10,498 |   |      |   | 10,169 |  
|                                                                              |  |                                |        |   |      |   |        |  
|Operating expenses:                                                           |  |                                |        |   |      |   |        |  
|Research and development                                                      |  |                                | 3,344  |   |      |   | 2,431  |  
|Sales and marketing                                                           |  |                                | 5,176  |   |      |   | 4,052  |  
|General and administrative                                                    |  |                                | 2,175  |   |      |   | 1,128  |  
|Amortization of intangible assets                                             |  |                                | 199    |   |      |   | 51     |  
|Write-off of purchased in-process research and development                    |  |                                |       |   |      |   | 557    |  
|                                                                              |  |                                |        |   |      |   |        |  
|Total operating expenses                                                      |  |                                | 10,894 |   |      |   | 8,219  |  
|                                                                              |  |                                |        |   |      |   |        |  
|Operating income (loss)                                                       |  |                                | (396   | ) |      |   | 1,950  |  
|Interest expense                                                              |  |                                |       |   |      |   | (3     | )
|Interest and other income                                                     |  |                                | 337    |   |      |   | 148    |  
|                                                                              |  |                                |        |   |      |   |        |  
|Income (loss) before benefit (provision) from income taxes                    |  |                                | (59    | ) |      |   | 2,095  |  
|Benefit (provision) from income taxes                                         |  |                                | 20     |   |      |   | (691   | )
|                                                                              |  |                                |        |   |      |   |        |  
|Net income (loss)                                                             |  | $                              | (39    | ) |      | $ | 1,404  |  
|                                                                              |  |                                |        |   |      |   |        |  
|Net income (loss) per common share:                                           |  |                                |        |   |      |   |        |  
|Basic                                                                         |  | $                              | (0.00  | ) |      | $ | 0.14   |  
|                                                                              |  |                                |        |   |      |   |        |  
|Diluted                                                                       |  | $                              | (0.00  | ) |      | $ | 0.14   |  
|                                                                              |  |                                |        |   |      |   |        |  
|Weighted-average shares used in computing net income (loss) per common share: |  |                                |        |   |      |   |        |  
|Basic                                                                         |  |                                | 9,933  |   |      |   | 9,758  |  
|                                                                              |  |                                |        |   |      |   |        |  
|Diluted                                                                       |  |                                | 9,933  |   |      |   | 10,240 |  
|                                                                              |  |                                |        |   |      |   |        |  



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



2



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IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS O
F CASH FLOWS

(Unaudited)



|                                                                                                   |  |                                |        |   |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                                   |  | Three Months EndedDecember 31, |       
|                                                                                                   |  | 2004                           |        |   | 2003 |  
|(In thousands)                                                                                     |  |                                |        |   |      |  
|Cash flows from operating activities:                                                              |  |                                |        |   |      |   |         |  
|Net income (loss)                                                                                  |  | $                              | (39    | ) |      | $ | 1,404   |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                |        |   |      |   |         |  
|Depreciation and amortization of property and equipment                                            |  |                                | 556    |   |      |   | 438     |  
|Amortization of intangible assets                                                                  |  |                                | 581    |   |      |   | 120     |  
|Accretion of available-for-sale securities                                                         |  |                                | 30     |   |      |   | 34      |  
|Write-off of purchased in-process research and development                                         |  |                                |       |   |      |   | 557     |  
|Provision for doubtful accounts                                                                    |  |                                | 25     |   |      |   | 32      |  
|Deferred income taxes                                                                              |  |                                |       |   |      |   | (343    | )
|Changes in assets and liabilities, net of effects of acquisitions:                                 |  |                                |        |   |      |   |         |  
|Accounts receivable                                                                                |  |                                | (2,174 | ) |      |   | (1,391  | )
|Unbilled accounts receivable                                                                       |  |                                | 52     |   |      |   |        |  
|Inventories                                                                                        |  |                                | 9      |   |      |   | (3      | )
|Prepaid expenses and other current assets                                                          |  |                                | (316   | ) |      |   | (117    | )
|Other assets                                                                                       |  |                                | (11    | ) |      |   | 37      |  
|Customer deposits                                                                                  |  |                                | (441   | ) |      |   | (221    | )
|Accounts payable                                                                                   |  |                                | 137    |   |      |   | (544    | )
|Accrued liabilities                                                                                |  |                                | (440   | ) |      |   | (1,810  | )
|Income tax payable/refund receivable                                                               |  |                                | (595   | ) |      |   | 503     |  
|Deferred revenue                                                                                   |  |                                | 4,382  |   |      |   | 965     |  
|                                                                                                   |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                                | 1,756  |   |      |   | (339    | )
|                                                                                                   |  |                                |        |   |      |   |         |  
|Cash flows from investing activities:                                                              |  |                                |        |   |      |   |         |  
|Acquisition of property and equipment                                                              |  |                                | (551   | ) |      |   | (372    | )
|Payments for the acquisition of Tamtron and MRS product lines                                      |  |                                |       |   |      |   | (22,430 | )
|Purchases of available-for-sale securities                                                         |  |                                | (3,634 | ) |      |   | (1,076  | )
|Proceeds from maturities of available-for-sale securities                                          |  |                                |       |   |      |   | 1,450   |  
|                                                                                                   |  |                                |        |   |      |   |         |  
|Net cash used in investing activities                                                              |  |                                | (4,185 | ) |      |   | (22,428 | )
|                                                                                                   |  |                                |        |   |      |   |         |  
|Cash flows from financing activities:                                                              |  |                                |        |   |      |   |         |  
|Principal payments on capital leases                                                               |  |                                |       |   |      |   | (18     | )
|Proceeds from the issuance of common stock, net                                                    |  |                                | 72     |   |      |   | 1,019   |  
|                                                                                                   |  |                                |        |   |      |   |         |  
|Net cash provided by financing activities                                                          |  |                                | 72     |   |      |   | 1,001   |  
|                                                                                                   |  |                                |        |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                          |  |                                | (2,357 | ) |      |   | (21,766 | )
|Effect of exchange rates on cash                                                                   |  |                                | (21    | ) |      |   | 7       |  
|Cash and cash equivalents at beginning of period                                                   |  |                                | 54,605 |   |      |   | 57,979  |  
|                                                                                                   |  |                                |        |   |      |   |         |  
|                                                                                                   |  |                               
|Cash and cash equivalents at end of period                                                         |  | $                              | 52,227 |   |      | $ | 36,220  |  
|                                                                                                   |  |                                |        |   |      |   |         |  



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



3



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IMPAC MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSO
LIDATED 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 month period ended December 31, 2004 are not necessarily indicative of the results that may be expected for the year
ending September 30, 2005, or for any future period. The balance sheet at September 30, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended
September 30, 2004 included in the Companys Form 10-K for the fiscal year ended September 30, 2004 filed December 14, 2004.



NOTE 2Significant Accounting Policies



The Companys significant accounting policies are disclosed in the Companys Form 10-K filed on December 14, 2004 for the year ended September 30, 2004.



Inventories



Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or
market. As of December 31, 2004 and September 30, 2004, 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 months
ended December 31, 2003 and 2004. The annual goodwill impairment test was completed during the first quarter of fiscal 2005 and 2004, and did not result in any impairment of recorded goodwill.



Revenue recognition



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



The Company accounts for sales of software and maintenance revenue under the provisions of Statement of Position 97-2, (SOP 97-2), Software Revenue Recognition, as amended. SOP 97-2 requires revenue earned on
software arrangements involving multiple elements to be allocated to each element based on vendor-specific objective evidence (VSOE) of the fair value of the delivered and/or undelivered elements. For hardware transactions where no
software is involved, the Company applies the provisions of Staff Accounting Bulletin 104, Revenue Recognition.



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 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 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.



Due to the significant implementation and customization efforts essential to the
functionality of the related products, the Company recognizes the license and



4



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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 Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards 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 as reported during the three months ended December 31, 2004 and 2003.



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



|                                                             |  |                                |       |   |      |   |       |  
|------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | - | ----- | -
|                                                             |  | Three Months EndedDecember 31, |      
|                                                             |  | 2004                           |       |   | 2003 |  
|Net income (loss) as reported                                |  | $                              | (39   | ) |      | $ | 1,404 |  
|Less stock-based compensation cost under a fair value method |  |                                | (200  | ) |      |   | (274  | )
|                                                             |  |                                |       |   |      |   |       |  
|Pro forma net income (loss)                                  |  | $                              | (239  | ) |      | $ | 1,130 |  
|                                                             |  |                                |       |   |      |   |       |  
|Net income (loss) per common share, basic                    |  |                                |       |   |      |   |       |  
|As reported                                                  |  | $                              | (0.00 | ) |      | $ | 0.14  |  
|                                                             |  |                                |       |   |      |   |       |  
|Pro forma                                                    |  | $                              | (0.02 | ) |      | $ | 0.12  |  
|                                                             |  |                                |       |   |      |   |       |  
|Net income (loss) per common share, diluted                  |  |                                |       |   |      |   |       |  
|As reported                                                  |  | $                              | (0.00 | ) |      | $ | 0.14  |  
|                                                             |  |                                |       |   |      |   |       |  
|Pro forma                                                    |  | $                              | (0.02 | ) |      | $ | 0.11  |  
|                                                             |  |                                |       |   |      |   |       |  



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 (loss)



Comprehensive income (loss) generally represents all changes in stockholders equity except those resulting from investments or contributions by stockholders. The
Companys unrealized gains and losses on available-for-sale securities and cumulative translation adjustments represent the components of comprehensive income (loss) that were excluded from the net income (loss). Total comprehensive income
(loss) for the three months ended December 31, 2004 and 2003 is presented in the following table (in thousands):



|                                               |  |                                |     |   |      |   |       |  
|---------------------------------------------- |  | ------------------------------ | --- | - | ---- | - | ----- | -
|                                               |  | Three Months EndedDecember 31, |    
|                                               |  | 2004                           |     |   | 2003 |  
|Net income (loss)                              |  | $                              | (39 | ) |      | $ | 1,404 |  
|Other comprehensive income:                    |  |                                |     |   |      |   |       |  
|Change in unrealized gain (loss) on securities |  |                                | (15 | ) |      |   | (25   | )
|Foreign currency translation adjustment        |  |                                | (2  | ) |      |   | 8     |  
|                                               |  |                                |     |   |      |   |       |  
|Comprehensive income (loss)                    |  | $                              | (56 | ) |      | $ | 1,387 |  
|                                               |  |                                |     |   |      |   |       |  



Net income (loss) per common share



Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted-average number of vested common shares outstanding for the period. Diluted net income (loss) per common share is computed giving effect to all potentially dilutive common stock equivalents.



5



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



|                                                                               |  |                                |  |       
|------------------------------------------------------------------------------ |  | ------------------------------ |  | ------
|                                                                               |  | Three Months EndedDecember 31,
|                                                                               |  | 2004                           |  | 2003  
|Weighted average shares used in computing basic net income per common share    |  | 9,933                          |  | 9,758 
|Dilutive effect of options to purchase shares and employee stock purchase plan |  |                               |  | 482   
|                                                                               |  |                                |  |       
|Weighted-average shares used in computing diluted net income per common share  |  | 9,933                          |  | 10,240
|                                                                               |  |                                |  |       



At December 31, 2004 and 2003, options
to purchase approximately 501,000 and 90,000 shares of common stock, respectively, were excluded from the computation of diluted net income (loss) per common share as their effect is antidilutive.



Recent accounting pronouncements



FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2), provides guidance under SFAS No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Creation Act) on enterprises income tax expense and deferred tax liability. The Jobs Creation Act was enacted on October 22, 2004. FSP 109-2 states that an
enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Creation Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not
yet completed its evaluation on the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Creation
Act.



In December 2004, the FASB issued SFAS No. 153,Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged.
SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the Companys fourth quarter of fiscal year 2005. The Company does not believe the adoption of SFAS No. 153 will have a material effect on its consolidated financial
position, results of operations or cash flows.



In December 2004, the FASB
issued SFAS No. 123R, Share-Based Payment, which replaced SFAS No. 123 and superseded APB 25. SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either
equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123R, companies will no longer be able to
account for share-based compensation transactions using the intrinsic method in accordance with APB 25 but will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of
earnings. SFAS No. 123R is effective beginning in the Companys fourth quarter of fiscal year 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under
SFAS No. 123R. The Company has not yet determined which fair-value method and transitional provision it will follow. The impact on the Companys consolidated financial statements of applying the Black-Scholes option valuation method of
accounting for stock options is disclosed in the Accounting for Stock-Based Compensation section above.



NOTE 3  Other Intangible Assets



The following table reflects the gross carrying amount and accumulated amortization of the Companys intangible assets on the consolidated balance sheets as follows (in thousands):



|                                   |  |                  |        |   |                   |   |        |  
|---------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------ | -
|                                   |  | December 31,2004 |        |   | September 30,2004 |  
|Technology                         |  | $                | 9,398  |   |                   | $ | 9,398  |  
|Customer base                      |  |                  | 3,388  |   |                   |   | 3,388  |  
|Non-compete                        |  |                  | 260    |   |                   |   | 260    |  
|Trade name                         |  |                  | 469    |   |                   |   | 469    |  
|                                   |  |                  |        |   |                   |   |        |  
|                                   |  |                  | 13,515 |   |                   |   | 13,515 |  
|Accumulated amortization           |  |                  | (6,404 | ) |                   |   | (5,823 | )
|                                   |  |                  |        |   |                   |   |        |  
|Total other intangible assets, net |  | $                | 7,111  |   |                   | $ | 7,692  |  
|                                   |  |                  |        |   |                   |   |        |  



Amortization expense for those
intangible assets still required to be amortized under SFAS No. 142 was $581,000 and $120,000 and for the three months ended December 31, 2004 and 2003, respectively. The Company estimates amortization expense on a straight-line basis to be
$1,744,000 for the remainder of fiscal 2005. For fiscal years 2006 through 2011, the Company estimates amortization expense of $1,797,000, $1,410,000, $1,410,000, $468,000, $141,000 and $28,000, respectively.



NOTE 4  Commitments



Operating leases



The Company leases its facilities and premises under noncancelable operating leases, which expire between October 2004 and March 2007. The
leases in Mountain View, California and in Cambridge, Massachusetts have options to extend the leases for additional terms ranging from two to five years. Under these agreements, the Company is responsible for certain maintenance costs, taxes and
insurance expenses. The Company also leases premises in various locations on a month to month basis.



6



---

In addition, the Company leases three automobiles and office equipment under operating leases with expiration dates
through July 2007, each having purchase options at the end of the lease term. At December 31, 2004, aggregate future minimum payments under noncancelable operating leases are as follows (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|Fiscal Year       |  |  
|Remainder of 2005 |  | $ | 2,351
|2006              |  |   | 2,753
|2007              |  |   | 1,115
|                  |  |   |      
|                  |  | $ | 6,219
|                  |  |   |      



In July 2002, the Company entered into
service agreements for telecommunications services through 2007. The services contracted for include wireless, frame-relay, voice/data and internet transport services. In September 2004, the Company entered into a distribution agreement with Advizor
Solutions to provide third party analysis products. At December 31, 2004, total future minimum obligations under these agreements are as follows (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|Fiscal Year       |  |  
|Remainder of 2005 |  | $ | 670  
|2006              |  |   | 870  
|2007              |  |   | 561  
|                  |  |   |      
|                  |  | $ | 2,101
|                  |  |   |      



Capital lease obligations



During 2000, the Company acquired office furniture under a capital lease.
Payments, comprising both principal and interest, were due in sixty equal monthly installments through March 2005. The Company paid the capital lease in full during fiscal year 2004.



In connection with the Tamtron/MRS acquisition in December 2003, the Company assumed several capital lease obligation liabilities. The
Company paid all acquired capital leases off in full during fiscal year 2004.



Royalties and software development agreement



The Company has
contracted with third parties to supply data used in conjunction with the Companys products. These contracts provide for payment of royalties ranging from 1.0% to 5.0% of future net sales from certain products.



Legal proceedings



Purported Shareholder Class Action Lawsuits



The following three putative securities class actions that were filed after the
Companys March 1, 2004 announcement of its intent to restate its financial statements for fiscal years 2000 through 2003 have been voluntarily dismissed by the plaintiffs that filed the actions.



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 Operating Engineers action). The lawsuit alleged, 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 purported 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 was 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 Lerner action). The second lawsuit alleged 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 (the Maras action). This lawsuit alleged the same claims under the federal securities
laws as the two earlier-filed lawsuits, and named 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 alleged the same class period as
the two earlier-filed actions (i.e., November 20, 2002 to May 13, 2004), and likewise alleged 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 alleged 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.



On January 11, 2005,
the plaintiff in the Maras action filed a notice of voluntary dismissal of his complaint. In view of this notice of voluntary dismissal, the Court on January 12, 2005, entered an order directing the clerk of the court to close the case file
and terminate all motions. On January 24, 2005, the plaintiff in the Operating Engineers action, and the plaintiffs in the Lerner action, filed a notice of voluntary dismissal of their respective complaints. On January 26, the Court
entered an order in each of these cases directing the clerk to close the case file and terminate all motions.



Indemnification agreements



The Company
enters into standard indemnification arrangements in its ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the
indemnified party, generally its business partners or customers, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its products. The term of these
indemnification agreements is generally perpetual anytime after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never
incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.



7



---

The Company has entered into indemnification agreements with its directors and officers that may require the Company: to
indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified; and to make good faith determination whether or not it is practicable for the Company to obtain directors and officers insurance. The Company currently has
directors and officers insurance.



NOTE 5  Subsequent
Events



Acquisition of the Company by Elekta AB



Elekta AB (Elekta) and the Company announced an agreement on January 18, 2005,
under which Elekta will acquire the Company. The acquisition will enable Elekta, a world leading supplier of advanced clinical solutions for high precision radiation treatment of cancer and for non- or minimally invasive treatment of brain
disorders, to offer customers a new, broad array of health care information products for clinical, administrative, outcomes and decision support purposes.



Under the terms of the agreement, Elekta will pay $24.00 in cash for each share of the Companys common stock outstanding, which represents a premium of 22% over the
Companys closing price on January 14, 2005, and equates to a diluted equity value of approximately $250 million and an enterprise value of approximately $190 million. The merger is contingent upon approval of the transaction by the
Companys stockholders, receipt of Hart-Scott-Rodino regulatory approval and other customary closing conditions. The Companys board of directors has approved the acquisition and recommends that stockholders vote in favor of the
transaction. The Company intends to hold a special stockholders meeting to approve the merger in mid-April 2005 and to close the transaction shortly thereafter. Major stockholders of the Company, together holding approximately 33 percent of the
Companys shares, have entered into agreements with Elekta to vote their shares in favor of the transaction.



Legal proceedings



On January 21, 2005, an alleged holder of IMPAC common stock filed a purported class action lawsuit, Stakely v. IMPAC Medical Systems, Inc., et al. in California Superior Court for the County of Santa
Clara. The complaint names as defendants IMPAC and each member of our board of directors. The complaint alleges that, in pursuing the merger with Elekta and approving the merger agreement, the directors violated their fiduciary duties to the holders
of IMPAC common stock by, among other things, failing to implement a process designed to maximize stockholder value, engaging in self-dealing and securing benefits for certain officers and directors of IMPAC at the expense of the plaintiffs and
other stockholders. The complaint seeks a preliminary and permanent injunction to enjoin the company from consummating the merger, as well as attorneys fees and other remedies.



8



---

Item 2. M
anagement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 for the fiscal year
ended September 30, 2004 filed December 14, 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.



Overview



We provide information technology systems for cancer care. Our systems provide electronic medical record, imaging, laboratory information
management, 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.



Acquisition of IMPAC by Elekta AB



Elekta AB
(Elekta) and IMPAC Medical Systems, Inc. announced on January 18, 2005 an agreement under which Elekta will acquire IMPAC. The acquisition will enable Elekta, a world leading supplier of advanced clinical solutions for high precision
radiation treatment of cancer and for non- or minimally invasive treatment of brain disorders, to offer customers a new, broad array of health care information products for clinical, administrative, outcomes and decision support purposes.



Under the terms of the agreement, Elekta will pay $24.00 in cash for each
share of IMPAC common stock outstanding, which represents a premium of 22 percent over the IMPAC closing price on January 14, 2005, and equates to a diluted equity value of approximately $250 million and an enterprise value of approximately $190
million. The merger is contingent upon approval of the transaction by IMPACs stockholders, receipt of Hart-Scott-Rodino regulatory approval and other customary closing conditions. IMPACs board of directors has approved the acquisition
and recommends that stockholders vote in favor of the transaction. IMPAC intends to hold a special stockholders meeting to approve the merger in mid-April and to close the transaction shortly thereafter. Major stockholders of IMPAC, together holding
approximately 33 percent of the companys shares, have entered into agreements with Elekta to vote their shares in favor of the transaction.



Recent Factors Affecting Business



Although our revenues in fiscal 2004 increased over fiscal 2003, the growth rate in our core oncology point-of-care business, which constitutes the majority of our
non-recurring revenue, 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 in our core business remained soft throughout 2004 and the softness
continued in the first quarter of fiscal 2005. We believe several factors contributed 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. We have begun testing our
interfaces to the new devices in the first quarter of fiscal 2005 and will continue those activities throughout the next few months. 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 two independent medical oncology IT players being acquired by cancer related companies. Fourth, Medicare reimbursement policies also continue to damper oncology IT spending. Decreased reimbursements in the radiation oncology segment and
anticipated reductions in the medical oncology segment led to delays in purchasing as facilities re-examine their budgets and return on investment expectations. Fifth, over the last several quarters our accounting restatements had an effect on
bookings as some of our competitors used the event to sell against us. We completed our financial restatement in the first quarter of fiscal 2005. 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 10.2% of our total net sales in the three months
ended December 31, 2004 and 7.1% for the same period in fiscal 2004. Distributor sales as a percentage of net sales have increased over the past year as their demand for information technology products has grown. 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 7.4% of our net sales in the three months ended December 31, 2004 and 2.1% of our net sales for the same
period in fiscal 2004. International sales as a percentage of net sales have increased over the past year as the demand of our information systems have grown due to our international expansion and international distributor sales have increased.



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 are 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 in our Form 10-K for the fiscal year ended September 30, 2004 filed December 14, 2004.



9



---

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.



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 2 to our condensed 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 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 3.0% of our total net sales in the three months ended December 31, 2004 and 4.3% for the same period in fiscal
2004. 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.



Due to the significant implementation and customization efforts essential to the functionality of the related products, 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.
| | - |  | -------------------------------------



10



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



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



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



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



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



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



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



Sales and marketing expenses primarily consist of:



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



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



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



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



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



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 if we continue 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.



11



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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 EndedDecember 31, |   
|                                                           |  | 2004                           |    |  | 2003  |  
|Sales:                                                     |  |                                |    |  |       |  
|Software license and other, net                            |  | 50.8                           | %  |  | 59.8  | %
|Maintenance and services                                   |  | 49.2                           |    |  | 40.2  |  
|                                                           |  |                                |    |  |       |  
|Total net sales                                            |  | 100.0                          |    |  | 100.0 |  
|                                                           |  |                                |    |  |       |  
|Cost of sales:                                             |  |                                |    |  |       |  
|Software license and other, net                            |  | 24.0                           |    |  | 19.4  |  
|Maintenance and services                                   |  | 13.5                           |    |  | 14.3  |  
|Amortization of purchased technology                       |  | 2.2                            |    |  | 0.4   |  
|                                                           |  |                                |    |  |       |  
|Total cost of sales                                        |  | 39.7                           |    |  | 34.1  |  
|                                                           |  |                                |    |  |       |  
|Gross profit                                               |  | 60.3                           |    |  | 65.9  |  
|                                                           |  |                                |    |  |       |  
|Operating expenses:                                        |  |                                |    |  |       |  
|Research and development                                   |  | 19.2                           |    |  | 15.8  |  
|Sales and marketing                                        |  | 29.8                           |    |  | 26.3  |  
|General and administrative                                 |  | 12.5                           |    |  | 7.3   |  
|Amortization of intangible assets                          |  | 1.1                            |    |  | 0.3   |  
|In-process research and development write-off              |  |                               |    |  | 3.6   |  
|                                                           |  |                                |    |  |       |  
|Total operating expenses                                   |  | 62.6                           |    |  | 53.3  |  
|                                                           |  |                                |    |  |       |  
|Operating income (loss)                                    |  | (2.3                           | )  |  | 12.6  |  
|Interest and other income, net                             |  | 2.0                            |    |  | 1.0   |  
|                                                           |  |                                |    |  |       |  
|Income (loss) before benefit (provision) from income taxes |  | (0.3                           | )  |  | 13.6  |  
|Benefit (provision) from income taxes                      |  | 0.1                            |    |  | (4.5  | )
|                                                           |  |                                |    |  |       |  
|Net income (loss)                                          |  | (0.2                           | )% |  | 9.1   | %
|                                                           |  |                                |    |  |       |  



Comparison of Three Months Ended
December 31, 2004 and 2003



Net Sales. Net sales increased 12.7% to
$17.4 million in the three months ended December 31, 2004 from $15.4 million for the same period in fiscal 2004 including $3.3 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 4.2% to $8.8 million in the three months ended December 31, 2004 from $9.2 million for the same period in fiscal 2004. The decline is a result of decreased sales of new systems in oncology of $1.9 million,
decreased sales of additional products to existing customers of $564,000 and imaging systems of $332,000, partially offset by increased sales of registry systems of $1.3 million and pathology lab systems of $1.1 million. We deferred a net $2.3
million of software license revenue in the three months ended December 31, 2004 as compared to $162,000 for the same period in fiscal 2004.



Maintenance and services sales increased 37.8% to $8.6 million for the three months ended December 31, 2004 from $6.2 million for the same period in fiscal 2004.
Maintenance and support contracts accounted for $2.2 million of the total $2.4 million increase with the remaining portion attributed to increased non-contract training and support. The acquired pathology line of business contributed $891,000 of the
total increase in maintenance and services. Our continued high customer retention on maintenance and support contracts, general price increases, 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 31.1% to $6.9 million for the three months ended December 31, 2004 from $5.3 million for the same period in fiscal 2004. Our gross margin decreased to 60.3% for the three months ended
December 31, 2004 from 65.9% for the same period in fiscal 2004.



Cost of sales
relating to net software sales increased 39.4% to $4.2 million for the three months ended December 31, 2004 from $3.0 million for the same period in fiscal 2004. Our gross margin associated with net software sales decreased to 52.9% for the three
months ended December 31, 2004 compared to 67.6% for the same period in fiscal 2004. The increase in expenses was related to $772,000 in employee costs for additional and acquired employees, $303,000 in supplies and materials, $67,000 in travel
costs, $18,000 in implementation costs and $18,000 in telecommunication costs. The decline in the gross margin associated with net software sales related to fewer than projected implementations of new oncology systems as a result of flat order
volume and a higher percentage of revenue deferrals compared to the same period in fiscal 2004.



Cost of sales relating to maintenance and services increased 6.7% to $2.4 million for the three months ended December 31, 2004 from $2.2 million for the same period in fiscal 2004. Our gross margin associated with
maintenance and services increased to 72.5% for the three months ended December 31, 2004 from 64.5% for the same period in fiscal 2004. The increase in expenses of $147,000 was primarily related to increased employee related 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 three months ended December 31, 2004 contributed to the improvement in our gross margin associated with
maintenance and services.



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 December 31, 2004 from $69,000 for the same period in fiscal 2004.



Research and Development. Research and development expenses increased 37.6% to $3.3 million for the three months ended December 31,
2004 from $2.4 million for the same period in fiscal 2004. As a percentage of total net sales, research and development expenses increased to 19.2% for the three months ended December 31, 2004



12



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from 15.8% for the same period in fiscal 2004. Additional engineering headcount and the associated personnel expenses accounted for $891,000 and travel
expenses accounted for $18,000 of the total increase in expenses. The increase as a percentage of total net sales in the three months ended December 31, 2004 was primarily due to increased engineering headcount associated with the acquired product
lines in December 2003 and lower net sales.



Sales and Marketing. Sales
and marketing expenses increased 27.7% to $5.2 million for the three months ended December 31, 2004 from $4.1 million for the same period in fiscal 2004. As a percentage of total net sales, sales and marketing expenses increased to 29.8% for the
three months ended December 31, 2004 from 26.3% for the same period in fiscal 2004. The increase in expenses in absolute dollars related to $930,000 in employee related expenses, $309,000 in travel expenses, $99,000 in outside services, $56,000 in
supplies and materials and $36,000 in telecommunication costs partially offset by a reduction in commissions of $236,000, sponsorships of $44,000 and advertising of $22,000. The increase as a percentage of total net sales in the three months ended
December 31, 2004 was primarily due to the expansion and specialization of our domestic and international sales force and lower net sales.



General and Administrative. General and administrative expenses increased 92.8% to $2.2 million for the three months ended December 31, 2004 from $1.1 million for
the same period in fiscal 2004. As a percentage of total net sales, general and administrative expenses increased to 12.5% for the three months ended December 31, 2004 from 7.3% for the same period in fiscal 2004. The increase in absolute dollars
and as a percentage of total net sales in the three months ended December 31, 2004 was primarily due to increases in accounting and legal fees of $658,000 primarily related to our annual audit, restatement of our financial statements and negotiation
of the proposed merger with Elekta, business insurance premiums of $133,000 for our directors and officers insurance renewal, outside services of $63,000, regulatory expenses of $46,000, employee related expense of $45,000, rent expense of $39,000
and other various net operational expenses of $52,000.



Amortization of
Intangible Assets. Amortization expense increased to $199,000 for the three months ended December 31, 2004 from $51,000 for the same period in fiscal 2004. 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.



In-Process Research and Development. During the three months ended December 31, 2004, we did not have any transactions that required an in-process research and development write-off. During the three months ended December 31, 2003,
we recorded a write-off of in-process research and development in the amount of $557,000 due to an analysis allocating the purchase price paid for certain intellectual property in that period. Both Tamtron and MRS were in the process of adding new
functionality to their lines of software products and we believed there was sufficient risk in completing the technology to qualify the in-process research and development write-off.



Operating Income (Loss). Operating loss was $396,000 for the three months ended December 31, 2004 compared to operating income of
$2.0 million for the same period in fiscal 2004. 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 annual audit, restatement of our financial statements and merger related expenses.



Interest and Other Income (Expense), Net. Interest and other income, net increased 132.4% to $337,000 for the three months ended December 31, 2004 from $145,000
for the same period in fiscal 2004. The increase was primarily related to a $148,000 settlement we received from a stockholder that had engaged in an inadvertent Section 16 matching transaction in our stock. The remaining increase was related to the
investment of excess operating cash in available-for-sale securities and improved interest rates compared to the same period in fiscal 2004.



Income Taxes. Our effective tax rate increased to 34.0% during the three months ended December 31, 2004 from 33.0% during the same period in fiscal 2004 due to a
reduction of research and development tax credits.



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.



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



|                                  |  |              |        |               |   |        |  |   |       
|--------------------------------- |  | ------------ | ------ | ------------- | - | ------ |  | - | ------
|                                  |  | December 31, |        | September 30,
|                                  |  | 2004         |        | 2003          |   | 2004  
|Customer deposits                 |  | $            | 10,516 |               | $ | 10,875 |  | $ | 10,957
|Deferred software license revenue |  |              | 19,509 |               |   | 15,061 |  |   | 17,234
|Other deferred revenue            |  |              | 25,954 |               |   | 17,065 |  |   | 23,863
|Unearned revenue                  |  |              | 31,491 |               |   | 26,027 |  |   | 31,326
|                                  |  |              |        |               |   |        |  |   |       
|Total backlog                     |  | $            | 87,470 |               | $ | 69,028 |  | $ | 83,380
|                                  |  |              |        |               |   |        |  |   |       



Total backlog increased 26.7% to $87.5
million at December 31, 2004 from $69.0 million at December 31, 2003, and total backlog increased 4.9%, or $4.1 million, from $83.4 million at September 30, 2004. During the three months ended December 31, 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.
Bookings remained soft during the balance of fiscal 2004, and they continued that trend in the three months ended December 31, 2004. Of the total $87.5 million of backlog at December 31, 2004, we expect to recognize approximately $82.7 million of
our backlog during the twelve months following December 31, 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.





13



---

Deferred revenue increased $13.4 million to $45.5 million at December 31, 2004 from $32.1 million at December 31, 2003.
Of the $13.4 million increase, deferred oncology software license revenue and the related deferred maintenance and support contributed $5.6 million. The remaining $7.8 million increase relates to other deferred revenue of $4.7 million in post
contract maintenance and support for oncology products, $1.4 million of pathology license revenue, $977,000 in registry term licenses and $717,000 in post-contract maintenance and support for pathology products.



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 $59.5 million at December 31, 2004 compared to $45.6 million at December 31, 2003.



During the three months ended December 31, 2004, net cash provided by operating activities was $1.8 million compared to $339,000 of net cash used in operating activities
for the same period in fiscal 2004. In the three months ended December 31, 2004, cash provided by operations was primarily attributable to net income (loss) after adjustment for the non-cash charges relating to depreciation and amortization, an
increase in deferred revenue, an increase in accounts payable and a decrease in unbilled accounts receivable partially offset by increases in accounts receivable, prepaid expenses and other current assets and a decrease in accrued liabilities,
income taxes payable and customer deposits. Cash used in operations during the three months ended December 31, 2003 was primarily attributable to an increase in deferred income taxes and accounts receivable and a decrease in accrued liabilities.
These uses of cash were partially offset by net income after non-cash adjustments for depreciation and amortization and the $557,000 write-off of acquired in-process research and development and an increase in deferred revenue. As discussed in the
Backlog section, bookings in our core oncology point-of-care business have unexpectedly flattened over the last year. 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 4.0 for the three months ended December 31, 2004 from 4.2 for the same period in fiscal 2004. Our days sales outstanding at December 31, 2004 increased to 88 from 86 at December 31, 2003. 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 $4.2 million for the three months ended December 31, 2004 and $22.4 million for the same period in fiscal 2004. During the three months ended December 31, 2004, cash used in investing activities
related to the purchase of available-for-sales securities of $3.6 million with excess operating cash and the acquisition of $551,000 of capital equipment. During the three months ended December 31, 2003, cash used in investing activities primarily
related to the Tamtron/MRS acquisition. Total cash outlays for this acquisition amounted to approximately $22.4 million, including acquisition costs.



Net cash provided by financing activities was $72,000 for the three months ended December 31, 2004, compared to $1.0 million for the same period in fiscal 2004. Cash
provided by financing activities during the three months ended December 31, 2004 and 2003 can be attributed primarily to the issuance of common stock.



The following table describes our commitments to settle contractual obligations in cash not recorded on the balance sheet as of December 31, 2004 (in thousands). The
telecommunications contracts with AT&T and others include wireless, frame-relay, voice/data and internet transport services.



|                                         |  |                 |       |                                       |   |                         |  |   |      
|---------------------------------------- |  | --------------- | ----- | ------------------------------------- | - | ----------------------- |  | - | -----
|Fiscal Year                              |  | OperatingLeases |       | TelecommunicationsContracts and Other |   | Total FutureObligations
|Less than one year (before 9/30/2005)    |  | $               | 2,351 |                                       | $ | 670                     |  | $ | 3,021
|One to three years (10/1/20059/30/2008) |  |                 | 3,868 |                                       |   | 1,431                   |  |   | 5,299
|                                         |  |                 |       |                                       |   |                         |  |   |      
|Total                                    |  | $               | 6,219 |                                       | $ | 2,101                   |  | $ | 8,320
|                                         |  |                 |       |                                       |   |                         |  |   |      



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 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



FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act
of 2004 (FSP 109-2), provides guidance under SFAS No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Creation
Act) on enterprises income tax expense and deferred tax liability. The Jobs Creation Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate
the effect of the Jobs Creation Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. We have not yet completed our evaluation on the impact of the repatriation provisions. Accordingly, as
provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Creation Act.



14



---

In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, an amendment of APB Opinion No.
29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset
exchanges beginning in our fourth quarter of fiscal year 2005. We do not believe the adoption of SFAS No. 153 will have a material effect on our consolidated financial position, results of operations or cash flows.



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which replaced
SFAS No. 123 and superseded APB 25. SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on
the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123R, companies will no longer be able to account for share-based compensation transactions using the intrinsic
method in accordance with APB 25 but will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of earnings. SFAS No. 123R is effective beginning in the Companys fourth
quarter of fiscal year 2005 and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS No. 123R. We have not yet determined which fair-value method and
transitional provision we will follow. The impact on our consolidated financial statements of applying the Black-Scholes option valuation method of accounting for stock options is disclosed in the Accounting for Stock-Based Compensation section in
Note 2 of the notes to the condensed consolidated financial statements.



Risk Factors Affecting Financial Performance



This Form 10-Q
contains forward-looking statements that involve risks and uncertainties, including statements relating to Elektas proposed acquisition of IMPAC. 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 for the fiscal year ended September 30, 2004. Potential risks and uncertainties
regarding the acquisition include, among others, the requirement that IMPACs stockholders must approve the transaction, the required receipt of necessary regulatory approvals, including from the SEC and under applicable antitrust laws, other
conditions to the closing of the merger, the possibility that the transaction will not close or that the closing may be delayed, and the effect of the announcement of the merger on IMPACs customer relationships, operating results and business
generally, including the ability to retain key employees.



You should carefully
consider the risks described in this Form 10-Q and in our Form 10-K for the fiscal year ended September 30, 2004. In addition, these risks 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.



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 consolidated results of operations. We reduce the sensitivity of our results of operations to these risks by maintaining an investment portfolio, which is primarily comprised of highly rated,
short-term investments. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes.



We have operated mainly in the United States and greater than 99% of our sales were made in U.S. dollars in each of the three months ended December 31, 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 a
nd Procedures



a. Evaluation Of Disclosure
Controls And Procedures.



Joseph Jachinowski, our Chief Executive Officer,
and Kendra Borrego, our Chief Financial Officer, conducted an evaluation of the effectiveness of IMPACs disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31,
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.



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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



None.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Purported
Shareholder Class Action Lawsuit Relating to Merger with Elekta



On
January 21, 2005, an alleged holder of IMPAC common stock filed a purported class action lawsuit, Stakely v. IMPAC Medical Systems, Inc., et al. in California Superior Court for the County of Santa Clara. The complaint names as
defendants IMPAC and each member of our board of directors. The complaint alleges that, in pursuing the merger with Elekta and approving the merger agreement, the directors violated their fiduciary duties to the holders of IMPAC common stock by,
among other things, failing to implement a process designed to maximize stockholder value, engaging in self-dealing and securing benefits for certain officers and directors of IMPAC at the expense of the plaintiffs and other stockholders. The
complaint seeks a preliminary and permanent injunction to enjoin the company from consummating the merger, as well as attorneys fees and other remedies.



Purported Shareholder Class Action Lawsuits Relating to Restatement Announcement



The following three putative securities class actions that were filed after the Companys March 1, 2004, announcement of its intent to
restate its financial statements for fiscal years 2000 through 2003 have been voluntarily dismissed by the plaintiffs that filed the actions.



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 Operating Engineers action). The lawsuit alleged, 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 purported 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 was 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 Lerner action). The second lawsuit alleged 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 (the Maras action). This lawsuit alleged the same claims under the federal securities laws as the two earlier-filed lawsuits, and named 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 alleged the same class period as the two earlier-filed actions (i.e., November 20, 2002 to May 13, 2004), and likewise alleged
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 alleged 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.



On January 11, 2005, the plaintiff in the Maras action filed a notice of voluntary
dismissal of his complaint. In view of this notice of voluntary dismissal, the Court on January 12, 2005, entered an order directing the clerk of the court to close the case file and terminate all motions. On January 24, 2005, the plaintiff in the
Operating Engineers action, and the plaintiffs in the Lerner action, filed a notice of voluntary dismissal of their respective complaints. On January 26, the Court entered an order in each of these cases directing the clerk to close
the case file and terminate all motions.



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



Not Applicable.



Item 3. Defaults Upon Senior Securities



Not
Applicable.



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



Not Applicable



Item 5. Other Information



Not applicable.



Item 6. Exhibits



|     |  |                                                                                                                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Agreement and Plan of Merger Among Elekta AB (Publ), Erbium Acquisition Corporation and IMPAC Medical Systems, Inc., dated as of January 17, 2005 (incorporated by reference from Exhibit 2.1
to IMPACs Form 8-K filed January 19, 2005).
|     | 
|10.1 |  | Severance Agreement between IMPAC Medical Systems, Inc. and Kendra Borrego, dated as of January 17, 2005 (incorporated by reference from Exhibit 10.1 to IMPACs Form 8-K filed January
19, 2005).                                        
|     | 
|10.2 |  | Elekta Sales Consultancy Agreement, dated October 5, 2004 between IMPAC and Elekta Limited.*                                                                                                                                              
|     | 
|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.                                                                                                                                                          



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|     |  |                                                                                                                                                                                                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|32.2 |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                  
|     | 
|99.1 |  | Form of Stockholder Agreement entered into by and among Elekta AB (publ), Erbium Acquisition Corporation and IMPAC Medical Systems, Inc. (incorporated by reference from Exhibit 99.2 to
IMPACs Form 8-K filed January 19, 2005).

---

|* | Confidential treatment requested as to certain portions of this Exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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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: February 9, 2005/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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